Deck 4: Cost Behavior and Cost-Volume-Profit Analysis

Question 1

Direct materials and direct labor costs are examples of variable costs of production.

Answer 1

True

Question 2

Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle.

Answer 2

False

Question 3

Unit variable cost does not change as the number of units of activity changes.

Answer 3

True

Question 4

Variable costs are costs that remain constant in total dollar amount as the level of activity changes.

Question 5

Variable costs are costs that vary on a per-unit basis with changes in the activity level.

Question 6

A mixed cost has characteristics of both a variable and a fixed cost.

Question 7

Variable costs are costs that vary in total in direct proportion to changes in the activity level.

Question 8

The fixed cost per unit varies with changes in the level of activity.

Question 9

In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity.

Question 10

The relevant range is useful for analyzing cost behavior for management decision-making purposes.

Question 11

Cost behavior refers to the methods used to estimate costs for use in managerial decision making.

Question 12

The relevant activity base for a cost depends upon which base is most closely associated with the cost and the decision-making needs of management.

Question 13

The range of activity over which changes in cost are of interest to management is called the relevant range.

Question 14

Total variable costs change as the level of activity changes.

Question 15

A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost.

Question 16

Variable costs are costs that remain constant on a per-unit basis as the level of activity changes.

Question 17

Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost.

Question 18

Cost behavior refers to the manner in which a cost changes as the related activity changes.

Question 19

Direct materials cost that varies with the number of units produced is an example of a fixed cost of production.

Question 20

Total fixed costs change as the level of activity changes.

Question 21

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%.

Question 22

If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000.

Question 23

If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point.

Question 24

A rental cost of $20,000 plus $.70 per machine hour of use is an example of a mixed cost.

Question 25

If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease.

Question 26

The point in operations at which revenues and expired costs are exactly equal is called the break-even point.

Question 27

If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold.

Question 28

Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.

Question 29

If direct materials cost per unit increases, the break-even point will increase.

Question 30

The dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost.

Question 31

For purposes of analysis, mixed costs can generally be separated into their variable and fixed components.

Question 32

The data required for determining the break-even point for a business are the total estimated fixed costs for a period, stated as a percentage of net sales.

Question 33

The contribution margin ratio is the same as the profit-volume ratio.

Question 34

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%.

Question 35

If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point.

Question 36

If direct materials cost per unit increases, the break-even point will decrease.

Question 37

If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease.

Question 38

If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease.

Question 39

Break-even analysis is one type of cost-volume-profit analysis.

Question 40

The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio.

Question 41

If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%.

Question 42

Cost-volume-profit analysis can be presented in both equation form and graphic form.

Question 43

If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units.

Question 44

Even if a business sells six products, it is possible to estimate the break-even point.

Question 45

If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%.

Question 46

Absorption costing is required for financial reporting under generally accepted accounting principles.

Question 47

The reliability of cost-volume-profit analysis does NOT depend on the assumption that costs can be accurately divided into fixed and variable components.

Question 48

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart.

Question 49

A low operating leverage is normal for highly automated industries.

Question 50

Assuming no other changes, operating income will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold.

Question 51

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart.

Question 52

The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced.

Question 53

If a business sells two products, it is not possible to estimate the break-even point.

Question 54

If a business sells four products, it is not possible to estimate the break-even point.

Question 55

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units.

Question 56

Companies with large amounts of fixed costs will generally have a high operating leverage.

Question 57

Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%.

Question 58

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.

Question 59

If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units.

Question 60

In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold.

Question 61

Which of the graphs in Figure 20-1 illustrates the behavior of a total fixed cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 62

Which of the following is NOT an example of a cost that varies in total as the number of units produced changes?

A) Electricity per KWH to operate factory equipment
B) Direct materials cost
C) Insurance premiums on factory building
D) Wages of assembly worker

Question 63

Which of the graphs in Figure 20-1 illustrates the behavior of a total variable cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 64

Which of the following describes the behavior of the variable cost per unit?

A) Varies in increasing proportion with changes in the activity level
B) Varies in decreasing proportion with changes in the activity level
C) Remains constant with changes in the activity level
D) Varies in direct proportion with the activity level

Question 65

Which of the following is an example of a cost that varies in total as the number of units produced changes?

A) Salary of a production supervisor
B) Direct materials cost
C) Property taxes on factory buildings
D) Straight-line depreciation on factory equipment

Question 66

Which of the following activity bases would be the most appropriate for food costs of a hospital?

A) Number of cooks scheduled to work
B) Number of x-rays taken
C) Number of patients who stay in the hospital
D) Number of scheduled surgeries

Question 67

Which of the graphs in Figure 20-1 illustrates the nature of a mixed cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 68

Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?

A) Direct labor
B) Salary of a factory supervisor
C) Units of production depreciation on factory equipment
D) Direct materials

Question 69

Which of the following costs is a mixed cost?

A) Salary of a factory supervisor
B) Electricity costs of $3 per kilowatt-hour
C) Rental costs of $10,000 per month plus $.30 per machine hour of use
D) Straight-line depreciation on factory equipment

Question 70

The graph of a variable cost when plotted against its related activity base appears as a:

A) circle
B) rectangle
C) straight line
D) curved line

Question 71

Costs that remain constant in total dollar amount as the level of activity changes are called:

A) fixed costs
B) mixed costs
C) product costs
D) variable costs

Question 72

Most operating decisions of management focus on a narrow range of activity called the:

A) relevant range of production
B) strategic level of production
C) optimal level of production
D) tactical operating level of production

Question 73

Which of the following describes the behavior of the fixed cost per unit?

A) Decreases with increasing production
B) Decreases with decreasing production
C) Remains constant with changes in production
D) Increases with increasing production

Question 74

Cost behavior refers to the manner in which:

A) a cost changes as the related activity changes
B) a cost is allocated to products
C) a cost is used in setting selling prices
D) a cost is estimated

Question 75

Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service, such as United Postal Service?

A) Number of trucks employed
B) Number of miles driven
C) Number of trucks in service
D) Number of packages delivered

Question 76

Which of the following is NOT an example of a cost that varies in total as the number of units produced changes?

A) Electricity per KWH to operate factory equipment
B) Direct materials cost
C) Straight-line depreciation on factory equipment
D) Wages of assembly worker

Question 77

The three most common cost behavior classifications are:

A) variable costs, product costs, and sunk costs
B) fixed costs, variable costs, and mixed costs
C) variable costs, period costs, and differential costs
D) variable costs, sunk costs, and opportunity costs

Question 78

A cost that has characteristics of both a variable cost and a fixed cost is called a:

A) variable/fixed cost
B) mixed cost
C) discretionary cost
D) sunk cost

Question 79

Costs that vary in total in direct proportion to changes in an activity level are called:

A) fixed costs
B) sunk costs
C) variable costs
D) differential costs

Question 80

For purposes of analysis, mixed costs are generally:

A) classified as fixed costs
B) classified as variable costs
C) classified as period costs
D) separated into their variable and fixed cost components