Cost Behaviour

Question 1

Why is an understanding of cost behaviour key to many decisions in an organisations?

Answer 1

Managers who understand how costs behave are better able to predict what costs will be under under various operating circumstances

Question 2

What is a variable cost example for merchandisers?

Answer 2

Cost of goods sold

Question 3

What is a variable cost example for manufacturers?

Answer 3

Direct material, direct labour and variable manufacturing overhead

Question 4

What is a variable cost example for service organisations?

Answer 4

Supplies and travel

Question 5

What is a variable cost example for merchandisers and manufacturers?

Answer 5

Sales commissions and shipping costs

Question 6

What is a fixed cost example for merchandisers, manufacturers and service organisations?

Answer 6

Real estate taxes, insurance, sales salaries, depreciation and advertising

Question 7

How can a cost be variable?

Answer 7

It must be variable with respect to its activity base

Question 8

What affects variable costs?

Answer 8

Cost drivers

Question 9

What are examples of cost drivers?

Answer 9

Units produced, machine hours, miles driven and labour hours

Question 10

What is a step-variable cost?

Answer 10

A cost that is obtainable only in large chunks, and that increases or decreases only in response to fairly wide changes in the activity level

Question 11

What are the different types of fixed costs?

Answer 11

Committed and discretionary

Question 12

What are committed fixed costs?

Answer 12

Relate to the investment in facilities, equipment and the basic organisational structure of a firm - long-term, cannot be reduced in the short term

Question 13

What are discretionary fixed costs?

Answer 13

Arise from annual decisions by management to spend in certain fixed cost areas - may be altered in the short-term by current managerial decisions

Question 14

What is a mixed cost?

Answer 14

Contains both variable and fixed cost elements

Question 15

What is the equation for the total mixed cost line?

Answer 15

Y=a+bX

Question 16

What is y in the equation: Y=a+bX?

Answer 16

The total mixed cost

Question 17

What is a in the equation: Y=a+bX?

Answer 17

The total fixed cost

Question 18

What is b in the equation: Y=a+bX?

Answer 18

The variable cost per unit of activity

Question 19

What is X in the equation: Y=a+bX?

Answer 19

The level of activity

Question 20

How do we calculate unit variable cost?

Answer 20

Change in cost / change in units

Question 21

How do we calculate fixed cost?

Answer 21

Total cost - total variable cost

Question 22

How do we calculate total cost?

Answer 22

Fixed cost + variable cost

Question 23

What is an activity base?

Answer 23

A measure of whatever causes the incurrence of variable cost

Question 24

What are the most common cost drivers?

Answer 24

Direct labour-hours, machine-hours, units produced and units sold

Question 25

Is labour a variable or fixed cost?

Answer 25

Both, wages and salaries may be fixed or variable

Question 26

How do management go about actually estimating the fixed and variable components of a mixed cost?

Answer 26

By using account analysis or the engineering approach

Question 27

What is account analysis?

Answer 27

When each account is classified as either variable or fixed based on the analysts prior knowledge of how the cost in the account behaves

Question 28

What is the engineering approach?

Answer 28

It involves a detailed analysis of what cost behaviour should be, based on an industrial engineers evaluation of the production methods to be used, the materials specification and so on

Question 29

What is the high-low method?

Answer 29

It is a way to get estimates of the slope and intercept of a mixed cost function by using only two data points

Question 30

What is the contribution approach?

Answer 30

It is used as an internal planning and decision making tool and emphasises costs by behaviour facilities cost-volume-profit analysis