Chapter 6 – Activity Analysis, Cost Behavior, and Cost Estimation
Chapter 06
Activity Analysis, Cost Behavior, and Cost Estimation
True / False Questions
1. The determination of cost behavior is called a cost prediction.
2. Cost estimation typically focuses on the future.
3. Variable costs change in direct proportion to a change in the activity level.
4. Cost that are nearly variable, but increase in small steps instead of continuously are called
step-variable costs.
5. The relevant range is that range of activity where a company achieves its maximum
efficiency.
6. If the organization operates at an activity level outside the relevant range, any cost
predictions based on data from the relevant range may not be very accurate.
7. A committed cost results from a management decision to spend a particular amount of
money for some purpose.
8. An example of a discretionary cost is the cost of research and development.
9. The least-squares regression method of cost estimation relies on only two data points.
10. In regression analysis, the variable that is being predicted is known as the independent
variable.
11. Multiple regression is a statistical method that estimates a linear (straight-line)
relationship between one dependent variable and one independent variable.
12. When the engineering method is applied to costs other than labor, it is referred to as the
experience method.
13. Mismatched time periods are not issues in the collection of data for cost estimation.
14. Outliers are a common data collection problem.
15. In the least-squares regression method, the cost line is estimated so as to maximize the
sum of the squared deviations between the cost line and the data points.
16. The slope of a regression line measures how steeply the cost line rises as activity
increases.
17. The relationship between cost and activity is known as:
18. A forecast of a cost at a particular level of activity is known as:
19. Which of the following costs changes in direct proportion to a change in the activity
level?
20. Macon Company has a variable selling cost. If sales volume increases, how will the total
variable cost and the variable cost per unit behave?
21. What type of cost exhibits the behavior shown below?
Manufacturing Volume (Units)
Cost Per Unit
50,000
$1.95
70,000
1.95
22. Paige Corporation observed that when 25,000 units were sold, a particular cost amounted
to $75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e.,
$3.00 per unit). The cost that Paige is studying can best be described as a:
23. When graphed, a typical variable cost appears as:
24. Norman Company pays a sales commission of 4% on each unit sold. If a graph is
prepared, with the vertical axis representing per-unit cost and the horizontal axis representing
units sold, how would a line that depicts sales commissions be drawn?
25. A company observed a decrease in the cost per unit. All other things being equal, which of
the following is most likely true?
26. Ralston has the following budgeted costs at its anticipated production level (expressed in
hours): variable overhead, $165,000; fixed overhead, $250,000. If Ralston now revises its
anticipated production slightly upward, it would expect:
27. What type of cost exhibits the behavior shown below?
Manufacturing Volume (Units)
Total Cost
Cost Per Unit
50,000
$150,000
$3.00
80,000
150,000
1.88
28. When graphed, a typical fixed cost appears as:
29. Straight-line depreciation is a typical example of a:
30. Which of the following choices denotes the typical cost behavior of advertising and sales
commissions?
Advertising
Sales Commissions
Variable
Variable
Variable
Fixed
Fixed
Variable
Fixed
Fixed
Semivariable
Variable
31. Costs that remain the same over a wide range of activity, but jump to a different amount
outside that range, are known as:
32. When graphed, a typical step-fixed cost appears as:
33. Each of Boggart’s production managers (annual salary cost, $45,000) can oversee 60,000
machine hours of manufacturing activity. Thus, if the company has 50,000 hours of
manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed;
for 125,000 hours, three managers are needed; and so forth. Boggart’s salary cost can best be
described as a:
34. Sophie Corporation recently produced and sold 100,000 units. Fixed costs at this level of
activity amounted to $50,000; variable costs were $100,000. How much cost would the
company anticipate if during the next period it produced and sold 102,000 units?
35. Organize, Inc. has only variable costs and fixed costs. A review of the company’s records
disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to
$800,000 and the cost per unit manufactured totaled $11. On the basis of this information,
how much cost would the firm anticipate at an activity level of 205,000 units?
36. A review of Parson Corporation’s accounting records found that at a volume of 90,000
units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of
this information, what amount of total cost would Parson anticipate at a volume of 85,000
37. A cost that has both a fixed and variable component is known as a:
38. A mixed cost is also known as a:
39. Brock Morton has a fast-food franchise and must pay a franchise fee of $45,000 plus 4%
of gross sales. In terms of cost behavior, the fee is known as a:
40. Which of the following is (are) example(s) of a mixed cost?
I. A building that is used for both manufacturing and sales activities.
II. An employee’s compensation, which consists of a flat salary plus a commission.
III. Depreciation that relates to five different machines.
IV. Maintenance cost that must be split between sales and administrative offices.
41. Which of the following costs exhibits both decreasing and increasing marginal costs over
a specific range of activity?
42. The relevant range is that range of activity:
43. Within the relevant range of activity, costs:
44. Within the relevant range, a curvilinear cost function can sometimes be graphed as a:
45. A variable cost that has a definitive physical relationship to the activity measure is called a
(n):
46. Costs that result from a company’s ownership or use of facilities and its basic
organizational structure are known as:
47. Property taxes are an example of a (n):