Financial and Managerial Accounting, 8e (Wild)
Chapter 18 Cost Behavior and Cost-Volume-Profit Analysis
1) Total variable costs change in proportion to changes in volume of activity.
2) Total fixed costs change in proportion to changes in volume of activity.
3) Variable costs per unit increase proportionately with increases in volume of activity.
4) Fixed costs per unit decrease proportionately with increases in volume of activity.
5) While the total amount of variable cost changes with the level of production, variable cost per
unit remains constant as volume changes.
6) While the total amount of fixed cost changes with the level of production, fixed cost per unit
remains constant as volume changes.
7) While the total amount of fixed cost remains constant with the level of production, fixed cost
per unit changes as volume changes.
8) Dividing a mixed cost into its separate fixed and variable cost components cannot be done in
cost-volume-profit analysis.
9) As production volume increases, fixed cost per unit of output remains constant.
10) As production volume activity increases, variable cost per unit remains constant.
11) A step-wise variable cost can be separated into a fixed component and a variable component.
12) Curvilinear costs increase as volume of activity increases, but at a nonconstant rate.
13) The relevant range of operations includes extremely high and low levels of production that
are unlikely to occur.
14) The relevant range of operations is a range of volume neither close to zero nor at maximum
capacity.
15) Cost-volume-profit analysis requires management to classify all costs as either fixed or
variable with respect to production or sales volume within the relevant range of operations.
16) Cost-volume-profit analysis is a predictive tool for identifying the impact of future cost
changes, price changes, and volume of activity changes.
17) Cost-volume-profit analysis is used to predict future costs to be incurred, volumes of activity,
sales to be made, and profit to be earned.
18) Cost-volume-profit analysis can be used to compute expected income from predicted sales
and cost levels.
19) The margin of safety is the amount that sales can drop before the company incurs a loss.
20) The dollar amount of sales needed to achieve a target income is computed by dividing the
sum of fixed costs plus the target pretax income by the contribution margin ratio.
21) The margin of safety can be expressed in dollars or as a percent of sales.
22) The method most likely to produce the most precise line of cost behavior and require the
least amount of judgment is the scatter diagram.
23) Contribution margin per unit is the amount by which a product’s unit selling price exceeds its
variable cost per unit.
24) The contribution margin ratio is the percent of each sales dollar that remains after deducting
the unit variable cost.
25) The extent, or relative size, of fixed costs in the total cost structure is known as operating
leverage.
26) Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided
by pretax income.
27) Least-squares regression is a statistical method for identifying cost behavior.
28) The high-low method of deriving an estimated cost line uses all the data points available.
29) The high-low method can be used to estimate the cost equation using just two points.
30) A visual line fit to points in a scatter diagram may be used to identify the approximate
relation between past cost and unit data.
31) There are only two methods to derive an estimated line of cost behavior; the high-low
method and the scatter diagram.
32) Scatter diagrams plot volume (units) on the vertical axis and cost on the horizontal axis.
33) Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.
34) To determine the slope of the variable cost from a scatter diagram, divide the change in units
by the change in cost.
35) A scatter diagram is useful for identifying extreme data points or outliers.
36) The high-low method is used to derive the variable cost per unit and total fixed costs using
just the highest and lowest volume levels.
37) A break-even point can be calculated either in units or in dollars of sales.
38) Cost-volume-profit analysis is used to determine the number of units that must be sold to
break even..
39) The break-even point is the sales level at which a company neither earns a profit nor incurs a
loss.
40) The contribution margin per unit is the price at which a unit must be sold in order for the
company to break even.
41) To calculate the break-even point in units, one must know unit fixed cost, unit variable cost,
and sales price.
42) The contribution margin ratio is the percent by which the margin of safety exceeds the break-
even point.
43) An important assumption in multiproduct CVP analysis is a constant sales mix.
44) A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
45) A cost-volume-profit (CVP) chart is a graph that plots number of units produced on the
horizontal axis and dollars of costs and sales on the vertical axis.
46) On a typical cost-volume-profit chart, unit sales are shown on the horizontal axis and both
dollars of sales and dollars of costs are represented on the vertical axis.
47) Cost-volume-profit analysis cannot be used when a firm produces and sells more than one
product.
48) The proportion of sales volumes for various products in a multiproduct company is known as
the composite mix.
49) The proportion of sales volumes for various products in a multiproduct company is known as
the sales mix.
50) An important assumption in multiproduct CVP analysis is a changing sales mix.
51) The variable costing method is required for external financial reporting.
52) The absorption costing method is required for external financial reporting.
53) Under variable costing, only costs that change in total with changes in production levels are
included in product costs.
54) Under variable costing, fixed overhead costs are excluded from product costs.
55) Under absorption costing, fixed overhead costs are excluded from product costs.
56) Managers can use variable costing information for internal decision making, but they must
use absorption costing for external reporting purposes.
57) A cost that remains unchanged in total despite variations in volume of activity within a
relevant range is a:
A) Fixed cost.
B) Curvilinear cost.
C) Variable cost.
D) Step-wise variable cost.
E) Standard cost.
58) A cost that changes in total in proportion to changes in volume of activity is a(n):
A) Differential cost.
B) Fixed cost.
C) Incremental cost.
D) Variable cost.
E) Product cost.
59) A cost that changes as volume changes, but at a nonconstant rate, is called a:
A) Variable cost.
B) Curvilinear cost.
C) Step-wise variable cost.
D) Fixed cost.
E) Differential cost.
60) A cost with a flat cost line within a relevant range that shifts to another level when volume
significantly changes is a(n):
A) Step-wise cost.
B) Fixed cost.
C) Curvilinear cost.
D) Incremental cost.
E) Flat line cost.
61) A cost that includes both fixed and variable cost components is called a:
A) Mixed cost.
B) Step-variable cost.
C) Composite cost.
D) Curvilinear cost.
E) Differential cost.
62) Curvilinear costs always increase:
A) With decreases in volume.
B) In constant proportion to changes in production levels.
C) When management performs break-even analysis.
D) When volume increases, but at a nonconstant rate.
E) On a per unit basis when volume of activity goes down.
63) Which one of the following statements is not true?
A) Total fixed costs remain the same regardless of volume within the relevant range.
B) Total variable costs change with volume.
C) Total variable costs decrease as the volume increases.
D) Fixed costs per unit increase as the volume decreases.
E) Variable costs per unit remain the same regardless of the volume.
64) An important tool in predicting the volume of activity, the costs to be incurred, the sales to
be made, and the profit to be earned is:
A) Target income analysis.
B) Cost-volume-profit analysis.
C) Least-squares regression analysis.
D) Variance analysis.
E) Process costing.
65) Select cost information for Seacrest Enterprises is as follows:
1,000 units of output
5,000 units of output
Total
Cost/Unit
Total
Cost/Unit
Direct materials
$
5,000
$
5.00
$
25,000
$
5.00
Utilities expense
$
1,000
$
1.00
$
3,750
$
0.75
Rent expense
$
4,000
$
4.00
$
4,000
$
0.80
Based on this information:
A) Both direct materials and rent expense are variable costs.
B) Utilities expense is a mixed cost and rent expense is a variable cost.
C) Utilities expense is a mixed cost and rent expense is a fixed cost.
D) Direct materials is a fixed cost and utilities expense is a mixed cost.
E) Both direct materials and utilities expense are mixed costs.
66) Select cost information for Klondike Corporation is as follows:
1,000 units of output
2,000 units of output
Total
Cost/Unit
Total
Cost/Unit
Direct materials
$
4,000
$
4.00
$
8,000
$
4.00
Rent expense
$
2,000
$
2.00
$
2,000
$
1.00
Based on this information:
A) Both direct materials and rent expense are variable costs.
B) Direct materials is a fixed cost and rent expense is a variable cost.
C) Both direct materials and rent expense are fixed costs.
D) Direct materials is a variable cost and rent expense is a fixed cost.
E) Both direct materials and rent expense are mixed costs.
67) Which of the following costs are most likely to be classified as variable?
A) Factory rent
B) Manager salaries
C) Insurance
D) Direct materials
E) Straight-line depreciation