Chapter 5: Cost Behavior Patterns

Question 1

What are the three cost behavior patterns that help organizations identify which costs will change and which will remain the same with changes in sales volume?

Answer 1

Variable costs
Fixed costs
Mixed costs

Question 2

*___ costs which change in total with direct proportion to changes in volume and per unit cost remains constant.

Answer 2

Variable

As volume increases, total variable costs increase

Question 3

Variable costs are affected by ___.

Answer 3

Different activities depending on the organization.

Question 4

___ costs which stay constant in total over a range of volume levels and per unit cost change I.e., salaried personnel, building rent, insurance, etc. As activity increases, the fixed costs are spread out over more units which results in a lower cost per unit.

Answer 4

Fixed

As volume chances, fixed costs do not

Question 5

On a graph, what do variable costs look like as units produced increases?

Answer 5

Slope increases

Question 6

On a graph, what do fixed costs look like as units produced increases?

Answer 6

Flat line

Question 7

A ___ is a fixed cost that cannot easily be changed in the short run without having a significant impact on the organization I.e., lease, salaried employees, depreciation on buildings, insurance, etc.

Answer 7

Committed fixed cost

Question 8

A ___ is a fixed cost that can be changed in the short run without having a significant impact on the organization I.e., charitable donations, advertising, R and D, training programs, etc. (however an argument can be made that reducing these could have an impact on the company)

Answer 8

Discretionary fixed cost

Question 9

In general, managements looks to cut discretionary fixed costs when sales and profits are ___.

Answer 9

Declining

Question 10

___ describes a cost that has a mix of fixed and variable costs I.e., monthly salary plus commission

Ex. Fixed salary of $10,000 per month plus a variable commission of $7 per unit

Answer 10

Mixed costs

As volume increases, total mixed cost increases

Question 11

On a graph, what do mixed costs look like as units produced increases?

Answer 11

The slope doesn’t start at $0 because of the fixed costs, but the slope increases

Question 12

Total Mixed Cost Equation:

Mixed costs = ___ + (___ x ___)

Answer 12

Total fixed costs + (unit variable cost x # units)

Y = f + vX

Question 13

In the short run, most costs are ___.

In the long run, all costs are ___.

Answer 13

Fixed

Variable and eventually recalculated

Question 14

___ is the limited range of accuracy of cost behavior patterns.

Answer 14

Relevant range

Question 15

What are the four common financial approaches used to estimate fixed and variable costs?

Answer 15

⚫️Account analysis
⚫️High-low method
⚫️Scattergraph method
⚫️Regression analysis

Question 16

How is the variable cost per unit determined?

Answer 16

Variable costs / Measure of activity

Question 17

F. ___ uses historical data to determine cost behavior.

Answer 17

Scatterplot

Know more details

Question 18

In a scatterplot, ___ is plotted on the y axis and ___ is plotted on the x axis.

Answer 18

y- cost data

x - volume

Question 19

___ separates variable costs from total costs to determine fixed costs.

Answer 19

High-low method

Question 20

How do you calculate fixed costs by the high-low method?

Answer 20

Step 1: Δ cost / Δ volume

Step 2: total at high volume - (high volume x variable cost) = fixed cost

Question 21

___ is a statistical calculation to find the line which best fits the data (cost equation); uses all data points and most often done in Excel.

Answer 21

Regression analysis

Question 22

What is R square in a regression analysis?

Answer 22

The statistical measure of how close the data is to the fitted regression line

Question 23

Which future cost predicting method is most accurate?

Answer 23

Regression analysis

Question 24

In a regression analysis, which variables are used in Y = f + vx?

Answer 24

f - y intercept coefficient

v - x variable

Question 25

___ is only appropriate for managerial accounting which reports expenses by behavior (rather than function).

Answer 25

Contribution Margin Income Statement

Question 26

___ is the incremental profit earned on each unit sold.

Answer 26

Contribution margin

Question 27

How is contribution margin income statement calculated?

Answer 27

revenues
- variable costs
= contribution margin
- fixed costs
= operating income

Question 28

quiz: T or F? The margin of safety is the difference between fixed costs and variable costs

Answer 28

False

High-low method

Question 28

*Why use contribution margin income statement over multi-step income statement?

Answer 28

Provides better information for:

1. Costs-volume profit analysis
2. Short-term business decisions
3. Budgetting

Question 29

quiz: Fixed costs are costs that:

a. remain the same in total regardless of changes in the activity level
b. vary inversely with activity on a per unit basis
c. both (a) and (b)
d. neither (a) nor (b)

Answer 29

c. both (a) and (b)

Question 31

quiz: In the Gabbana Company, maintenance costs are a mixed cost. At the low level of activity (40 direct labor hours), maintenance costs are $600. At the high level of activity (100 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

a. Variable Cost per Unit = $8.33 and Total Fixed Cost = $500
b. Variable Cost per Unit = $11.00 and Total Fixed Cost = $220
c. Variable Cost per Unit = $15.00 and Total Fixed Cost = $400
d. Variable Cost per Unit = $8.33 and Total Fixed Cost = $267

Answer 31

d. Variable Cost per Unit = $8.33 and Total Fixed Cost = $267

Work: ??

Question 32

*quiz: The range of activity index over which the company expects to operate during the year is the ___.

Answer 32

Relevant range

Question 33

quiz: The level of activity at which total revenues equal total costs is the ___.

Answer 33

Break-even point

Question 34

quiz: The contribution margin per unit decreases when unit selling price remains the same and:

Select one:

a. variable cost per unit decreases
b. fixed costs decrease
c. fixed costs increase
d. variable costs per unit increases

Answer 34

d. variable costs per unit increases

Question 37

quiz: Costs that remain the same in total regardless of changes in the activity level is ___.

Answer 37

Fixed costs

Question 38

quiz: T or F? The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars

Answer 38

True

Question 39

quiz: The study of how specific costs respond to changes in the level of activity is the ___.

Answer 39

Cost behavior analysis

Question 40

quiz: The amount of revenue remaining after deducting variable costs is ___.

Answer 40

Contribution margin

Question 41

quiz: T or F? For purposes of CVP (contribution margin) analysis, mixed costs must be classified into their fixed and variable elements.

Answer 41

True

Question 41

quiz: T or F? The contribution margin per unit is the unit selling price less the fixed costs per unit

Answer 41

False

Selling unit less the variable costs per unit

Question 41

quiz: T or F? A CVP (contribution margin) income statement classifies expenses by function rather than by cost behavior

Answer 41

False

Behavior rather than by function (multi-step income statement)

Question 42

quiz: Costs that vary in total directly and proportionately with changes in the activity level is ___.

Answer 42

Variable costs

Question 43

quiz: T or F? If the contribution margin ratio is 60% and the amount of fixed costs are $400,000, then the sales dollars at the break-even point are $666,667

Answer 43

True