Chapter 2 – Cost Behavior and Cost Estimation
2-1
Cost Behavior and Cost
Estimation
Learning Objectives
unit cost. (Unit 2.1)
(Unit 2.2)
3. Prepare a contribution format income statement. (Unit 2.3)
Summary of End of Chapter Material
Difficulty: E = Easy, M = Moderate, D = Difficult
Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation
AACSB: A = Analytic, C = Communication, E = Ethics
AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology
AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management,
PS = Problem Solving and Decision Making, T = Technology
IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis,
PM = Performance Measurement, R = Reporting, SP = Strategic Planning
Item
L. O.
Difficulty
Level
Minutes to
Complete
Bloom’s
Taxonomy
AACSB
IMA
Ethics
Coverage
GUIDED UNIT PREPARATION
Unit 2.1
1
1
M
2
C
A
CM
2
1
M
4
C, K
A
CM
3
1
M
3
C, K
A
CM
4
1
E
2
C
A
CM
5
1
M
4
C, K
A
CM
6
1
M
4
C, K
A
CM
Unit 2.2
1
2
E
1
K
A
CM
2
2
M
2
C
A
CM
3
2
M
4
K
A
CM
4
2
E
2
C
A
CM
5
2
M
4
C
A
CM
Unit 2.3
1
3
E
1
K
A
CM
2
3
E
2
K
A
CM
3
3
D
3
C
A
CM
4
3
D
3
C
A
CM
EXERCISES
2-1
1
M
12
C
A
CM
2-2
1
M
15
C
A
CM
2-3
1
M
12
AP
A
CM
2-4
1
M
15
AP, C
A
CM
2-5
1
M
15–20
AP, AN
A
CM
2-6
1
D
5-7
AN
A
CM
2
CHAPTER
photo: © Tischenko
Irina/Shutterstock
2-2
Item
L. O.
Difficulty
Level
Minutes
to
Complete
Bloom’s
Taxonomy
AACSB
IMA
Ethics
Coverage
2-7
1
D
8
AP, AN
A
CM
2-8
2
M
15–20
AP, AN
A
CM
2-9
2
M
20
AP, AN
A
CM
2-10
2
M
12
AP, AN
A
CM
2-11
2
D
20
AP
A
CM
2-12
2
D
10–15
AP
A
CM
2-13
3
M
10–15
AP
A
CM
2-14
3
E
10–15
AN
A
CM
2-15
3
D
10–15
AP
A
CM
2-16
3
M
15
AP
A
CM
2-17
3
E
15
AP
A
CM
2-18
3
E
10
AP
A
CM
PROBLEMS
2-19
1
E
20–25
AP, AN
A
CM
2-20
2
M
20–25
AP, AN
A
CM
2-21
2
D
15–20
AP, AN
A
CM
2-22
2
M
20–25
AP, AN
A
CM
2-23
2
D
30–35
AP, AN
A
CM
2-24
1, 3
D
20–25
AP
A
CM
2-25
2, 3
D
20
AP
A
CM
2-26
3
D
20–25
AP
A
CM,
DA
C&C CONTINUING CASE
2-27
1
E
5-7
C
A
CM
2-28
2, 3
M
10
AP, AN
A
CM
CASES
2-29
1
D
20–25
AP
A
CM
2-30
M
10–15
AN
A, E
BA
Chapter 2 – Cost Behavior and Cost Estimation
2-3
SOLUTIONS TO GUIDED UNIT PREPARATION
Unit 2.1
1. Managers must be able to predict the financial results of their various
2. A variable cost is a cost that varies in total in proportion to a business
bicycle manufacturer, and cost of postage for a direct mail advertiser.
3. A fixed cost is a cost that does not change in total with the activity
rent, a manager’s salary, and property taxes.
4. Discretionary fixed costs are fixed costs that can be changed over the
run.
5. A mixed cost is a cost that has both fixed and variable components.
printing when the charge includes a set up fee plus a charge for each
t-shirt printed.
6. A step cost is a cost that is fixed over a small range of activity. Total
cost will not change as activity levels increase if the level of activity is
students on a class trip.
2-4
Unit 2.2
2. With a scattergraph, a line is drawn to best fit the data points. The
activity, is the variable cost per unit.
3. The high-low method uses the highest and lowest points within a data
4. Regression analysis is preferable as it produces a line with the least
5. The relevant range is the normal level of operating activity. The
relevant range.
Unit 2.3
2. Contribution margin ratio is the contribution margin divided by sales.
3. If the variable cost per unit increases and the selling price decreases,
Chapter 2 – Cost Behavior and Cost Estimation
2-5
4. A product’s contribution margin can be increased by increasing the
SOLUTIONS TO EXERCISES
Exercise 2-1
a. variable
e. step
b. fixed
f. fixed
c. variable
g. mixed
d. fixed
Exercise 2-2
a. variable
f. fixed
b. fixed
g. mixed
c. step
h. variable
d. mixed
i. variable
e. variable
j. fixed
Exercise 2-3
a. TC(300) = (300 × $10 per return) + $500 fee = $3,500
c. As the number of returns increased from 300 to 500, the fixed cost of
2-6
Exercise 2-4
Answer
Reasoning
Balloons
variable
The total cost increases as activity
increases and the cost per unit remains
constant at $2 per bouquet.
Insurance
fixed
The total cost remains constant across all
activity levels.
Delivery
mixed
The total cost increases as activity
increases and the cost per unit decreases
as activity increases.
Employee
compensation
mixed
The total cost increases as activity
increases and the cost per unit decreases
as activity increases.
Advertising
fixed
The total cost remains constant across all
activity levels.
Per unit costs:
5,000
7,500
10,000
Balloons
$10,000
5,000 bouquets
= $2
$15,000
7,500 bouquets
= $2
$20,000
10,000 bouquets
= $2
Delivery
$5,500
5,000 bouquets
= $1.10
$8,000
7,500 bouquets
= $1.07
$10,500
10,000 bouquets
= $1.05
Employee
compensation
$10,000
5,000 bouquets
= $2
$13,000
7,500 bouquets
= $1.73
$16,000
10,000 bouquets
= $1.60
2-7
Exercise 2-5
Home Visit Hours
F, V, M
10,000
12,500
15,000
17,500
Medical records
automation and storage
mixed
$3,000
$3,625
$4,250
$4,875
Medical testing supplies
variable
$7,500
$9,375
$11,250
$13,125
Insurance filing services
variable
$4,000
$5,000
$6,000
$7,000
Communications system
lease
fixed
$2,000
$2,000
$2,000
$2,000
Variable cost per unit:
Medical records automation and storage:
$4,875 $3,000
17,500 10,000
Medical testing supplies:
$13,125 $7,500
17,500 10,000
= $0.75 per home visit hour
Insurance filing services:
$6,000 $4,000
15,000 10,000
Fixed cost (using the low point):
Medical records automation and storage:
Medical testing supplies:
Insurance filing services:
Exercise 2-5, continued
2-8
Total cost:
Medical records automation and storage:
Medical testing supplies:
Insurance filing services:
Chapter 2 – Cost Behavior and Cost Estimation
2-9
Exercise 2-6
units next year.
Exercise 2-7
b. Decrease – the increase in accounting quantity would lower the fixed
Exercise 2-8
a.
exercise.
b. The line intersects the y-axis at $50, representing total fixed costs.