7.2 Cost Behavior and Relevant Range Flashcards
The controller of an online retailer has negotiated a 5-year contract with a shipping company to pay the following amounts annually for the delivery of its goods, regardless of the amount:
Year 1: €1,000,000
Year 2: 1,000,000
Year 3: 1,500,000
Year 4: 1,500,000
Year 5: 2,000,000
What type of costs are these shipping expenditures?
A. Mixed.
B. Fixed.
C. Variable.
D. By-product.
B. Fixed.
A fixed cost remains constant regardless of production. Thus, the shipping costs would be categorized as fixed costs since they will remain constant regardless of the units shipped in a year.
An entity has the following cost components for 100,000 units of product for the year:
Direct materials: $200,000
Direct labor: 100,000
Manufacturing overhead: 200,000
Selling and administrative expense: 150,000
All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expenses. The total costs to produce and sell 110,000 units for the year are
A. $650,000
B. $715,000
C. $695,000
D. $540,000
C. $695,000
Direct materials unit costs are strictly variable at $2 ($200,000 ÷ 100,000 units). Similarly, direct labor has a variable unit cost of $1 ($100,000 ÷ 100,000 units). The $200,000 of manufacturing overhead for 100,000 units is 50% variable. The variable unit cost is $1. Selling costs are $100,000 fixed and $50,000 variable for production of 100,000 units, and the variable unit selling expenses is $0.50 ($50,000 ÷ 100,000 units). The total unit variable cost is therefore $4.50 ($2 + $1 + $1 + $0.50). Fixed costs are $200,000. At a production level of 110,000 units, variable costs are $495,000 (110,000 units × $4.50). Thus, total costs are $695,000 ($495,000 + $200,000).
Which one of the following is true regarding a relevant range?
A. Total variable costs will not change.
B. Total fixed costs will not change.
C. Actual fixed costs usually fall outside the relevant range.
D. The relevant range cannot be changed after being established.
B. Total fixed costs will not change.
The relevant range is the range of activity over which unit variable costs and total fixed costs are constant. The incremental cost of one additional unit of production will be equal to the variable cost.
The difference between variable costs and fixed costs is
A. Variable costs per unit fluctuate and fixed costs per unit remain constant.
B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
C. Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change.
D. Variable costs per unit change in varying increments, while fixed costs per unit change in equal increments.
B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
Fixed costs remain unchanged within the relevant range for a given period despite fluctuations in activity, but per unit fixed costs do change as the level of activity changes. Thus, fixed costs are fixed in total but vary per unit as activity changes. Total variable costs vary directly with activity. They are fixed per unit, but vary in total.
A company has the following budget formula for annual electricity expense in its shop:
Expense = $7,200 + (Units produced × $0.60)
If management expects to produce 20,000 units during February, for the purpose of performance evaluation, what amount of expenses should the company expect to incur in February?
A. $7,200
B. $12,000
C. $12,600
D. $19,200
C. $12,600
The formula is for an annual period. Thus, the first step is to divide the $7,200 of fixed costs by 12 months to arrive at monthly fixed costs of $600. Variable costs will be $.60 per unit, or $12,000 for 20,000 units. The total expected expenses are therefore $12,600 ($600 + $12,000).
A company pays each member of its sales staff a salary as well as a commission on each unit sold. For the coming year, the company plans to increase all salaries by 5% and to keep unchanged the commission paid on each unit sold. Because of increased demand, the company expects the volume of sales to increase by 10%. How will the total cost of sales salaries and commissions change for the coming year?
A. Increase by more than 10%
B. Increase by 5% or less
C. Increase by 10%
D. Increase by more than 5% but less than 10%
D. Increase by more than 5% but less than 10%
Sales salaries will increase by exactly 5%. The per-unit commission amount will remain constant, but sales commissions in total are expected to be increase by 10%. Thus, the total sales salaries and commissions will increase somewhere between 5% and 10%.
Production levels are expected to increase within the relevant range. What are the anticipated effects on the following?
- Fixed Cost per Unit: Increase/decrease/no change
- Variable Costs per Unit: Increase/decrease/no change
- Fixed Cost per Unit: decrease
- Variable Costs per Unit: no change
Which one of the following categories of cost is most likely not considered a component of fixed factory overhead?
A. Property taxes.
B. Rent.
C. Power.
D. Depreciation.
C. Power.
A fixed cost is one that remains unchanged within the relevant range for a given period despite fluctuations in activity. Such items as rent, property taxes, depreciation, and supervisory salaries are normally fixed costs because they do not vary with changes in production. Power costs, however, are at least partially variable because they increase as usage increases.
Which of the following is the best example of a variable cost?
A. Interest charges
B. Property taxes
C. The corporate president’s salary
D. Cost of raw material
D. Cost of raw material
Variable costs vary directly with the level of production. As production increases or decreases, material cost increases or decreases, usually in a direct relationship.
