Chapter 5
Cost Behavior: Analysis and Use
True/False
1. A variable cost is a cost that remains constant in total throughout wide ranges of activity.
Level: Easy LO: 1 Ans: F
2. If the activity level increases, then one would expect the variable cost per unit to increase as well.
Level: Medium LO: 1 Ans: F
3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.
Level: Medium LO: 1 Ans: T
4. Calculation of fixed costs on a per unit basis is critical for internal reporting to managers.
Level: Medium LO: 1 Ans: F
5. Management’s strategy will determine to a large degree the classification of a fixed cost as
discretionary or committed.
Level: Easy LO: 1 Ans: T
6. Committed fixed costs cannot be reduced to zero without seriously impairing the company’s long term
goals.
Level: Easy LO: 1 Ans: T
7. Unless the behavior pattern of each cost of a company is understood, the impact of a company’s
activities on its costs will not be known until after the activity has occurred.
Level: Medium LO: 1 Ans: T
8. When using the high-low method, if the high and low activity levels do not coincide with the high and
low levels of cost, then the analyst should use the points with the high and low levels of cost.
Level: Medium LO: 3 Ans: F
9. A traditional functional income statement organizes costs on the basis of behavior.
Level: Easy LO: 4 Ans: F
10. The contribution income statement organizes costs according to behavior.
Brewer, Introduction to Managerial Accounting, 3/e174
Level: Easy LO: 4 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e175
11. The contribution margin represents the amount available to contribute toward covering fixed expenses
and toward profits for the period.
Level: Easy LO: 4 Ans: T
12. Most companies use the contribution approach in preparing financial statements for external reporting
purposes.
Level: Medium LO: 4 Ans: F
13. The least-squares regression method computes the regression line that minimizes the sum of the
squared deviations from the plotted points to the line.
Level: Medium LO: 5 Ans: T
14. Account analysis is a special form of least-squares regression in which more than one account is
analysed at the same time.
Level: Easy LO: 6 Ans: F
15. The inventory value shown on the balance sheet is generally higher under absorption costing than
under variable costing.
Level: Medium LO: 5 Ans: T
16. Under variable costing, inventoriable product costs consist of direct materials, direct labor, variable
manufacturing overhead and variable selling and administration expenses.
Level: Medium LO: 5 Ans: F
17. Under variable costing, an increase in the fixed factory overhead will have no effect on the unit
product cost.
Level: Medium LO: 5 Ans: T
18. Under the absorption costing method, a portion of fixed manufacturing overhead cost is allocated to
each unit of product.
Level: Easy LO: 5 Ans: T
19. Under variable costing, it is possible to defer a portion of the fixed manufacturing overhead costs of
the current period to future periods through the inventory account.
Level: Medium LO: 5 Ans: F
20. Under absorption costing, a portion of fixed manufacturing overhead cost is released from inventory
when sales volume exceeds production volume.
Level: Medium LO: 5 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e 176
Brewer, Introduction to Managerial Accounting, 3/e177
21. Contribution margin and gross margin mean the same thing.
Level: Easy LO: 5 Ans: F
22. When reconciling variable costing and absorption costing net operating income, fixed manufacturing
overhead costs deferred in inventory under absorption costing should be deducted from variable costing
net operating income to arrive at the absorption costing net operating income.
Level: Medium LO: 5 Ans: F
23. If production equals sales for the period, absorption costing and variable costing will produce the
same net operating income under LIFO.
Level: Medium LO: 5 Ans: T
24. When the number of units in inventories decrease between the beginning and end of the period,
absorption costing net operating income will typically be greater than variable costing net operating
income.
Level: Medium LO: 5 Ans: F
25. When viewed over the long term, accumulated net operating income will be the same for variable and
absorption costing if there are no ending inventories at the end of the term.
Level: Hard LO: 5 Ans: T
26. Under absorption costing, the profit for a period is not affected by changes in inventory.
Level: Medium LO: 5 Ans: F
Multiple Choice
27. As the level of activity increases, how will a mixed cost in total and per unit behave?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Hard LO: 1 Ans: A
Brewer, Introduction to Managerial Accounting, 3/e 178
Brewer, Introduction to Managerial Accounting, 3/e179
28. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore, always
using natural gas. However, when there is no pizza in the oven, the oven automatically lowers its flame
and reduces its natural gas usage by 70%. The cost of natural gas would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.
Level: Easy LO: 1 Ans: B
29. When the activity level is expected to decline within the relevant range, what effects would be
anticipated with respect to each of the following?
A) A above
B) B above
C) C above
D) D above
E) E above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
30. Within the relevant range, variable costs can be expected to:
A) vary in total in direct proportion to changes in the activity level.
B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases.
D) increase on a per unit basis as the activity level decreases.
E) none of these.
Level: Easy LO: 1 Ans: A
31. Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on management’s strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without seriously
impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.
Level: Easy LO: 1 Ans: D
Brewer, Introduction to Managerial Accounting, 3/e 180
32. Which of the following statements is true when referring to fixed costs?
A) Committed fixed costs arise from the annual decisions by management.
B) As volume increases, unit fixed cost and total fixed cost will change.
C) Fixed costs increase in total throughout the relevant range.
D) Discretionary fixed costs can often be reduced to zero for short periods of time without seriously
impairing the long-run goals of the company.
Level: Easy LO: 1 Ans: D
33. For the past 8 months, Jinan Corporation has experienced a steady increase in its cost per unit even
though total costs have remained stable This cost per unit increase may be due to _____________ costs
because the level of activity at Jinan is _______________.
A) fixed, decreasing
B) fixed, increasing
C) variable, decreasing
D) variable, increasing
Level: Medium LO: 1 Ans: A
34. Discretionary fixed costs:
A) cannot be changed since they are fixed.
B) have a long-term planning horizon, generally encompassing many years.
C) are made up of facilities, equipment, and basic organization.
D) responses b and c are both correct.
E) none of these.
Level: Easy LO: 1 Ans: E
35. An example of a committed fixed cost is:
A) management training seminars.
B) a long-term equipment lease.
C) research and development.
D) advertising.
Level: Easy LO: 1 Ans: B
36. Which of the following would usually be considered a committed fixed cost for a retail sales
corporation?
A) lease payments made on its store buildings
B) the cost of the Caribbean trip given to the employee of the year
C) the cost of running an annual leadership seminar for managers
D) both a and c above
Level: Medium LO: 1 Ans: A
Brewer, Introduction to Managerial Accounting, 3/e181
37. Which of the following would usually be considered a discretionary fixed cost for a financial planning
company?
A) the cost of the annual employee picnic
B) property taxes on its corporate office building
C) the cost of internships for selected college seniors
D) both a and c above
Level: Medium LO: 1 Ans: D
38. Which of the following is unlikely to be classified as a fixed cost with respect to the number of units
produced and sold?
A) Property taxes on a headquarters building.
B) Legal department salaries.
C) Cost of leasing the company’s mainframe computer.
D) Production supplies.
Level: Easy LO: 1 Ans: D
39. The following data have been collected for four different cost items.
Which of the following classifications of these cost items by cost behavior is correct?
A) A above
B) B above
C) C above
D) D above
E) E above
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 182
40. Which of the following methods of analyzing mixed costs can be used to estimate an equation for the
mixed cost?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Easy LO: 2,5 Ans: A
41. In describing the cost formula equation, Y = a + bX, which of the following is correct:
A) “Y” is the independent variable.
B) “a” is the variable cost per unit.
C) “a” and “b” are valid for all levels of activity.
D) in the high-low method, “b” equals the change in cost divided by the change in activity.
Level: Medium LO: 3 Ans: D
42. The high-low method is used with which of the following types of costs?
A) Variable.
B) Mixed.
C) Fixed.
D) Step-variable.
Level: Medium LO: 3 Ans: B
43. The contribution approach income statement:
A) organizes costs on a functional basis.
B) provides owners with more cash flows.
C) is particularly helpful to the manager in planning and decision making.
D) provides a gross margin figure from which selling and administrative expenses are deducted.
E) none of these.
Level: Medium LO: 4 Ans: C
44. Contribution margin is:
A) Sales less cost of goods sold.
B) Sales less variable production, variable selling, and variable administrative expenses.
C) Sales less variable production expense.
D) Sales less all variable and fixed expenses.
Brewer, Introduction to Managerial Accounting, 3/e183
E) none of the above.
Level: Easy LO: 4 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 184
45. The contribution approach to income statement preparation:
A) organizes costs according to the functions of production, administration, and sales.
B) is used for external reporting.
C) organizes costs according to their variable and fixed cost behavior.
D) both b and c are true.
E) both a and b are true
Level: Easy LO: 4 Ans: C
46. Under variable costing, fixed manufacturing overhead is:
A) carried in a liability account.
B) carried in an asset account.
C) ignored.
D) immediately expensed as a period cost.
Level: Easy LO: 5 Ans: D
47. Which of the following is true of a company that uses absorption costing?
A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs.
