Question 1

Discretionary fixed costs

Accepted Answer

Discretionary fixed costs are those costs that can be reduced or eliminated in the short term without significantly affecting the long-term goals of the organization. These costs include items such as advertising, employee training, and research and development. While they may contribute to the overall success of the organization, they are not essential to its operations and can be scaled back if necessary.

Question 2

The R2 (i.e., R-squared) is a measure of the goodness-of-fit in least-squares regression, True or

Accepted Answer

The R-squared is a measure of the proportion of the variation in the dependent variable that is explained by the independent variable(s) in a least-squares regression model. It ranges from 0 to 1, with higher values indicating a better fit between the model and the data.

The least-squares regression method involves using historical data to identify the relationship between the cost driver (independent variable) and the mixed cost (dependent variable). The method involves finding the line of best fit through the data points that minimizes the sum of squared differences between the actual and predicted values of the mixed cost. This line can then be used to predict the total cost at different levels of the cost driver.

Question 3

A merchandising company typically will have a high proportion of which type of cost in its cost structure

Accepted Answer

Merchandising companies typically have a high proportion of variable costs, such as the cost of goods sold, which varies directly with the volume of sales.

Question 4

A disadvantage of the high-low method of cost analysis is that

Accepted Answer

The high-low method of cost analysis relies on selecting the two extreme data points, which may not be representative of normal conditions. This can lead to inaccurate cost estimates.

Question 5

Account analysis is a method for analysing cost behavior in which each account under consideration is classified as either variable or fixed based upon the analyst's prior knowledge of how the cost in the account behaves.

Accepted Answer

Once the cost behavior has been identified as either variable or fixed using account analysis, a cost formula can be developed to predict costs at different levels of activity. Therefore, the statement is true.

Question 6

Rible Company has observed that at an activity level of 8,000 units the cost for maintenance is £15,000, and at 10,000 units the cost for maintenance is £16,500. Using the high-low method, the cost formula for maintenance is

Accepted Answer

Using the high-low method, we need to find the variable cost per unit and the fixed cost. 
Variable cost per unit = (cost at high activity level - cost at low activity level) / (high activity level - low activity level) 
= (£16,500 - £15,000) / (10,000 - 8,000) 
= £1.50 per unit 
Fixed cost = cost at low activity level - (variable cost per unit x low activity level) 
= £15,000 - (£1.50 x 8,000) 
= £9,000 
Therefore, the maintenance cost formula is: 
Maintenance cost = £9,000 + (£1.50 x number of units) 
= £9,000 + £0.75 per unit 
The closest option is B.

Question 7

The cost of goods sold in a merchandising firm typically would be classified as a

Accepted Answer

The cost of goods sold in a merchandising firm would typically be classified as a variable cost because it varies directly with the level of sales. As sales increase, the cost of goods sold will also increase and vice versa.

Question 8

If the business unit in France plans to produce sell 3,000 units next month, the expected contribution margin would be

Accepted Answer

The contribution margin per unit is £10.25. So, the expected contribution margin for 3,000 units is £10.25 * 3,000 = £30,750.

Question 9

Which of the following types of firms likely would have a high proportion of variable costs in its cost structure?

Accepted Answer

Fast food outlets typically have a high proportion of variable costs, such as food ingredients and hourly wages, which vary directly with the volume of sales.

Question 10

Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following:$\begin{array}{lrr}
&\text { This Year}&\text { Last Year }\
  \text { Units Sold } &250,000&200,000\
 \text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\
 \text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \
 \text {Gross Margin  } &375,000 & 300,000 \
 \text {Less: Operating Expenses  } &\underline{222,000} &\underline{210,000}\
 \text {Net Operating Income  } &£ 153,000& £ 90,000\
\end{array}$

-Using the high-low method of analysis, what are the company's estimated total fixed operating expenses per year?

Accepted Answer

To use the high-low method of analysis, we need to identify the highest and lowest levels of activity and their corresponding costs. From the table, we can see that the highest level of activity is 20,000 units, with a total cost of £540,000, and the lowest level of activity is 10,000 units, with a total cost of £378,000.

Using the formula for the slope of the line (change in cost divided by change in activity), we get:

Slope = (540,000 - 378,000) / (20,000 - 10,000) = 162,000

This slope represents the variable cost per unit of activity, so we need to subtract it from the total cost at either the high or low level of activity to get the estimated total fixed operating expenses:

Estimated total fixed operating expenses = Total cost - (Variable cost per unit x Level of activity)

Using the high level of activity, we get:

Estimated total fixed operating expenses = 540,000 - (162,000 x 20,000) = £150,000

Therefore, the estimated total fixed operating expenses per year for Compton Company is £150,000, which corresponds to answer choice D.

Question 11

Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following:$\begin{array}{lrr}
&\text { This Year}&\text { Last Year }\
  \text { Units Sold } &250,000&200,000\
 \text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\
 \text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \
 \text {Gross Margin  } &375,000 & 300,000 \
 \text {Less: Operating Expenses  } &\underline{222,000} &\underline{210,000}\
 \text {Net Operating Income  } &£ 153,000& £ 90,000\
\end{array}$

-What is the company's contribution margin for this year?

Accepted Answer

The contribution margin is calculated as Sales Revenue minus Variable Costs. Assuming Cost of Goods Sold is the only variable cost, the contribution margin is £1,250,000 - £875,000 = £375,000.

Question 12

A variable cost remains constant in total amount, but varies per unit of activity

Accepted Answer

A variable cost varies in total in direct proportion to changes in the level of activity, but remains constant per unit.

Question 13

The high-low method uses cost and activity data from just two periods to establish a cost formula

Accepted Answer

The high-low method is a technique used to separate mixed costs into their fixed and variable components by analyzing data from two periods – a period of high activity and a period of low activity. By using this data, a cost formula can be determined which helps in predicting costs for different levels of activity. Therefore, the statement is true.

Question 14

Committed fixed costs are those that relate to the investment in facilities, equipment and the basic organisational structure of a company, True or

Accepted Answer

Committed fixed costs are those that are inherent to the company's infrastructure and are not affected by changes in activity levels. They include expenses such as rent, property taxes, insurance, and depreciation of assets. On the other hand, variable costs are directly related to production or sales activity and change proportionally with changes in output levels. Therefore, a change in activity levels will not affect the total amount of committed fixed costs but will increase or decrease the fixed cost per unit as output levels change. For example, if a company produces 100 units and has $10,000 in committed fixed costs, the fixed cost per unit is $100 ($10,000/100). However, if the company doubles its production to 200 units, the total committed fixed costs will remain the same, but the fixed cost per unit will be reduced to $50 ($10,000/200).

Question 15

Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following:$\begin{array}{lrr}
&\text { This Year}&\text { Last Year }\
  \text { Units Sold } &250,000&200,000\
 \text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\
 \text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \
 \text {Gross Margin  } &375,000 & 300,000 \
 \text {Less: Operating Expenses  } &\underline{222,000} &\underline{210,000}\
 \text {Net Operating Income  } &£ 153,000& £ 90,000\
\end{array}$

-
Using the high-low method of analysis, what are the company's estimated variable operating expenses per unit

Accepted Answer

The variable operating expenses per unit is calculated as the change in operating expenses divided by the change in units sold. In this case, the change in operating expenses is £222,000 - £210,000 = £12,000, and the change in units sold is 250,000 - 200,000 = 50,000. Therefore, the variable operating expenses per unit is £12,000 / 50,000 = £0.24.

Question 16

The contribution approach to the income statement classifies costs by function rather than by behavior

Accepted Answer

The contribution approach classifies costs by behavior (variable and fixed costs) rather than by function (such as manufacturing, selling, and administrative expenses).

Question 17

If the level of activity increases within the relevant range

Accepted Answer

When activity level increases within the relevant range, total costs (which include both variable and fixed costs) will increase due to the rise in variable costs. However, fixed costs are spread over more units, leading to a decrease in fixed cost per unit.

Question 18

Stott Company requires one dockhand for every 500 packages loaded daily. The wages for these dockhands would be classified as

Accepted Answer

Step-variable costs are those that change only when a certain production limit is reached, such as the hiring of an additional employee after a certain amount of output. In this case, the number of dockhands needed is directly tied to the number of packages loaded daily, but only increases once a threshold of 500 packages is reached. Therefore, the wages for these dockhands would be classified as step-variable costs.

Question 19

Fixed cost remains constant if expressed on a unit basis

Accepted Answer

Fixed costs remain constant in total regardless of changes in activity level. However, the fixed costs per unit will vary depending on the level of activity. As activity increases, the fixed cost per unit decreases and vice versa.

Question 20

The contribution format is widely used for preparing external financial statements

Accepted Answer

The contribution format is primarily used for internal management purposes and decision-making, not for preparing external financial statements, which typically follow a traditional format.

Quiz 5: Planning Budgeting and Behaviour