Chapter 3—Cost Behavior Key
1. Costs can display variable, fixed, or mixed behavior, and it important that they are classified accurately.
2. A cost that does not change as output changes is a variable cost, and one that changes is a fixed cost.
3. A cost object is the item for which managers want cost information, so the first step is to determine
appropriate cost objects.
4. Fixed costs are costs that, in total, are constant within the relevant range as the level of the associated driver
varies.
5. Variable costs are defined as costs that, in total, are constant regardless of change in an activity driver.
6. Mixed costs are costs that have both a fixed and a variable component.
7. Resources, such as direct materials, direct labor, electricity, equipment, and so on, are economic elements
8. The level of activity performance where the amount of activity capacity needed corresponds to the level of
efficiency required is called the activity capacity.
9. Resources are categorized as flexible, which are supplied as needed, and committed, which are supplied in
advance of usage.
10. Activity-based use of resources can improve both managerial control and decision making because it
encourages managers to pay more attention to controlling resource usage and spending.
11. Methods of estimating costs used by companies include the industrial engineering method, the account
analysis method, and the instant decision method.
12. The industrial engineering method is used to determine which activities, and in what amounts, are necessary
to complete a process.
13. The account analysis method can be used to estimate costs by classifying accounts in the general ledger as
variable.
14. The three widely used quantitative methods of separating a mixed cost into its fixed and variable
components are the high-low method, the scatter plot method, and the method of least squares.
15. The high-low method preselects the two points that are used to compute the parameters F and X in the
expression Y = F + VX
16. The plot of data points showing the relationship between materials handling costs and activity output is
called a scattergraph.
17. In the method of least squares, each single measure of closeness is first squared. Squaring the deviations
avoids problems caused by a mix of positive and negative numbers.
18. A feature of regression routines, not provided by the scatter plot of high-low methods, is to provide
information to and in the assessment of reliability of the estimated costs formula.
19. The percentage of variability in the dependent variable explained by an independent variable (i.e. measure
of activity output) is called the coefficient of correlation.
20. An alternative measure of goodness of fit is the coefficient of determination.
21. Finding a strong statistical association between an activity cost and an activity driver can provide evidence
22. Whenever least squares is used to fit an equation involving two or more independent variables, the method
is called multiple regression.
23. When Multiple regression is used, the user has a choice of using manual computation or using regression
programs.
24. Multiple regression is a dependable tool for identifying the behavior of activity costs.
25. Multiple regression can be useful to assess cost behavior when dependent variable is affected by only one
independent variable.
26. A number of cost behavior patterns do not follow a linear pattern, instead, they follow a nonlinear cost curve
called the learning curve.
27. Managers agree that the ideas behind the learning curve can extend to the service industry only.
28. The basis of the learning curve is that as we perform an action over and over, we improve, and each
additional performance takes less time than the preceding ones.
29. The experience curve relates cost to increased efficiency, such that the more a task is performed, the lower
the cost of doing will be.
30. The cumulative average-time learning curve model states that the cumulative average time per unit increases
by a constant percentage.
31. The most widely used method to determine cost behavior is managerial judgement.
32. Managerial judgement includes the possibility of mixed costs.
33. Before opting to use managerial judgment, management should make sure that each cost is predominantly
fixed or variable.
34. Based on managerial judgement, the best predictor of manufacturing costs is the units available.
35. If a company changes from skilled labor to robots, the previous data are of little value in predicting future
costs.
36. __________ explain changes in costs as units produced change.
37. __________ explain changes in cost factors other than changes in units produced.
38. __________ analysis focuses on how costs react to changes in activity levels.
39. __________ are assumed to be the sole drivers of a traditional cost management system.
40. __________ result when organizations acquire many multiperiod service capacities by paying cash up
front.
41. __________ are those acquired from outside sources where the terms of acquisition do not require any long-
term commitments.
42. __________ are costs incurred that provide long-term activity capacity.
43. A __________ function displays a constant level of cost for a range of output and then jumps to a higher
level.
44. Costs that follow a step-cost behavior are defined as __________ costs.
45. The __________ analysis method is a method of determining cost behavior.
46. The __________ method may be used to determine the activities and amounts for cost behavior.
47. __________ and __________ studies may be used in conjunction with the industrial engineering method.
48. The three quantitative methods of separating a mixed cost into its fixed and variable components are: the
high-low method, the scatter plot method and the method of __________ .
49. The method of least squares requires a __________ in order to be utilized.
regression
50. The Y in the equation Y = F + VX represents the __________, the dependent variable
51. The __________ parameter is the point at which the mixed cost line intercepts the cost (vertical) axis.
52. The graph showing the relationship between activity costs and drivers/outputs is called the __________ .
53. The hypothesis test of cost parameters indicates whether the parameters are different from __________ .
54. A __________ interval provides a range of values for the actual cost with a prespecified degree of
confidence.
55. A correlation coefficient near +1 means that two variables are moving in the __________ direction.
56. A correlation coefficient near 0 means that two variables are __________ .
57. A correlation coefficient near -1 means that two variables are moving in the __________ direction
58. The __________ method is used whenever least squares is used to fit an equation involving two or more
independent variables.
59. Multiple regression has __________ or __________ independent variables.
60. __________ is useful when the dependent variable is affected by more than one independent variable.
61. When a cost behavior pattern does not follow a linear pattern, a non linear cost curve is used called the
__________ curve.
62. Each time cumulative volume doubles, __________ fall by a constant and predictable percentage.
63. Costs in marketing, distribution, and service after the sale __________ as number of units produced and
sold __________ .
64. Cumulative average-time __________ curve assumes the cumulative average time per unit decreases by a
constant percentage each time the cumulative quantity of units produced doubles.
65. Knowledge of cost and activity-level relationship is used by experienced __________ .
66. Cost behavior analysis focuses on how costs
67. The drivers that explain changes in costs as units produced change are called:
68. Drivers that explain changes in costs as factors other than changes in units produced are called:
69. In a traditional cost management system, cost behavior is assumed to be driven only by
70. Which of the following would be an example of a unit-based cost driver?
71. A $4,000 per month salary paid to a supervisor is an example of a:
72. When the volume of activity increases within the relevant range, the fixed cost per unit
73. Fixed cost per unit is $7 when 25,000 units are produced and $5 when 35,000 units are produced. What is
the total fixed cost when nothing is produced?
74. The range of activity within which a linear cost function is valid is called the
75. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of
the following costs would be represented by a line that is parallel to the horizontal axis?
76. Given the following graphs, which graph represents fixed costs?
I
II
III
77. As the volume of activity increases within the relevant range, the variable cost per unit
78. A manufacturing company pays an assembly line worker $12 per hour. What is the proper classification of
this labor cost?
79. The direct material cost is $20,000 when 2,000 units are produced. What is the direct material cost for 2,500
units produced?
80. Sandusky Corporation has the following costs for 1,000 units:
Total Cost
Cost per Unit
Direct materials
$ 1,500
$ 1.50
Direct labor
7,500
7.50
Depreciation on building
30,000
30.00
What is the total cost of direct materials for 100 units?
81. Which of the following costs is a variable cost?
82. Direct materials are an example of a
83. Which of the following statements is TRUE about fixed and variable costs?
84. Which of the following statements is TRUE about relevant range?
85. Which of the following is NOT a correct statement concerning cost behavior?
86. The following is an example of a mixed cost:
87. The linearity assumption is most likely to be a close approximation for an underlying nonlinear cost
function
88. Mixed costs, by definition, contain both
89. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of
the following costs would be represented by a line that starts at the origin and reaches a maximum value beyond
which the line is parallel to the horizontal axis?
90. Longhorn Enterprises rents a truck for a flat fee plus an additional charge per mile. What type of cost is the
rent?
91. If production volume increases from 16,000 to 20,000 units,
92. Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $250 per month
plus $0.40 per mile. Management is evaluating the desirability of switching to a modern, fuel-efficient truck,
which can be leased from Goliath, Inc., for a fee of $600 per month plus $0.05 per mile. All operating costs and
fuel are included in the rental fees. In general, a lease from
93. An equipment lease that specifies a payment of $8,000 per month plus $7 per machine hour used is an
example of a
94. Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per
year and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000
units.
See Figure 3-1. Develop a cost equation for the total machine maintenance cost.
95. Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per
year and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000
units.
Refer to Figure 3-1. Compute the total variable machine maintenance cost last year.
96. Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per
year and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000
units.
See Figure 3-1. Compute the total machine maintenance cost for last year.
97. Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per
year and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000
units.
See Figure 3-1. What is the total maintenance cost per unit produced?
98. Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per
year and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000
units.
See Figure 3-1. If 300,000 machine hours had been worked last year, what would be the total machine
maintenance cost?
99. The efficient level of activity performance is called
100. If all the activity capacity acquired is not used, this is an example of
101. Flexible resources
102. Committed resources
103. Which of the following is an example of a committed fixed expense?
104. The expenses that result when organizations acquire many multiperiod service capacities by paying cash
up front or by entering into an explicit contract that requires periodic cash payments are called:
105. The type of resources that are acquired from outside sources, where the terms of acquisition do NOT
require any long-term commitment for any given amount of the resource are called:
106. The costs incurred that provide long-term activity capacity, usually as the result of strategic planning are
called:
107. Which of the following is an example of a discretionary fixed expense?
108. The costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly planning
are called:
109. When a firm acquires the resources needed to perform an activity, it is obtaining
110. The activity-based resource usage model allows managers to better calculate the changes in resource
supply and demand resulting from decisions such as:
111. A nursing home requires one nurse for each six patients. This is an example of a
112. Which of the following is an example of a step-fixed cost?
113. Salaries paid to shift supervisors are an example of a
114. Figure 3-2
A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders
were processed.
Refer to Figure 3-2. What is the cost of unused activity?
115. Figure 3-2
A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders
were processed.
Refer to Figure 3-2. What is the cost of resource usage?
116. Figure 3-3
The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last
year 5,250 design changes were produced by the four engineers. Each engineer is paid $60,000 per year.
Refer to Figure 3-3. Calculate the activity rate per change order.
117. Figure 3-3
The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last
year 5,250 design changes were produced by the four engineers. Each engineer is paid $60,000 per year.
Refer to Figure 3-3. Calculate the unused capacity.
118. Figure 3-3
The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last
year 5,250 design changes were produced by the four engineers. Each engineer is paid $60,000 per year.
Refer to Figure 3-3. What is the unused capacity in dollars?
119. Which of the following is NOT a method of determining cost behavior?
120. The method for analyzing cost behavior that generally classifies general ledger accounts is
121. The cost behavior method that may use time and motion studies to determine the activities and amounts for
cost behavior analysis is
122. Which of the following decision-making tools would NOT be useful in determining the slope and intercept
of a mixed cost?
123. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as
follows:
124. In the formula Y = F + VX, VX refers to the
D. independent variable.
125. In the formula Y = F + VX, V refers to the
126. In the formula Y = F + VX, F refers to the
127. In the formula Y = F + VX, Y refers to the
128. In the formula Y = F + VX, X refers to the