Deck 23: Cost Behavior Analysis

Question 1

Linear approximation is a method of converting nonlinear variable costs into linear fixed costs.

Answer 1

False

Question 2

Cost behavior analysis is not useful to a service business.

Answer 2

False

Question 3

Normal capacity is the average annual level of operating capacity needed to meet expected sales demand.

Answer 3

True

Question 4

Total variable and fixed costs will be the same regardless of how many units are produced.

Question 5

Unit fixed costs vary inversely with activity or volume.

Question 6

Within the relevant range, fixed and variable costs behave differently.

Question 7

When managers plan, they may use cost behavior to decide how to change the mix of products to meet changing demand.

Question 8

The relevant range of activity is the range in which actual operations are likely to occur.

Question 9

Fixed costs always remain constant.

Question 10

Cost behavior is defined as the manner in which costs respond to changes in volume or activity.

Question 11

Cost behavior is the way prices are adjusted due to changes in costs.

Question 12

Any cost can be classified as either a variable cost or a fixed cost.

Question 13

Regression analysis can be performed using one or more activities to predict costs.

Question 14

A scatter diagram helps to determine if a linear relationship exists between a cost item and its related activity measure.

Question 15

Practical capacity is theoretical or ideal capacity reduced by normal and anticipated work stoppages, such as machine breakdowns.

Question 16

Theoretical operating capacity is the level at which management expects to operate during a normal business environment.

Question 17

Total costs that change in direct proportion to changes in productive output, or any other volume measure, are called variable costs.

Question 18

The engineering method of separating costs is sometimes called a time and motion study.

Question 19

Unit variable costs vary with changes in productive output, whereas total variable costs remain constant.

Question 20

Practical capacity and normal capacity are synonymous terms.

Question 21

All variable costs except manufacturing costs are subtracted from sales to determine the total contribution margin.

Question 22

Contribution Margin Income Statement divides costs into product and period costs.

Question 23

When using the high-low method, the accountant assumes the fixed portion of mixed costs to be the lowest fixed amount incurred during the period under review.

Question 24

Contribution Margin Income Statement is prepared to present for external users of financial information.

Question 25

Margin of safety is the excess of actual sales over break even sales.

Question 26

Operating income is determined by deducting all fixed costs related to production, selling, and administration from contribution margin.

Question 27

Cost-volume-profit analysis assumes a constant sales mix.

Question 28

Telephone costs are an example of a mixed cost.

Question 29

The breakeven point is the level of activity at which fixed costs are recovered.

Question 30

An increase in the unit sales price will cause the breakeven point to increase.

Question 31

Mixed costs are fixed and variable costs that are recorded in the same general ledger account.

Question 32

A contribution margin income statement is formatted to emphasize cost behavior rather than organizational functions.

Question 33

A project breaks even when total revenue less all costs is equal to zero.

Question 34

Straight-line depreciation on the controller's computer is an example of a variable cost.

Question 35

The point at which the total cost line intersects with the total revenue line provides information on the number of units that must be sold to break even.

Question 36

Depreciation calculated using the production or units of output method is an example of a fixed cost.

Question 37

The objective of breakeven analysis is to find the level of activity at which sales revenue equals the sum of all variable and fixed costs.

Question 38

The contribution margin income statement enables managers to view revenue and cost relationships on a per unit basis or as a percentage of sales.

Question 39

Contribution margin (CM) is the amount that remains after all fixed costs are subtracted from sales.

Question 40

The high-low method allows you to differentiate between fixed and variable costs when dealing with mixed costs.

Question 41

If targeted sales are 12,000 units, the sales price per unit is $70, fixed costs are $130,000, and variable costs are $40 per unit, then planned profit must be $230,000.

Question 42

Adding the contribution margin as a component to cost-volume-profit computations will not change the resulting amount of breakeven units in a given situation.

Question 43

Sales mix is the proportion of each product's unit sales relative to the company's total sales dollars.

Question 44

The contribution margin and the gross margin can be used interchangeably.

Question 45

Last year, RC Rancho's revenue was $120,000,000, variable costs were $90,000,000 and fixed costs were $15,000,000. RC Rancho's contribution margin ratio was 25 percent.

Question 46

If fixed costs are $180,000, variable costs are $38 per unit, and the product sells for $70, the breakeven point in sales dollars is $393,750.

Question 47

The weighted-average contribution margin is computed by multiplying each product's unit contribution margin by the sales mix percentage of each product.

Question 48

If fixed costs are increased, then a breakeven analysis with an adjustment for profit will yield an increase in the number of sales or targeted sales units.

Question 49

The weighted-average breakeven point is the breakeven point for the entire company.

Question 50

A product line's contribution margin represents its contribution to paying off variable costs and to generating a profit.

Question 51

In breakeven analysis adjusted for a profit factor, increasing the unit sales price will decrease the number of units needed to meet the targeted profit.

Question 52

In a graph of variable costs, the slope of the line is dependent on the variable costs per unit.

Question 53

Breakeven, simply, is when total costs equal total revenues.

Question 54

"Breakeven" is the point at which a company will begin to earn a profit.

Question 55

The contribution margin equals total fixed costs at the breakeven point.

Question 56

If a company wishes to evaluate the likelihood of success with a new product line, the breakeven point will provide information about the average amount of profit the company will make.

Question 57

The graphical approach to cost-volume-profit analysis generally yields more precise results than using a formula.

Question 58

If a company wants to know how many units of a certain product it must sell to make a desired level of profit, it should add the amount of profit to the numerator in the breakeven analysis.

Question 59

Contribution margin is selling price minus unit fixed costs.

Question 60

If fixed costs are $24,000, variable costs are $25 per unit, and the product sells for $45, the total contribution margin at the breakeven point is $1,200.

Question 61

For profit planning purposes, the following equation is used: Target Sales Units = (FC + P) CM per Unit.

Question 62

Adding a desired profit level to breakeven computations will lower the number of sales units.

Question 63

As production increases, what should you expect to happen to the fixed costs per unit?

A) Increase
B) Decrease
C) Remain the same
D) Either increase or decrease, depending on the variable cost

Question 64

Which of the following would not require the use of cost behavior analysis?

A) Transferring production costs from one department to another
B) Projecting anticipated costs of a new project
C) Buying an existing business
D) Changing an existing product or service

Question 65

Breakeven sales in dollars can be obtained without knowing the contribution margin per unit.

Question 66

A retail manager is preparing a budget for the coming year and is considering the various costs of the retail store. What is the best approach for the manager to take when budgeting for the cost of the store's merchandise?

A) The total costs will stay the same as last year, but the unit cost will change with each sale.
B) The total cost of merchandise for the year and the unit cost will remain constant with each sale.
C) The total cost of merchandise for the year will depend on the amount of sales, but the unit cost of each sale will stay fairly constant.
D) The total costs will stay the same as last year, and the unit cost will remain constant with each sale.

Question 67

Cost-volume-profit analysis assumes costs and revenues have a close linear approximation.

Question 68

An insurance company pays its employees a commission of 6 percent on each sale. What is the proper classification of the cost of sales commissions?

A) Constant cost
B) Variable cost
C) Mixed cost
D) Fixed cost

Question 69

Which of the following statements most accurately explains the behavior of costs?

A) There is no norm; rather, costs can be fixed, variable, or a combination of both.
B) The majority of costs are variable per unit of production.
C) The majority of costs are fixed per unit of production.
D) Costs can be fixed or variable but usually not a combination of both.

Question 70

Suppose a company rents a building for $250,000 a year for the purpose of manufacturing between 80,000 and 140,000 units (the relevant range of activity). The rental cost per unit of production will __________ as production levels increase.

A) behave in a nonlinear fashion
B) increase
C) decrease
D) remain fixed

Question 71

Which of the following statements is true regarding fixed and variable costs?

A) Both costs are constant when considered on a total basis.
B) Variable costs are constant in total, and fixed costs are constant per unit.
C) Both costs are constant when considered on a per unit basis.
D) Fixed costs are constant in total, and variable costs are constant per unit.

Question 72

Cost-volume-profit analysis cannot be used to estimate a targeted profit for service businesses.

Question 73

The level of operating capacity that is needed to meet expected sales demand is called

A) practical capacity.
B) normal capacity.
C) ideal capacity.
D) excess capacity.

Question 74

The variable cost per unit ____________ as the number of sales increase.

A) decreases
B) changes
C) remains constant
D) increases

Question 75

The typical relationship between variable costs and volume may be described best as follows:

A) Costs increase in an erratic, unpredictable fashion with changes in volume.
B) Costs stay fairly constant with changes in volume.
C) Costs increase with changes in volume up to a certain point and then remain constant.
D) Costs increase in direct proportion to increases in volume.

Question 76

If direct materials costs are decreased, the breakeven point will decrease.

Question 77

Service businesses do not have any overhead costs.

Question 78

In cost-volume-profit analysis, sales revenue is computed by multiplying units sold by the selling price per unit, and the targeted profit is projected by management.

Question 79

Which of the following costs is a variable manufacturing cost?

A) Depreciation costs computed using the straight-line method
B) Factory rent
C) President's salary
D) Direct labor costs

Question 80

Cost-volume-profit analysis is not appropriate for service businesses.