Question 1

The term "relevant range" means the range within which:

Accepted Answer

The term "relevant range" refers to the range of activity within which the assumptions made about the cost behavior are reasonably valid. In other words, it is the range where a particular cost formula is applicable. Beyond this range, the formula may not reflect the cost behavior accurately. Therefore, option B is the correct choice. Options A and C are not correct because they do not describe the concept of relevant range precisely. Option D is partially correct, but it is not complete, as relevant costs could be incurred both within and outside the relevant range.

Question 2

Within the relevant range of activity,variable cost per unit will:

Accepted Answer

Within the relevant range of activity, variable cost per unit will remain constant. This means that the cost per unit will not change regardless of how many units are produced. However, if the level of activity goes beyond the relevant range, then the variable cost per unit may change.

Question 3

Contribution margin is the excess of revenues over:

Accepted Answer

Contribution margin refers to the excess of revenues over all variable costs. It does not include fixed costs, such as manufacturing costs, or indirect costs, such as overhead. Therefore, choice D, all variable costs, is the best answer.

Question 4

An example of a committed fixed cost is:

Accepted Answer

Committed fixed costs are expenses that cannot be easily changed or avoided in the short-term, even if operations decrease. Property taxes on a factory building are a fixed cost that must be paid regardless of the level of production or sales. A training program for salespersons (A) and new product research and development (D) are examples of discretionary fixed costs, which can be adjusted or eliminated if necessary. Executive travel expenses (B) are typically classified as variable costs, which change in relation to company activity.

Question 5

The linear equation Y = a + bX is often used to express cost formulas.In this equation:

Accepted Answer

In the linear equation Y = a + bX, the b term represents the variable cost per unit of activity. This means that the cost increases or decreases by a fixed amount for each unit of activity. The a term represents the total fixed cost, which remains constant regardless of the level of activity. The X term represents the level of activity, and the Y term represents the total cost, which is the sum of fixed and variable costs. Therefore, the best choice is A.

Question 6

A cost driver is:

Accepted Answer

A cost driver is a factor that causes variations in a cost. It could be related to activities, volume, or other factors that impact the overall cost of a product or service. Options A, B, and D are incorrect as they do not accurately define a cost driver.

Question 7

At an activity level of 10,000 units,variable costs totalled $35,000 and fixed costs totalled $20,800.If 16,000 units are produced and this activity is within the relevant range,then:

Accepted Answer

Variable cost per unit is $35,000 / 10,000 = $3.50. For 16,000 units, variable costs are 16,000 * $3.50 = $56,000. Fixed costs remain $20,800. Total cost = $56,000 + $20,800 = $76,800. Total unit cost = $76,800 / 16,000 = $4.80.

Question 8

Anaconda Mining Company shipped 9,000 tons of copper concentrate for $450,000 in March and 11,000 tons for $549,000 in April.Shipping costs for 12,000 tons to be shipped in May would be expected to be?

Accepted Answer

Variable shipping cost per ton = Change in cost F1F1F1S1F1F1F10 Change in activity
= ($549,000 - $450,000)F1F1F1S1F1F1F10 (11,000 tons - 9,000 tons)
= $99,000 F1F1F1S1F1F1F10 2,000 tons
= $49.50 per ton
Fixed cost element of shipping cost = Total cost - Total variable cost
= $549,000 - ($49.50 per ton F1F1F1S1F1F1F10 11,000 tons)
= $549,000 - $544,500
= $4,500
Total shipping cost = $4,500 + $49.50 per ton F1F1F1S1F1F1F10 12,000 tons = $4,500 + $594,000 = $598,500

Question 9

The following data pertains to activity and costs for two months:  Assuming that these activity levels are within the relevant range,the mixed costs for July were?

Accepted Answer

To calculate the mixed costs for July, we need to use the high-low method. 
The highest activity level is 8,000 machine hours in June, and the corresponding total cost is $43,000. 
The lowest activity level is 4,000 machine hours in May, and the corresponding total cost is $28,000. 
The variable cost per machine hour is (43,000 - 28,000) / (8,000 - 4,000) = $3.75.
The fixed cost component is the total cost minus the variable cost component:
$43,000 - $3.75 * 8,000 = $13,000.
Therefore, the mixed costs for July (assuming a similar activity level as June) would be:
$13,000 + $3.75 * 9,000 = $43,750 / 2 = $21,875.
However, none of the answer choices match this amount, so the closest choice is B) $15,000.

Question 10

An example of a cost that is variable with respect to the number of units produced is:

Accepted Answer

Power required to run production equipment varies with the number of units produced. As production increases, more power will be required to operate the equipment, and vice versa.

Option A (insurance on the headquarters building) is a fixed cost since it remains constant regardless of the number of units produced.

Option C (supervisory salaries) may also be fixed if the number of supervisors remains the same, regardless of production levels.

Option D (depreciation of factory facilities) is a fixed cost since it is based on the original cost of the facilities and is spread out over time. It does not vary with the number of units produced.

Question 11

The following data pertain to activity and costs for two recent months:  Assuming that these activity levels are within the relevant range,the mixed costs for November were?

Accepted Answer

To determine the mixed costs, we need to separate the fixed costs and variable costs. We can use the high-low method to do this.

Using the high-low method:
Variable cost per unit = change in cost / change in activity level
= (35,000 - 25,000) / (5,000 - 4,000) = $10 per unit

Fixed costs = Total costs - (Variable costs per unit x Total activity level)
= 35,000 - (10 x 5,000) = $20,000

Therefore, the mixed costs for November were $20,000 + (10 x 4,500) = $25,000. The mixed costs for the other month are not relevant to this question.

Question 12

An increase in the activity level within the relevant range results in:

Accepted Answer

The answer of An increase in the activity level within...

Question 13

An analysis of past maintenance costs indicates that maintenance cost is an average of $0.20 per machine-hour at an activity level of 10,000 machine-hours and $0.25 per machine-hour at an activity level of 8,000 machine-hours.Assuming that this activity is within the relevant range,what is the total expected maintenance cost if the activity level is 8,700 machine-hours?

Accepted Answer

The answer of An analysis of past maintenance costs indicates...

Question 14

In describing the cost formula equation Y = a + bX,which of the following statements is correct:

Accepted Answer

In the cost formula equation Y = a + bX, "Y" is the dependent variable (as it depends on the value of "X"), "a" is the fixed component (representing the cost at zero units of "X"), and "b" is the variable component or the slope of the equation (representing the increase in cost per unit of "X"). Therefore, option B is correct. Option D is also incorrect, as there is no direct relationship between the increase or decrease in "X" and "Y" without knowing the value of "b".

Question 15

An example of a discretionary fixed cost is:

Accepted Answer

Discretionary fixed costs are expenses that a company chooses to incur, rather than being required to do so by external factors. Management development programs are not necessary for day-to-day operations and are therefore considered a discretionary fixed cost. Insurance (A) and taxes on real estate (B) are both fixed costs, but they are not discretionary as they are required by law or contractual obligation. Depreciation of buildings and equipment (D) is also a fixed cost, but it is not discretionary as it reflects the gradual wear and tear of assets over time.

Question 16

Average maintenance costs are $1.50 per machine-hour at an activity level of 8,000 machine-hours and $1.20 per machine-hour at an activity level of 13,000 machine-hours.Assuming that this activity is within the relevant range,total expected maintenance cost for a budgeted activity level of 10,000 machine-hours would be closest to?

Accepted Answer

We will use the high-low method to calculate the variable cost per machine-hour:

Variable cost per machine-hour = (Total maintenance cost at high activity level - Total maintenance cost at low activity level) / (High activity level - Low activity level)
Variable cost per machine-hour = ($1.20 - $1.50) / (13,000 - 8,000)
Variable cost per machine-hour = -$0.06

Note that the variable cost per machine-hour is negative because the maintenance cost decreased as the activity level increased.

Now we can calculate the total expected maintenance cost for a budgeted activity level of 10,000 machine-hours:

Total expected maintenance cost = Variable cost per machine-hour x Activity level + Fixed cost
Total expected maintenance cost = (-$0.06 x 10,000) + ($1.50 x 10,000)
Total expected maintenance cost = -$600 + $15,000
Total expected maintenance cost = $14,400

Therefore, the closest answer is B) $13,440.

Question 17

The contribution margin approach to the income statement:

Accepted Answer

The contribution margin approach is useful to managers for planning and decision making as it highlights the contribution of each product to covering fixed costs and generating profit.

Question 18

Discretionary fixed costs:

Accepted Answer

Discretionary fixed costs are costs that can be easily adjusted or eliminated by management decisions, usually on an annual basis. Examples include advertising, research and development, and employee training. These costs are not directly related to the level of activity and do not have a long-term planning horizon.

Question 19

Shipping expense is $9,000 for 8,000 pounds shipped and $11,250 for 11,000 pounds shipped.Assuming that this activity is within the relevant range,if the company ships 9,000 pounds,its expected shipping expense is closest to?

Accepted Answer

The shipping expense can be calculated using the high-low method to find the variable cost per pound and the fixed cost. The variable cost per pound is ($11,250 - $9,000) / (11,000 - 8,000) = $0.75. The fixed cost is $9,000 - (8,000 * $0.75) = $3,000. For 9,000 pounds, the expense is $3,000 + (9,000 * $0.75) = $9,750.

Question 20

Which costs will change with a decrease in activity within the relevant range?

Accepted Answer

Unit fixed costs remain the same regardless of changes in activity levels. However, total fixed costs are spread out over a larger activity base with a decrease in activity, resulting in a decrease in unit fixed costs. Total variable cost will also decrease with a decrease in activity within the relevant range. Therefore, B is the best choice as it identifies the changes in unit fixed costs and total variable costs.

Quiz 3: Systems Design: Activity-Based Costing