Deck 5: How Do Organizations Identify Cost Behavior Patterns

Question 1

Examples of variable costs include factory building insurance and wages for hourly workers.

Answer 1

False

Question 2

To accurately predict costs,managers must understand how costs behave with changes in activity.

Answer 2

True

Question 3

Variable costs such as direct labor and direct materials typically stay constant on a per unit basis.

Answer 3

True

Question 4

The contribution margin income statement is used for internal reporting purposes and presents the fixed and variable components of cost information.

Question 5

The high-low method is one of the most accurate methods for estimating costs,because its estimates are based on the data set as a whole.

Question 6

If a firm's activity expands beyond its relevant range,only fixed costs must be reevaluated.

Question 7

When 85,000 units are produced,the fixed cost is $10 per unit.Assuming our company is within the relevant range and we produce 120,000 units,our fixed costs will not remain at $10 per unit.

Question 8

Total fixed costs change with changes in volume of activity.

Question 9

Per unit fixed costs change with changes in activity.

Question 10

The contribution margin is calculated by taking total sales revenue minus total fixed costs.

Question 11

Regression analysis and the high-low method often result in the same fixed and variable cost estimates because both approaches use the same data.

Question 12

Unusual data points are often called outliers.

Question 13

All costs behave in a linear manner.

Question 14

The traditional income statement does not separate costs into fixed and variable components.

Question 15

An example of a mixed cost would include salespersons who are paid salaries plus commissions based on sales dollars.

Question 16

The R-squared measure is used to measure the percent of variance in the dependent variable that is explained by the independent variable.

Question 17

The traditional income statement and the contribution margin income statement follow the identical format in presenting operating results.

Question 18

Regression analysis is one of the most accurate methods for estimating costs,because its estimates are based on the data set as a whole.

Question 19

When identifying cost behavior patterns,short-term time periods are always measures in one year increments.

Question 20

Total mixed costs do not change in proportion to changes in activity.

Question 21

Exhibit 5-2
Manchester Company is a small company that has hired you to help them estimate costs.They present you with the following information from the company's most recent fiscal year.
Sales (2,000 units)$1,000,000
Cost of goods sold (24% of sales)240,000
Store supervisor's annual salary 65,000
Annual operating costs 70,000
Annual advertising and promotion 10,000
Sales commissions (5% of sales)50,000
Refer to Exhibit 5-2.What are the estimated total costs if Manchester expects to sell 2,100 computers next year?

A)$439,500
B)$523,000
C)$460,000
D)$449,500
E)None of the answer choices is correct.

Question 22

Exhibit 5-2
Manchester Company is a small company that has hired you to help them estimate costs.They present you with the following information from the company's most recent fiscal year.
Sales (2,000 units)$1,000,000
Cost of goods sold (24% of sales)240,000
Store supervisor's annual salary 65,000
Annual operating costs 70,000
Annual advertising and promotion 10,000
Sales commissions (5% of sales)50,000
Refer to Exhibit 5-2.What type of cost estimation method is being used for Manchester?

A)Regression analysis
B)Scattergraph method
C)Account analysis
D)High-low method
E)None of the answer choices is correct.

Question 23

Exhibit 5-1
Presented below are the production data for the mixed costs incurred by Clarion Company.
$$\begin{array} { l r r } \text { Muoth } & \text { Cast } & \text { Units } \\\text { March } & \$ 4,700 & 3,700 \\\text { April } & 7,200 & 5,050 \\\text { May } & 5,565 & 4,725 \\\text { June } & 9,500 & 8,500 \\\text { July } & 7,915 & 6,745 \\\text { August } & 8,300 & 7,500\end{array}$$ Clarion Company uses the high-low method to estimate mixed costs.

-Refer to Exhibit 5-1.What is the estimated total mixed cost at an operating level of 7,000 units?

A)$10,700
B)$16,500
C)$7,700
D)$8,000
E)None of the answer choices is correct.

Question 24

Exhibit 5-3
Hayley Inc.is using the account analysis approach to identify the cost behavior of production costs for one month.The production manager was asked to review these costs and provide her best guess as to how they should be categorized.Hayley produced 200 units for the month.She responded with the following information.
$\begin{array}{lrrr}&\text { Total } &=\text { Variable } &+\text { Fixed }\\ \text { Direct materials used in production } & \$ 370,000 & \$ 370,000 & \$-0- \\\text { Direct labor used in production } & 230,000 & 230,000 & -0- \\\text { Overhead costs } & \underline{220,000} & \underline{200,000} & \underline{20,000} \\\text { Total production costs } & \underline{\$ 20,000} & \underline{\$ 800,000} & \underline{\$ 20,000}\end{array}$


-Refer to Exhibit 5-3.Assume Hayley intends to produce 180 units next month.Using the account analysis approach,which of the following is the correct estimate of the total production costs for the month?

A)$740,000
B)$720,000
C)$738,000
D)$820,000
E)None of the answer choices is correct.

Question 25

You are using the following information to estimate costs:
$\begin{array}{lll}\text { Muoth } & \text { Cast } & \text { cost per Unit } \\\text { June } & 2,500 & \$ 20.00 \\\text { July } & 1,000 & \$ 50.00 \\\text { August } & 4,000 & \$ 12.50\end{array}$
What type of costs are these?

A)Fixed
B)Variable
C)Mixed
D)Nonlinear
E)None of the answer choices is correct.

Question 26

Factory maintenance costs are estimated for Bing Company based on the level of machine hours used.If total monthly fixed costs are $150,000,variable costs per machine hour are $8,and 15,000 machine hours are expected to be used in June,which of the following would be the best estimate of total maintenance costs?

A)$150,000
B)$120,000
C)$30,000
D)$270,000
E)None of the answer choices is correct.

Question 27

Exhibit 5-2
Manchester Company is a small company that has hired you to help them estimate costs.They present you with the following information from the company's most recent fiscal year.
Sales (2,000 units)$1,000,000
Cost of goods sold (24% of sales)240,000
Store supervisor's annual salary 65,000
Annual operating costs 70,000
Annual advertising and promotion 10,000
Sales commissions (5% of sales)50,000
Refer to Exhibit 5-2.What were the total fixed costs for the company's most recent fiscal year?

A)$145,000
B)$135,000
C)$70,000
D)$195,000
E)None of the answer choices is correct.

Question 28

Exhibit 5-2
Manchester Company is a small company that has hired you to help them estimate costs.They present you with the following information from the company's most recent fiscal year.
Sales (2,000 units)$1,000,000
Cost of goods sold (24% of sales)240,000
Store supervisor's annual salary 65,000
Annual operating costs 70,000
Annual advertising and promotion 10,000
Sales commissions (5% of sales)50,000
Refer to Exhibit 5-2.What was the variable cost per unit for the company's most recent fiscal year?

A)$120 per unit
B)$180 per unit
C)$145 per unit
D)$150 per unit
E)None of the answer choices is correct.

Question 29

Cost estimates made using activity levels outside the relevant range:

A)Are more accurate.
B)May result in poor decisions.
C)Mean that cost behavior patterns are accurate at all levels of activity.
D)Mean the cost estimates will be relevant.
E)None of the answer choices is correct.

Question 30

Which of the following approaches for estimating fixed and variable costs using historical information fits a straight line to a set of data points?

A)Scattergraph method and regression analysis
B)Scattergraph method and account analysis
C)High-low method and account analysis
D)Scattergraph method and high-low method
E)None of the answer choices is correct.

Question 31

Which of the following is the total mixed cost equation for a factory where machine operating costs include $300,000 of machine depreciation per year,plus $70 of utility costs for each day the machinery is in operation?

A)Y = $300,000 + $70X
B)Y = 300,000X
C)Y = $70X
D)Y = $300,000 - $70X
E)None of the answer choices is correct.

Question 32

Which of the following costs is typically not a fixed overhead cost for a factory?

A)Salaries of factory supervisors.
B)Rent on the factory building.
C)Property taxes on the factory building.
D)Indirect materials used in production.
E)None of the answer choices is correct.

Question 33

All of the following are steps of the high-low method except:

A)stating the results in equation form Y = f + vX.
B)calculating the fixed cost per unit.
C)calculating the variable cost per unit.
D)identifying the high and low activity data points.
E)None of the answer choices is correct.

Question 34

The equation that best describes a mixed cost is:

A)Y = f - vX
B)Y = f + vX
C)Y = f + v + X
D)Y = fv + X
E)None of the answer choices is correct.

Question 35

You are using the following information to estimate costs:
$\begin{array}{lll}\text { Muoth } & \text { Cast } & \text { cost per Unit } \\\text { January } & 2,000 & \$ 50 \\\text { February } & 3,100 & \$ 50 \\\text { March } & 3,800 & \$ 50\end{array}$
What type of costs are these?

A)Fixed
B)Variable
C)Mixed
D)Nonlinear
E)None of the answer choices is correct.

Question 36

Which of the following represents total variable costs?

A)v
B)vX
C)f + vX
D)f
E)None of the answer choices is correct.

Question 37

All of the following are steps for using the scattergraph method except:

A)estimating the total fixed costs.
B)visually fitting a line to the data points,with at least one data point touching the line.
C)identifying the high and low activity data points.
D)plotting the data points for each period on a graph.
E)None of the answer choices is correct.

Question 38

Exhibit 5-1
Presented below are the production data for the mixed costs incurred by Clarion Company.
$$\begin{array} { l r r } \text { Muoth } & \text { Cast } & \text { Units } \\\text { March } & \$ 4,700 & 3,700 \\\text { April } & 7,200 & 5,050 \\\text { May } & 5,565 & 4,725 \\\text { June } & 9,500 & 8,500 \\\text { July } & 7,915 & 6,745 \\\text { August } & 8,300 & 7,500\end{array}$$ Clarion Company uses the high-low method to estimate mixed costs.

-Refer to Exhibit 5-1.How would the cost function be stated using the high-low method?

A)Y = $3,700 + $1.00X
B)Y = $9,500 + $1.00X
C)Y = $1,000 + $1.00X
D)Y = $3,700 + $1.10X
E)None of the answer choices is correct.

Question 39

Which of the following costs does not change in total when the activity level increases or decreases within the relevant range?

A)mixed costs
B)fixed costs
C)variable costs
D)relevant costs
E)None of the answer choices is correct.

Question 40

Exhibit 5-3
Hayley Inc.is using the account analysis approach to identify the cost behavior of production costs for one month.The production manager was asked to review these costs and provide her best guess as to how they should be categorized.Hayley produced 200 units for the month.She responded with the following information.
$\begin{array}{lrrr}&\text { Total } &=\text { Variable } &+\text { Fixed }\\ \text { Direct materials used in production } & \$ 370,000 & \$ 370,000 & \$-0- \\\text { Direct labor used in production } & 230,000 & 230,000 & -0- \\\text { Overhead costs } & \underline{220,000} & \underline{200,000} & \underline{20,000} \\\text { Total production costs } & \underline{\$ 20,000} & \underline{\$ 800,000} & \underline{\$ 20,000}\end{array}$


-Refer to Exhibit 5-3.Which of the following best describes the production costs in equation form?

A)Y = $20,000 * $4,000X
B)Y = $20,000 + $4,000X
C)Y = $800,000 + $20,000X
D)Y = $4,100X
E)None of the answer choices is correct.

Question 41

Exhibit 5-4
Wayside Company has machine hours of 5,000 and machine costs of $170,000 at the high data point.Machine hours are 2,000 and machine costs are $110,000 at the low data point.Wayside uses the high-low method to estimate costs.
Refer to Exhibit 5-4.What is the estimated total fixed cost?

A)$60,000
B)$140,000
C)$55,000
D)$70,000
E)None of the answer choices is correct.

Question 42

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Which of the following amounts represents total variable costs?

A)$18,000
B)$126,000
C)$144,000
D)$70,000
E)None of the answer choices is correct.

Question 43

Exhibit 5-5
Tyler Incorporated sells 5,000 units per month with the following costs:
Variable costs: $1.25 per unit
Fixed costs: $3,000 per month

-Refer to Exhibit 5-5.What is Tyler's cost equation used to estimate total monthly costs?

A)Y = $3,000 + $1.25X
B)Y = $3,000 - $1.25X
C)Y = $3,000 / $1.25X
D)Y = $3,000 + $1.25 + 5,000X
E)None of the answer choices is correct.

Question 44

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Using a traditional income statement,which of the following amounts is the gross margin?

A)$424,000
B)$474,000
C)$456,000
D)$386,000
E)None of the answer choices is correct.

Question 45

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Which of the following amounts represents total fixed costs?

A)$20,000
B)$50,000
C)$70,000
D)$144,000
E)None of the answer choices is correct.

Question 46

Randle Company ran a regression analysis comparing total units of production and maintenance costs for the past four months.The regression analysis shows an R-squared of 0.76.Which of the following statements best describes this measure?

A)76 percent of the total maintenance costs are fixed and 24 percent are variable.
B)76 percent of the variation in maintenance costs is not explained by the increase or decrease in production.
C)76 percent of the variation in maintenance costs is explained by the increase or decrease in production.
D)76 percent of the company's total costs are maintenance costs.
E)None of the answer choices is correct.

Question 47

Exhibit 5-5
Tyler Incorporated sells 5,000 units per month with the following costs:
Variable costs: $1.25 per unit
Fixed costs: $3,000 per month
Refer to Exhibit 5-5.What are Tyler's total costs each month?

A)$3,000
B)$9,250
C)$6,250
D)$7,250
E)None of the answer choices is correct.

Question 48

Exhibit 5-5
Tyler Incorporated sells 5,000 units per month with the following costs:
Variable costs: $1.25 per unit
Fixed costs: $3,000 per month

-Refer to Exhibit 5-5.Tyler recently switched vendors and expects variable costs to rise by $1.00 per unit.However,with a new lease on the factory,Tyler expects fixed costs to drop by $300 per month.
After making the changes,what is Tyler's cost equation used to estimate total monthly costs?

A)Y = $2,700 + $0.25X
B)Y = $2,700 + $1.25X
C)Y = $2,700 + $2.25X
D)Y = $2,700 * $2.25X
E)None of the answer choices is correct.

Question 49

Some companies choose to use the scattergraph method to estimate costs because this method considers:

A)only the average levels of activity.
B)only the highest levels of activity.
C)only the lowest levels of activity.
D)all data points.
E)None of the answer choices is correct.

Question 50

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Using a contribution margin income statement,which of the following amounts is the contribution margin?

A)$424,000
B)$474,000
C)$456,000
D)$386,000
E)None of the answer choices is correct.

Question 51

When using a graph of total mixed costs,the y-intercept represents:

A)unit mixed costs
B)total mixed costs
C)total variable costs
D)total fixed costs
E)None of the answer choices is correct.

Question 52

Exhibit 5-4
Wayside Company has machine hours of 5,000 and machine costs of $170,000 at the high data point.Machine hours are 2,000 and machine costs are $110,000 at the low data point.Wayside uses the high-low method to estimate costs.
Refer to Exhibit 5-4.What is the estimate of total machine costs at Wayside when 3,700 machine hours are used?

A)$144,000
B)$70,000
C)$140,000
D)$74,000
E)None of the answer choices is correct.

Question 53

Exhibit 5-6
Regression analysis for Barton Industries results in the following output.
$$\begin{array} { l r } &\text { Coefficients } \\ \text { \( Y \) Intercept } & 880 \\\text { \( X \) Variable } & 1,016.75 \end{array}$$

-Refer to Exhibit 5-6.Using the information above,what is the cost equation in the form Y = f + vX?

A)880 = f + v (1,016.75)
B)Y = 1,016.75 + 880X
C)1,016.75 = 880 + vX
D)Y = 880 + 1,016.75X
E)None of the answer choices is correct.

Question 54

All of the following statements are false regarding the scattergraph method except:

A)The scattergraph method only considers outlier points.
B)The scattergraph method allows for review of all data points.
C)The final cost equation using this method is not based on estimates.
D)The scattergraph method yields less accurate results than the high-low method.
E)None of the answer choices is correct.

Question 55

Exhibit 5-5
Tyler Incorporated sells 5,000 units per month with the following costs:
Variable costs: $1.25 per unit
Fixed costs: $3,000 per month
Refer to Exhibit 5-5.Tyler recently switched vendors and expects variable costs to rise by $1.00 per unit.However,with a new lease on the factory,Tyler expects fixed costs to drop by $300 per month.
In the month after the change in suppliers and the signing of the new lease,Tyler anticipates selling 5,500 units per month.What will be the estimated total costs each month?

A)$12,375
B)$15,075
C)$2,700
D)$11,250
E)None of the answer choices is correct.

Question 56

Exhibit 5-4
Wayside Company has machine hours of 5,000 and machine costs of $170,000 at the high data point.Machine hours are 2,000 and machine costs are $110,000 at the low data point.Wayside uses the high-low method to estimate costs.
Refer to Exhibit 5-4.What is the estimated cost per machine hour?

A)$34
B)$55
C)$20
D)$40
E)None of the answer choices is correct.

Question 57

You are trying to decide whether to use machine hours or direct labor hours as the best predictor for overhead costs.Below are the results from the two regression analyses that you run.
$$\begin{array} { c c c } &\text { Machine Hours } &\text { Direct Labrar }\\&&\text { Hours }\\\hline\text { R-squared } & .22 & .76\end{array}$$
Which of the following statements is the most correct regarding which activity would be the best cost driver and why?

A)Direct labor hours because the variable explains 76% of the variance in overhead costs.
B)Machine hours because the variable explains 78% (100 * 22%)of the variance in overhead costs.
C)Machine hours because only 22% of the variance in overhead costs is not explained in the analysis.
D)Direct labor hours because this activity is perfectly correlated with overhead costs.
E)None of the answer choices is correct.

Question 58

Total costs at the low point were $340,000 when 30,000 units were produced and total costs at the high point were $400,000 when 40,000 units were produced.Using the high-low method,what are the estimated total costs for a production level of 36,000 units?

A)$400,000
B)$240,000
C)$160,000
D)$376,000
E)None of the answer choices is correct.

Question 59

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Which of the following amounts represents total operating profit?

A)$424,000
B)$600,000
C)$386,000
D)$404,000
E)None of the answer choices is correct.

Question 60

Exhibit 5-6
Regression analysis for Barton Industries results in the following output.
$$\begin{array} { l r } &\text { Coefficients } \\ \text { \( Y \) Intercept } & 880 \\\text { \( X \) Variable } & 1,016.75 \end{array}$$

-Refer to Exhibit 5-6.Assume Barton Industries will produce 500 units next month.What are the total estimated production costs for the month?

A)$441,016.75
B)$508,375.00
C)$509,255.00
D)$880.00
E)None of the answer choices is correct.

Question 61

Presented below are the production data for the first six months of the year for the mixed costs incurred by Crew Industries.
$$\begin{array} { l r r } \text { Month } & \text { Cost } & \text { Units } \\\text { January } & \$ 4,076 & 3,050 \\\text { February } & 4,012 & 3,000 \\\text { March } & 5,560 & 4,270 \\\text { April } & 7,840 & 6,500 \\\text { May } & 5,100 & 3,700 \\\text { June } & 6,780 & 5,600\end{array}$$
Crew Industries uses the high-low method to analyze mixed costs.
(1)How would the cost function be stated? (Round results to the nearest cent. )
(2)What is the estimated total cost at an operating level of 5,000 units?

Question 62

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Which of the following amounts represents total cost of goods sold?

A)$176,000
B)$126,000
C)$164,000
D)$424,000
E)None of the answer choices is correct.

Question 64

Exhibit 5-7
Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month.
Refer to Exhibit 5-7.Which of the following amounts represents total selling and administrative costs?

A)$18,000
B)$38,000
C)$20,000
D)$386,000
E)None of the answer choices is correct.

Question 65

Last month,Pioneer Company sold its product for $50 per unit.Fixed production costs were $20,000,and variable production costs amounted to $8.00 per unit.Fixed selling and administrative costs totaled $13,000,and variable selling and administrative costs amount to $3.00 per unit.Pioneer produced and sold 4,000 units last month.
(1)Prepare a traditional income statement for Pioneer Industries.
(2)Prepare a contribution margin income statement for Pioneer Industries.
(3)Why do companies use the contribution margin income statement format?

Question 66

Riley Company would like to estimate production costs on an annual basis.Costs incurred for direct materials and direct labor are variable costs.The accounting records indicate the following production costs were incurred last year for 40,000 units:
$$\begin{array} { l r } \text { Direct materials } & \$ 60,000 \\\text { Direct labor } & 80,000 \\\text { Marufacturing overhead } & 200,000& \text { (20\% fixed; 80\% variable) }\end{array}$$
Use account analysis to estimate the fixed costs per year,and the variable cost per unit.

Question 67

Which of the following assumptions are typically made when estimating costs?

A)Costs are nonlinear and costs estimated for a specific level of activity are within the relevant range.
B)Costs are linear and costs estimated for a specific level of activity are within the relevant range.
C)Costs are nonlinear and total costs never exceed fixed costs.
D)Costs are linear and total costs never exceed variable costs.
E)None of the answer choices is correct.

Question 68

The following regression analysis output is for Watson Company's cost of paying sales people salary plus commission as a percent of sales on a monthly basis:
$$\begin{array} { l r } &\text { Coefficients } \\ \text { \( Y \) Intercept } & 258,323 \\\text { \( X \) Variable } & 0.04\end{array}$$

a.Use the regression output above to develop the cost equation Y = f + vX.
b.What would be Watson's estimated costs if it had sales of $2,000,000 next month?
c.What concerns would you have if Watson's CEO wanted you to compute estimated costs based on $8,000,000 sales for next month,when sales amounts have never exceeded $3,000,000?

Question 69

Why do companies use the contribution margin income statement format?

A)To comply with generally accepted accounting principles (GAAP).
B)For external reporting purposes.
C)To present cost of goods sold to external users.
D)To predict how costs will behave with changes in activity.
E)None of the answer choices is correct.