Chapter 3—Cost Behavior
TRUE/FALSE
1. A cost that changes in total as output changes is a variable cost.
2. The cost of raw materials used is usually a fixed cost.
3. Fixed costs are costs that in total remain constant within the relevant range as the level of output
increases or decreases.
4. As output decreases fixed costs per unit will increase.
5. As output increases variable cost per unit will also increase.
6. The cost of advertising is usually a discretionary fixed cost.
7. A discretionary fixed cost can be changed relatively easily at management discretion.
8. The relevant range is the range of output which the assumed cost relationship is valid for the normal
operations of the firm.
9. Determining cost behavior is not essential to planning, controlling, and decision making.
10. A variable cost increases in total when output increases but the per-unit costs remains the same.
11. Cost relationships may change at output levels outside of the relevant range.
12. Computing unit fixed costs may result in misleading information.
13. Discretionary fixed costs often involve a long-term contract.
14. Total variable costs = Variable rate amount of output.
15. A driver is a factor that causes or leads to a change in a cost.
16. Mixed costs have both a fixed and a variable component.
17. Managerial judgment is critically important in determining cost behavior.
18. The high-low method is an objective method to separate the cost behavior of a mixed cost.
19. “Outliers” are points that seem to fit the general pattern of behavior.
20. The slope of a mixed cost line is equal to the fixed element of the cost.
21. Using the high-low method, the calculation of the cost line uses the highest and lowest activity period.
22. Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an
outlier.
23. Using a linear regression program, the term ‘Intercept’ refers to the variable cost.
24. Using a regression program, the term ‘X Variable 1’ refers to the dependent variable.
25. Using regression, the value of ‘X Variable 1’ equals the slope of the line.
MATCHING
Select the appropriate cost behavior for each of the costs listed below.
a.
variable
b.
fixed
1. factory supervisor’s salary
2. factory supplies
3. direct labor
4. factory insurance
5. controller’s salary
6. depreciation
7. direct materials
8. indirect materials
Select the appropriate type of fixed cost for each cost listed below.
a.
discretionary
b.
committed
9. property taxes
10. advertising
11. cost of leasing
12. travel costs
13. cost of executive training seminars
14. depreciation
15. rent of building
16. salary of receptionist
Select the appropriate item for each of the definitions listed below.
a.
relevant range
b.
cost behavior
c.
driver
d.
variable cost
e.
fixed cost
17. a factor that causes a change in cost or activity
18. may be discretionary or committed
19. total cost depends on the level of output
20. a description of how a cost changes when the level of output changes
21. the range of output over which the assumed cost relationship is valid
Select the appropriate cost behavior for the following costs incurred by an automobile manufacturer.
a.
variable
b.
fixed
22. cost of windshields
23. cost of assembly line workers
24. depreciation on robotic equipment
25. cost of car stereos
26. cost of transporting cars to dealerships
27. cost of inspections
28. factory supervisor’s salary
29. cost of rework
Select the appropriate cost behavior for each of the costs listed below.
a.
variable
b.
fixed
30. cost of lubricating machinery
31. sales commissions
32. salary of chief executive officer
33. real estate taxes
34. license fees on automobiles
35. factory supplies
36. rental cost of warehouse
37. raw materials
Select the appropriate type of cost for each of the definitions below.
a.
variable
b.
fixed
c.
mixed
d.
step
38. remains the same in total within the relevant range
39. will increase in total in direct proportion to an increase in the cost driver
40. has an increased fixed component at specific intervals
41. has both a variable and a fixed component
Select the appropriate item for each of the definitions listed below.
a.
committed fixed cost
b.
discretionary fixed cost
c.
mixed cost
d.
step cost
42. the y-intercept corresponds to the fixed cost
43. must be purchased in chunks
44. can be changed by management
45. may involve a long-term contract
Select the appropriate type of cost for each of the definitions listed below.
a.
variable
b.
fixed
c.
mixed
d.
step
46. total cost = total fixed cost + total variable cost
47. remains constant on a per-unit basis within the relevant range
48. will decrease on a per-unit basis as output increases
49. has a discontinuous cost function
Select the appropriate item for each of the definitions listed below.
a.
dependant variable
b.
independent variable
c.
intercept
d.
slope
50. it corresponds to the variable rate
51. it corresponds to the fixed cost
52. it measures output and explains changes in cost
53. its value depends on the value of another variable
Select the appropriate item for each of the definitions listed below.
54. results in the best-fitting line through a set of data points
55. may reveal the presence of outliers
56. involves plotting data points on a graph
57. allows a cost analyst to inspect the data visually
58. relies on the quality of the subjective judgment of the analyst
59. is a statistical method
Select the best description for the following:
SUMMARY OUTPUT
Regression Statistics
Multiple R
1
R Square
0.99
Adjusted R Square
0.99
Standard Error
195.35
Observations
5
ANOVA
df
SS
F
Significance F
Regression
1
12492415.96
327.37
0
Residual
3
114479.24
Total
4
12606895.2
Standard
Lower
Upper
Lower
Upper
Coefficients
Error
t Stat
P-value
95%
95%
95%
95.%
Intercept
10630.8
1187.44
8.95
0
6851.83
14409.76
6851.83
14409.76
X Variable 1
8.83
0.49
18.09
0
7.28
10.38
7.28
10.38
a.
variable rate
b.
fixed cost
c.
variable cost
d.
cost equation
e.
coefficient of determination
60. $8.83 independent variable
61. $10,630.80
62. 8.83
63. 99%
64. cost = intercept + X variable 1 driver
COMPLETION
1. The ________________ is the range of output over which the assumed cost relationship is valid for
the normal operations of a firm.
2. A cost __________ is a casual factor that measures the output of the activity that leads costs to change.
3. __________________ is the general term for describing whether a cost changes when the level of
output changes.
4. The fabric used to manufacture curtains is an example of a ____________ cost.
5. Depreciation on factory equipment would be an example of a _________.
6. A type of cost behavior where the true total cost function is increasing at a decreasing rate is called
______________.
7. Rental expense for a warehouse is an example of a ___________ cost.
8. Fixed costs that cannot be easily changed and typically involve a long-term contract are known as
___________________.
9. A fixed cost that management can easily decide to increase or decrease is known as a
_________________.
10. ___________________ are costs that in total vary in direct proportion to changes in output within the
relevant range.
11. A _______________ displays a constant level of cost for a range of output and then jumps to a higher
level of cost at some point.
12. _______________________ are costs that have both a fixed and a variable component.
13. The ______________________________ is a statistical way to find the best-fitting line through a set
of data points.
14. __________________________ is critically important in determining cost behavior and is by far the
most widely used method in practice.
15. The _________________________ is a way to see the cost relationship by plotting the data points on
a graph.
16. The ________________________ is a variable whose value depends on the value of another variable.
17. Graphically, the ______________ is the point at which the cost line intercepts the cost (vertical) axis.
18. An advantage of the high-low method is that it is ___________.
19. The percentage of variability in the dependent variable explained by an independent variable is called
the ____________________________________.
20. The spreadsheet regression program supplies more than the estimates of the coefficients; it also
provides information that can be used to see how ________ the cost equation is which is a feature not
available for the high-low method.
MULTIPLE CHOICE
1. Knowing how costs change as output changes is essential to
a.
planning and controlling.
b.
controlling and decision making.
c.
planning, controlling and decision making.
d.
None of these are correct.
2. A fixed cost within the relevant range
a.
increases in total as output decreases.
b.
does not change in total as output changes.
c.
decreases in total as output increases.
d.
All of these are correct.
3. Which of the following would be an example of a fixed cost?
a.
wages for an assembly line worker
b.
electric bill
c.
depreciation on equipment
d.
materials used
4. Which of the following would not be an example of a fixed cost?
a.
glue used to put together tables
b.
insurance on factory building
c.
depreciation on factory building
d.
property taxes
5. Discretionary fixed costs
a.
cannot be easily changed.
b.
often involve a long-term contract.
c.
can be changed relatively easy at management discretion.
d.
increase as output increases.
6. Which of the following is an example of a discretionary fixed cost?
a.
depreciation of equipment
b.
advertising costs
c.
rental of machinery
d.
insurance on automobiles
7. Which of the following is not an example of a discretionary fixed cost?
a.
research and development
b.
training costs
c.
advertising costs
d.
direct materials
8. A committed fixed cost
a.
can easily be changed.
b.
often involves a long-term contract.
c.
changes when the level of output changes.
d.
all of these are correct
9. Variable costs within the relevant range
a.
stay constant on a per unit basis as output changes.
b.
increase in total as output increases.
c.
decrease in total as output decreases.
d.
All of these are correct.
10. Which of the following would be a variable cost for a dentist’s office?
a.
depreciation on equipment
b.
cost of renting office space
c.
cost of teeth cleaning material
d.
salary of dentist
11. Total variable costs
a.
increases as output increases.
b.
decreases as output decreases.
c.
equal a variable rate amount of output.
d.
all of these are correct.
12. A factor that causes or leads to a change in a cost or activity is a(n)
a.
cost formula.
b.
step cost.
c.
mixed cost.
d.
driver.
13. Which of the following would probably be a fixed cost in a fast-food restaurant?
a.
cost of hamburger
b.
cost of french fries
c.
shift manager’s salary
d.
utility cost
14. Which of the following would probably be a variable cost at a college?
a.
salary of the head janitor
b.
cost of registration forms
c.
salary of the college president
d.
none of these options
15. The relevant range
a.
is the normal range of output.
b.
is the range of output where cost relationships are valid.
c.
may change from period to period.
d.
All of these are correct.
16. Per-unit fixed costs
a.
can be misleading and lead to poor decisions.
b.
stay the same as output changes.
c.
decrease as output decreases.
d.
increase as output increases.
17. Which of the following would probably be a discretionary fixed cost for a law firm?
a.
salary of receptionist
b.
advertising
c.
depreciation on furniture and equipment
d.
cost of legal forms
18. Which of the following would probably be a committed fixed cost for an accounting firm?
a.
lease of computers
b.
rent on the office building
c.
property taxes on building
d.
All of these are correct.
19. Per-unit variable costs
a.
can be misleading and lead to poor decisions.
b.
increase as output increases.
c.
decrease as output decreases.
d.
remain constant within the relevant range.
20. If output increases
a.
per-unit fixed cost will increase.
b.
total variable costs will increase.
c.
per-unit variable costs will increase.
d.
per-unit variable costs will decrease.
21. If output decreases
a.
total fixed costs will remain the same.
b.
total variable costs will increase.
c.
per-unit fixed costs will decrease.
d.
All of these are correct.
22. If output increases by 50% and is still within the relevant range
a.
total fixed costs will increase by 50%.
b.
per-unit fixed cost will remain the same.
c.
total variable costs will increase by 50%.
d.
net income will increase by 50%.
Figure 3-2.
Lassiter Toys, Inc.
Cost of Materials
No. of toys produced
Total cost of materials
100,000
$20,000