CHAPTER 19(4): COST BEHAVIOR AND COST-VOLUME-PROFIT
ANALYSIS
1.
Cost behavior refers to the methods used to estimate costs for use in managerial decision making.
a.
True
b.
False
2.
Cost behavior refers to the manner in which a cost changes as the related activity changes.
a.
True
b.
False
3.
The fixed cost per unit varies with changes in the level of activity.
a.
True
b.
False
4.
A production supervisor’s salary that does not vary with the number of units produced is an example of a fixed cost.
a.
True
b.
False
5.
Direct materials cost that varies with the number of units produced is an example of a fixed cost of production.
a.
True
b.
False
6.
In order to choose the proper activity base for a cost, managerial accountants must be familiar with the
operations
of the entity.
a.
True
b.
False
7.
The relevant range is useful for analyzing cost behavior for management decision-making purposes.
a.
True
b.
False
8.
The relevant activity base for a cost depends upon which base is most closely associated with the cost and the
decision-making needs of management.
a.
True
b.
False
9.
The range of activity over which changes in cost are of interest to management is called the relevant range.
a.
True
b.
False
10.
Total fixed costs change as the level of activity changes.
a.
True
b.
False
11.
Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of
the
variable costs when plotted against the activity level appears as a circle.
a.
True
b.
False
12.
Variable costs are costs that remain constant in total dollar amount as the level of activity changes.
a.
True
b.
False
13.
Variable costs are costs that remain constant on a per-unit basis as the level of activity changes.
a.
True
b.
False
14.
Variable costs are costs that vary in total in direct proportion to changes in the activity level.
a.
True
b.
False
15.
Variable costs are costs that vary on a per-unit basis with changes in the activity level.
a.
True
b.
False
16.
Direct materials and direct labor costs are examples of variable costs of production.
a.
True
b.
False
17.
Total variable costs change as the level of activity changes.
a.
True
b.
False
18.
Unit variable cost does not change as the number of units of activity changes.
a.
True
b.
False
19.
A mixed cost has characteristics of both a variable and a fixed cost.
a.
True
b.
False
20.
Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost.
a.
True
b.
False
21.
A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost.
a.
True
b.
False
22.
For purposes of analysis, mixed costs can generally be separated into their variable and fixed components.
a.
True
b.
False
23.
The contribution margin ratio is the same as the profit-volume ratio.
a.
True
b.
False
24.
Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.
a.
True
b.
False
25.
The dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost.
a.
True
b.
False
26.
The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to
provide
operating income is termed the contribution margin ratio.
a.
True
b.
False
27.
If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution
margin
ratio is 60%.
a.
True
b.
False
28.
If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution
margin
ratio is 40%.
a.
True
b.
False
29.
The data required for determining the break-even point for a business are the total estimated fixed costs for
a
period, stated as a percentage of net sales.
a.
True
b.
False
30.
If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is
$930,000.
a.
True
b.
False
31.
If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold.
a.
True
b.
False
32.
The point in operations at which revenues and expenses are exactly equal is called the break-even point.
a.
True
b.
False
33.
Break-even analysis is one type of cost-volume-profit analysis.
a.
True
b.
False
34.
If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point.
a.
True
b.
False
35.
If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break–
even
point.
a.
True
b.
False
36.
If employees accept a wage contract that increases the unit contribution margin, the break-even point
will
decrease.
a.
True
b.
False
37.
If employees accept a wage contract that decreases the unit contribution margin, the break-even point
will
decrease.
a.
True
b.
False
38.
If direct materials cost per unit increases, the break-even point will decrease.
a.
True
b.
False
39.
If direct materials cost per unit increases, the break-even point will increase.
a.
True
b.
False
40.
If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will
decrease.
a.
True
b.
False
41.
If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating
income
of $50,000 are 10,000 units.
a.
True
b.
False
42.
If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating
income
of $30,000 are 14,000 units.
a.
True
b.
False
43.
Only a single line, which represents the difference between total sales revenues and total costs, is plotted on
the
profit-volume chart.
a.
True
b.
False
44.
Only a single line, which represents the difference between total sales revenues and total costs, is plotted on
the
cost-volume-profit chart.
a.
True
b.
False
45.
Cost-volume-profit analysis can be presented in both equation form and graphic form.
a.
True
b.
False
46.
If a business sells two products, it is not possible to estimate the break-even point.
a.
True
b.
False
47.
If a business sells four products, it is not possible to estimate the break-even point.
a.
True
b.
False
48.
Even if a business sells six products, it is possible to estimate the break-even point.
a.
True
b.
False
49.
If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to
$2,500,000,
and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units.
a.
True
b.
False
50.
If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to
$2,500,000,
and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.
a.
True
b.
False
51.
If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety
is
25%.
a.
True
b.
False
52.
If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety
is
45.8%.
a.
True
b.
False
53.
Companies with large amounts of fixed costs will generally have a high operating leverage.
a.
True
b.
False
54.
A low operating leverage is normal for highly automated industries.
a.
True
b.
False
55.
Garmo Co. has an operating leverage of 5. Next year’s sales are expected to increase by 10%. The company’s
operating income will increase by 50%.
a.
True
b.
False
56.
The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be
accurately
divided into fixed and variable components.
a.
True
b.
False
57.
Absorption costing is required for financial reporting under generally accepted accounting principles.
a.
True
b.
False
58.
The adoption of variable costing for managerial decision making is based on the premise that fixed factory
overhead
costs are related to productive capacity of the manufacturing plant and are normally not affected by the
number of
units produced.
a.
True
b.
False
59.
In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost
of
goods sold.
a.
True
b.
False
60.
Assuming no other changes, operating income will be the same under both the variable and absorption
costing
methods when the number of units manufactured equals the number of units sold.
a.
True
b.
False