Question 1

Which costs will change with a decrease in activity within the relevant range?
A) Total fixed costs and total variable cost.
B) Unit fixed costs and total variable cost.
C) Unit variable cost and unit fixed cost.
D) Unit fixed cost and total fixed cost.

Accepted Answer

When activity decreases within the relevant range, total fixed costs remain constant as they are not affected by changes in activity. However, unit fixed costs increase because they are spread over fewer units of output. Total variable costs decrease as less input or materials are needed to produce fewer units of output. Therefore, unit fixed costs and total variable costs change with a decrease in activity within the relevant range. Unit variable cost, on the other hand, remains the same as it is independent of the volume of output produced.

Question 2

Fixed cost per unit increases as activity decreases and decreases as activity increases.

Accepted Answer

Fixed costs are spread over more units as activity increases, reducing the cost per unit, and spread over fewer units as activity decreases, increasing the cost per unit.

Question 3

A cost that is obtained in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as a step-variable cost.

Accepted Answer

Step-variable costs are costs that remain fixed within specific ranges of activity, then increase or decrease in response to step changes in activity level. For example, the cost of leasing a larger factory or hiring additional staff would be a step-variable cost.

Question 4

Discretionary fixed costs:
A) vary directly and proportionately with the level of activity.
B) have a long-term planning horizon, generally encompassing many years.
C) are made up of plant, equipment, and basic organizational costs.
D) None of these.

Accepted Answer

Discretionary fixed costs are not directly related to the level of activity and do not have a long-term planning horizon like plant, equipment, and basic organizational costs. They are instead more flexible and can be adjusted according to the company's needs or decisions made by management.

Question 5

Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that:
A) expense A has remained unchanged.
B) expense B has decreased.
C) expense A has decreased.
D) expense B has increased.

Accepted Answer

As the activity level increases, the fixed cost per unit (expense A) decreases because the total fixed cost is spread over more units. Variable cost per unit (expense B) remains constant.

Question 6

The linear equation Y = a + bX is often used to express cost formulas. In this equation:
A) the b term represents variable cost per unit of activity.
B) the a term represents variable cost in total.
C) the X term represents total cost.
D) the Y term represents total fixed cost.

Accepted Answer

In the linear equation Y = a + bX, the b term represents the slope or variable cost per unit of activity. This means that as the activity level increases, the total cost will increase in proportion to the variable cost per unit of activity. The a term represents the intercept or fixed cost component of the equation, and the X term represents the level of activity or volume. Therefore, B is incorrect as a represents total fixed cost and X represents total volume not cost.

Question 7

The fact that the high-low method uses only two data points is a major defect of the method.

Accepted Answer

The high-low method uses only two data points to estimate the variable and assumes a linear relationship between the variable and the cost driver. This can result in inaccurate estimates if the relationship between the variable and the cost driver is not linear, or if there are outliers in the data. Therefore, using only two data points is a major defect of the high-low method.

Question 8

With automation, fixed costs increase relative to variable costs.

Accepted Answer

Automation often involves investing in expensive equipment or software, which increases fixed costs. While variable costs like labor may decrease, the overall cost structure of the organization may shift towards higher fixed costs.

Question 9

When the level of activity increases within the relevant range, how does each of the following change? 
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

The answer of When the level of activity increases within...

Question 10

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

Accepted Answer

The contribution approach to the income statement classifies costs into variable and fixed categories, based on their behavior, rather than by the functions they perform within the organization.

Question 11

An example of a discretionary fixed cost is:
A) insurance.
B) taxes on real estate.
C) management training.
D) depreciation of buildings and equipment.

Accepted Answer

Discretionary fixed costs are expenses that are not directly tied to production or sales and can be adjusted at the discretion of management. Management training is an example of a discretionary fixed cost because it is a planned expense that can be adjusted based on the company's budget and priorities. Insurance (A) and taxes on real estate (B) are typically considered fixed costs, but they are not discretionary because they are required expenses that cannot be adjusted by management. Depreciation of buildings and equipment (D) is a fixed cost, but it is not discretionary because it is determined by accounting rules and is not a decision that management can make.

Question 12

The relevant range concept is not applicable to mixed costs.

Accepted Answer

The relevant range concept is applicable to mixed costs because it refers to the range of activity within which the fixed and variable components of a mixed cost remain constant. As activity levels increase or decrease outside of the relevant range, the proportion of fixed and variable costs may change and the cost behavior may no longer be accurately represented by a mixed cost formula.

Question 13

A cost formula may not be valid outside the relevant range of activity.

Accepted Answer

A cost formula is developed based on a specific range of activity levels. If the level of activity goes beyond this range, the cost formula may not accurately predict costs. For example, a manufacturing company may have a cost formula based on producing 10,000 units per month. If the company starts producing 15,000 units per month, the cost formula may not be accurate for predicting costs related to producing 15,000 units per month.

Question 14

On an income statement prepared by the traditional approach, costs are organized and presented according to function.

Accepted Answer

The traditional approach categorizes costs by their function, such as production, sales, and administration, and presents them on the income statement accordingly. This helps to provide a better understanding of where costs are being incurred within the organization.

Question 15

The high-low method is generally less accurate than the least-squares regression method for analyzing the behavior of mixed costs.

Accepted Answer

The high-low method only uses two data points (the highest and lowest levels of activity), which can result in a less accurate estimation of fixed and variable costs. The least-squares regression method uses all the available data points and produces a more accurate estimation of the cost behavior.

Question 16

Within the relevant range, the variable cost per unit:
A) remains constant as activity changes.
B) increases as activity increases.
C) decreases as activity increases.
D) can increase or decrease as the activity changes.

Accepted Answer

Within the relevant range, variable costs per unit remain constant even if the volume of activity changes. This is because variable costs are incurred for each unit produced, and as long as the level of complexity or the amount of raw material used doesn't change, variable costs per unit shouldn't change.

Question 17

An example of a cost that is variable with respect to the number of units produced and sold is:
A) insurance on the headquarters building.
B) power to run production equipment.
C) supervisory salaries.
D) depreciation of factory facilities.

Accepted Answer

The cost of power to run production equipment is dependent on the number of units being produced and sold. The more units that are produced and sold, the more power that will be required to operate the equipment, and thus the greater the variable cost of power.

A, C, and D are examples of fixed costs, as they do not change with the level of production and sales. Insurance on the headquarters building is a fixed cost because the cost remains the same regardless of how many units are produced and sold. Similarly, supervisory salaries and depreciation of factory facilities are fixed costs that do not vary based on the level of production and sales.

Question 18

Economists correctly point out that many costs that the accountant classifies as variable are actually curvilinear.

Accepted Answer

Economists argue that some costs that are classified as variable costs (such as labor costs) do not increase or decrease uniformly with changes in output, but may instead reflect curvilinear relationships. For example, at low levels of production, additional workers may be able to increase output significantly, but at higher levels of production, adding more workers may lead to diminishing returns and increasing costs. This means that the cost per unit may not remain constant as output varies, and therefore may not be truly variable in the traditional accounting sense.

Question 19

The planning horizons for committed fixed costs and discretionary fixed costs are generally the same.

Accepted Answer

Committed fixed costs typically have a longer planning horizon as they are more difficult to adjust or eliminate in the short term, such as long-term contracts, leases, or investments in equipment. Discretionary fixed costs, on the other hand, can be adjusted more easily and have a shorter planning horizon.

Question 20

An increase in the activity level within the relevant range results in:
A) an increase in fixed cost per unit.
B) a proportionate increase in total fixed costs.
C) an unchanged fixed cost per unit.
D) a decrease in fixed cost per unit.

Accepted Answer

As the activity level increases, the total fixed costs remain constant, but the fixed cost per unit decreases because the same total fixed costs are spread over a larger number of units.

Quiz 5: Cost Behavior Analysis and Use

Which costs will change with a decrease in activity within the relevant range?

Fixed cost per unit increases as activity decreases and decreases as activity increases.

A cost that is obtained in large chunks and that increases or decreases only in response to fairly wide changes in the activity level is known as a step-variable cost.

Discretionary fixed costs:

Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that:

The linear equation Y = a + bX is often used to express cost formulas. In this equation:

The fact that the high-low method uses only two data points is a major defect of the method.

With automation, fixed costs increase relative to variable costs.

When the level of activity increases within the relevant range, how does each of the following change?

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

An example of a discretionary fixed cost is:

The relevant range concept is not applicable to mixed costs.

A cost formula may not be valid outside the relevant range of activity.

On an income statement prepared by the traditional approach, costs are organized and presented according to function.

The high-low method is generally less accurate than the least-squares regression method for analyzing the behavior of mixed costs.

Within the relevant range, the variable cost per unit:

An example of a cost that is variable with respect to the number of units produced and sold is:

Economists correctly point out that many costs that the accountant classifies as variable are actually curvilinear.

The planning horizons for committed fixed costs and discretionary fixed costs are generally the same.

An increase in the activity level within the relevant range results in: