Deck 4: Techniques for Estimating Fixed and Variable Costs

Question 1

Most firms rely on future data to estimate their cost structure.

Answer 1

False

Question 2

The high-low method avoids the need to classify individual cost items as fixed or variable.

Answer 2

True

Question 3

The contribution margin is well suited to evaluate short-term decision options.

Answer 3

True

Question 4

An advantage of using the high-low method is that we can apply it if we know only total revenues, total costs, and activity volume.

Question 5

A disadvantage of using the regression analysis method is that it provides only one statistic to evaluate the data.

Question 6

With advances in computer and information technologies, the account classification task may still be a daunting task.

Question 7

The contribution margin statement groups costs by their function.

Question 8

The major disadvantage of the account classification method is that it uses few observations of aggregate cost data to estimate total fixed and variable costs.

Question 9

The regression analysis method results in the least error between the estimated and true total cost line.

Question 10

The regression analysis method of estimating fixed and variable costs uses all available observations to come up with a line that best "fits" the data.

Question 11

R-square will always lie between negative one and positive one.

Question 12

Because account classification requires us to examine each account in detail, it often provides inaccurate estimates.

Question 13

The high-low method uses two observations of aggregate cost data to estimate total fixed costs and the unit variable cost.

Question 14

Using the high-low method, we know the true cost line.

Question 15

A major drawback of using regression analysis is that the technique makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions.

Question 16

Capacity costs are controllable in the short term.

Question 17

The account classification is both time-consuming and subjective in nature.

Question 18

Using the high-low method, managers use the two observations pertaining to the highest and lowest activity levels because these values are most likely to define any abnormal costs.

Question 19

The contribution margin is the amount that contributes toward recovering fixed costs and earning a profit.

Question 20

We obtain the data for the account classification method from the contribution margin statement.

Question 21

Which of the following is not a technique used to construct contribution margin statements?

A)Account classification
B)Capacity analysis
C)High-low method
D)Regression analysis
E)All of the above are techniques used to construct contribution margin statements.

Question 22

Contribution margin equals revenues less variable costs.

Question 23

A useful step for estimating controllable costs is:

A)Separating product costs from administrative costs.
B)Separating contribution costs from product costs.
C)Separating variable costs from fixed costs.
D)Separating variable costs from product costs.
E)Separating fixed costs from product costs.

Question 24

Relevant range is defined as:

A)The proportion of total costs that are fixed and variable.
B)A statistical method that uses the normal range of operations to estimate fixed and variable costs.
C)A non-statistical method that uses the normal range of operations to estimate fixed and variable costs.
D)A firm's normal range of operations in which we expect a stable relation between activity and cost.
E)None of the above.

Question 25

Account classification involves categorizing cost accounts as:

A)Product costs and administrative costs.
B)Contribution costs and product costs.
C)Variable costs and fixed costs.
D)Variable costs and product costs.
E)Fixed costs from product costs.

Question 26

When constructing segmented statements, we use the term segment in a narrow sense.

Question 27

P-value:

A)Is not useful in interpreting the results of regression analysis.
B)Indicates the goodness-of-fit.
C)Is a residual number obtained when using the high-low method.
D)Indicates the confidence that the coefficient estimates reliably differ from zero.
E)Both b and c.

Question 28

Which of the following is a drawback of using regression analysis?

A)It is difficult to implement.
B)It makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions.
C)It is not a well-defined statistical method.
D)It provides only one statistic to evaluate the data.
E)None of the above are drawbacks of using regression analysis.

Question 29

In the short run:

A)Most fixed costs are controllable
B)Most fixed costs are not controllable
C)Most variable costs are not controllable
D)Both fixed costs and variable costs are controllable
E)Neither fixed costs nor variable costs are controllable

Question 30

Using the account classification method, estimating the change in variable costs involve three steps.Which of the following is correct?

A)I.Sum the costs classified as fixed to obtain the total fixed costs for the most recent period. II.Multiply the amount in (I) by the volume of activity for the corresponding period to estimate the unit fixed cost.
III)Divide (2) by the change in activity to estimate the total controllable cost.
B)I.Sum the costs classified as fixed to obtain the total fixed costs for the most recent period. II.Divide the amount in (I) by the volume of activity for the corresponding period to estimate the unit fixed cost.
III)Multiply (2) by the change in activity to estimate the total controllable cost.
C)I.Sum the costs classified as variable to obtain the total variable costs for the most recent period. II.Multiply the amount in (I) by the volume of activity for the corresponding period to estimate the unit variable cost.
III)Divide (2) by the change in activity to estimate the total controllable cost.
D)I.Sum the costs classified as variable to obtain the total variable costs for the most recent period. II.Divide the amount in (I) by the volume of activity for the corresponding period to estimate the unit variable cost.
III)Multiply (2) by the change in activity to estimate the total controllable cost.

Question 31

Contribution margin denotes:

A)The amount that remains after subtracting costs of goods sold from revenue.
B)The amount that remains after subtracting fixed costs from revenue.
C)The amount that remains after subtracting fixed costs from costs of goods sold.
D)The amount that remains after subtracting variable costs from revenue.
E)The amount that remains after subtracting variable costs from costs of goods sold.

Question 32

Fixed costs are relevant for decisions involving increasing or decreasing production volumes.

Question 33

Which of the following statements is not true?

A)Using the account classification method requires us to examine each cost account in detail.
B)Using the account classification method frequently requires considerable knowledge and experience.
C)Using the account classification method may be a daunting task for very large firms that offer a wide range of products and have expansive account lists.
D)Using the account classification method requires us to use statistical analysis.
E)All of the above are correct statements.

Question 34

For any volume of activity, total costs are:

A)Fixed costs + (Unit variable costs x Volume of activity).
B)Fixed costs + (Total variable costs/volume of activity).
C)Variable costs + (Unit fixed costs x Volume of activity).
D)Variable cost + (Total fixed costs/volume of activity).
E)None of the above.

Question 35

Many firms do not choose to use the account classification method because:

A)It is time consuming to implement.
B)It is subjective in nature.
C)It does not provide very accurate estimates.
D)Both a and b.
E)Both b and c.

Question 36

An advantage of estimating variable costs by the account classification method is

A)It is less demanding than other methods
B)It provides statistical analysis
C)It is easy to implement.
D)It can provide very accurate estimates.
E)None of the above is an advantage.

Question 37

The "segmented" contribution margin statement is one way firms modify the contribution margin statement to reflect GAAP.

Question 38

Trish's Quilt Connection is an on-line company specializing in high-quality quilt frames and accessories.Trish does not charge customers shipping charges for quilt frame orders.She has provided the following information; $\begin{array}{lcr}\text { Month } & \text { Quilt Frames Sold } & \text { Shipping Costs } \\\text { January } & 1,075 & \$ 8,800 \\\text { February } & 780 & \$ 8,000 \\\text { March } & 1,150 & \$ 9,000 \\\text { April } & 1,280 & \$ 10,000\end{array}$ Using the high-low method, estimate Trish's total variable and fixed costs are at if she sells 1,280 frames:

A)Total variable cost=$5,120; Total Fixed Cost $4,880
B)Total variable cost=$320; Total Fixed Cost $9,680
C)Total variable cost=$10,000; Total Fixed Cost $0
D)Total variable cost=$2,000; Total Fixed Cost $8,000
E)Total variable cost=$7,500; Total Fixed Cost $500

Question 39

The contribution margin statement focuses attention on:

A)Revenues and variable costs.
B)Revenues and fixed costs.
C)Revenues and costs of goods sold.
D)Revenues only.
E)Revenues and total costs.

Question 40

Common fixed costs do not relate to any product in particular but to the entire business.

Question 41

Common fixed costs:

A)Are also referred to as facility-level costs.
B)Do not relate to any product in particular but to the entire business.
C)Are not controllable at the product level.
D)Both a and b.
E)a, b, and c.

Question 42

In a contribution margin statement, profit before taxes is calculated by:

A)Subtracting common fixed costs from segment (product) margin.
B)Subtracting traceable fixed costs from contribution margin.
C)Subtracting variable costs from contribution margin.
D)Subtracting contribution margin from Segment (product) margin.
E)Subtracting common fixed costs from contribution margin.

Question 43

Which of the following statements is not true concerning the segmented contribution margin statement?

A)The contribution margin statement may be organized by product.
B)The statement begins with sales volume and revenue.
C)The statement does not present cost of goods sold.
D)Variable and fixed costs are shown separately.
E)All of the above statements are true.

Question 44

Which of the following statements is not true?

A)The high-low method is a non-statistical method; regression analysis is a statistical method.
B)The high-low method and regression analysis use only two observations to estimate fixed and variable costs.
C)The mechanics of regression analysis are complex; the mechanics of the high-low method are simple.
D)Both A and B are untrue.
E)A, B and C are untrue.

Question 45

Segment (product) margin is calculated by:

A)Subtracting common fixed costs from its contribution margin.
B)Subtracting variable costs traceable to that product from contribution margin.
C)Subtracting fixed costs traceable to that product from its contribution margin.
D)Summing all contribution margins, and then subtracting common fixed costs.
E)None of the above.

Question 46

Which of the following is not an example of a segment?

A)Product.
B)Customer.
C)Geographical region.
D)A Store
E)All of the above could be segments of a firm.

Question 47

Regression analysis is:

A)The proportion of total costs that are fixed and variable.
B)A statistical method for estimating fixed and variable costs.
C)A non-statistical method that uses the normal range of operations to estimate fixed and variable costs.
D)A firm's normal range of operations in which we expect a stable relation between activity and cost.
E)None of the above.