Question 1

Within the relevant range of activity fixed cost per unit will tend to:

Accepted Answer

Fixed costs per unit decrease as the level of activity increases because the total fixed costs are spread over more units, leading to a lower cost per unit. This is why they vary inversely with the level of activity.

Question 2

A retail organisation pays its employees a commission of three percent on each sale. This is a:

Accepted Answer

A variable cost is a cost that changes in proportion to the level of activity or output of a company, meaning that it varies as the level of sales changes. In this case, the commission paid to employees is directly tied to the amount of sales made, and therefore it is a variable cost.

Question 3

Items such as depreciation, property taxes and insurance can be described as:

Accepted Answer

Depreciation, property taxes, and insurance are considered fixed costs because they do not vary based on the level of production or sales volume.

Question 4

In terms of cost behaviour, telephone expense and rent of premises are classified as:

Accepted Answer

Telephone expense is often considered a mixed cost because it typically includes a fixed monthly charge plus variable charges based on usage. Rent of premises is generally a fixed cost as it does not change with the level of business activity.

Question 5

On a per unit basis, a variable cost will:

Accepted Answer

Variable costs are costs that change in direct proportion to the level of activity or production. However, on a per unit basis, the variable cost per unit remains constant, assuming that there is no change in the cost structure.

Question 6

Using the high-low method if the highest maintenance cost and machine hours are $50 000 and 10 000 respectively and the lowest maintenance cost and machine hours are $20 000 and 4000 respectively, the variable maintenance costs per machine hour are:

Accepted Answer

The answer of Using the high-low method if the highest...

Question 7

CVP analysis is based on a number of assumptions, which of these is not one of those assumptions?

Accepted Answer

One of the key assumptions of CVP analysis is that costs are either fixed or variable. Mixed costs, which contain both fixed and variable components, do not fit neatly into this framework and are therefore not included in CVP analysis.

Question 8

Mailroom clerks at Speedy Mail are paid a salary of $2200 per month. All clerks are full time. A new clerk is hired whenever the volume of mail increases by 40 000 pieces since the last clerk was hired. If volume of mail is the activity base mail-handling costs are:

Accepted Answer

Since a new clerk is only hired when the volume of mail increases by a certain amount, the mail-handling costs are step-variable costs. The salary of the mailroom clerks would be considered a fixed cost, but the addition of a new clerk represents a variable cost that increases as the volume of mail increases.

Question 9

Which of these is not an example of a mixed cost for an internet service provider?

Accepted Answer

Mixed costs consist of a fixed component and a variable component. Insurance of office is a fixed cost, not varying with the level of activity or usage, unlike telephone, water rates, or electricity, which can have variable components based on usage.

Question 10

Which of these is an example of a fixed cost?

Accepted Answer

Fixed costs are those that do not vary with the level of production, such as rent or salaries. Factory rental is an example of a fixed cost as it remains constant regardless of the production level. Options B, C, and D are variable costs as they change with the level of production. Factory bonuses are linked to the level of production, packaging costs increase as the volume of products increases, and raw materials are directly tied to the number of items being produced.

Question 11

The term 'relevant range', as used in cost accounting, means the range:

Accepted Answer

The relevant range refers to the range of activity or level of output within which the assumptions about the cost behavior are valid. It is the range of activity or production levels over which the management expects the company to operate during a certain period. This is important because it allows the company to make accurate cost projections and budgeting decisions based on a realistic understanding of how costs will behave within this range. Option A is incorrect because costs can vary outside of the relevant range, but this doesn't affect the behavior assumptions within the relevant range. Option C is too narrow in its definition of the relevant range, as it only covers a subset of costs, while the concept of relevant range includes all costs. Option D is incorrect because margin of safety is unrelated to the relevant range.

Question 12

Which of these quantitative methods will separate a semi-variable mixed cost into its fixed and variable components with the highest degree of precision?

Accepted Answer

The linear regression method is considered the most accurate method for separating a mixed cost into its fixed and variable components. This is because it uses all the available data points to plot a trend line and determine the variable cost rate and fixed cost component. The other methods listed - high-low method, simplex method, and visual fit method - are less precise and may yield less accurate results.

Question 13

Which statement relating to the visual fit of a scatter diagram technique is not true?

Accepted Answer

The visual fit of a scatter diagram technique, while simple and useful for identifying patterns, is not typically characterized as "fairly accurate" due to its subjective nature. The accuracy of fitting a line through data points visually can vary significantly depending on the individual's judgment and is not as precise as statistical methods like least squares regression.

Question 14

Mitcham Ltd has observed that at an activity level of 10 000 units the maintenance cost is $13 000, and at 20 000 units the maintenance cost is $18 000. Using the high-low method, the cost formula for maintenance is:

Accepted Answer

The high-low method involves calculating the variable cost per unit using the highest and lowest activity levels. The difference in cost between the high and low levels is divided by the difference in units to find the variable cost per unit. Here, ($18,000 - $13,000) / (20,000 units - 10,000 units) = $5,000 / 10,000 units = $0.50 per unit. The fixed cost is then found by subtracting the total variable cost at one activity level from the total cost at that level. Using the high level, $18,000 - ($0.50 * 20,000) = $18,000 - $10,000 = $8,000. So, the correct formula is $8,000 + $0.50 x units, which is not listed as an option. It seems there was a mistake in my calculation of the variable cost per unit or in interpreting the options provided. Let's correct that:The correct variable cost per unit calculation should be: ($18,000 - $13,000) / (20,000 - 10,000) = $5,000 / 10,000 = $0.50 per unit. However, the options provided do not match this calculation directly, indicating a mistake in my initial explanation. Given the options, none directly reflect the corrected calculation. Therefore, let's re-evaluate the calculation based on the options provided:The correct calculation using the high-low method is as follows: Variable cost per unit = (Change in cost) / (Change in activity level) = ($18,000 - $13,000) / (20,000 - 10,000) = $5,000 / 10,000 = $0.50. Fixed cost = Total cost - (Variable cost per unit * Activity level). Using either the high or low point: For 20,000 units, Fixed cost = $18,000 - ($0.50 * 20,000) = $18,000 - $10,000 = $8,000. Thus, the correct formula should indeed involve a fixed cost and a variable cost per unit, but none of the provided options accurately reflect the correct calculation based on the high-low method as described. Given the discrepancy and re-evaluation, it appears there was an error in the initial explanation and calculation. The correct approach to finding the cost formula using the high-low method was outlined, but the conclusion was mistakenly aligned with the provided options. The correct formula based on the initial calculation should involve a fixed cost of $8,000 and a variable cost of $0.50 per unit, which does not match any of the given choices accurately. This indicates a need to correct the explanation based on the options provided or acknowledge a misunderstanding in the application of the high-low method to the options available.

Question 15

The most serious shortcoming of the high-low method of estimating a mixed cost function is that it:

Accepted Answer

The high-low method only uses two data points, the highest and lowest levels of activity, which may be an insufficient representation of the entire range of activity. As such, it may not accurately estimate the variable and fixed components of the mixed cost function.

Question 16

Which of these costs is a variable manufacturing cost?

Accepted Answer

Direct labour costs are a variable manufacturing cost because they vary with the level of production. The other choices (A, C, D) are fixed manufacturing costs because they do not vary with the level of production.

Question 17

The high-low method is:

Accepted Answer

The high-low method is a quantitative technique used to estimate a mixed cost function, which contains both variable and fixed costs. It involves using the highest and lowest levels of activity to determine the variable cost per unit and then using that to calculate the fixed cost component of the mixed cost function. The other options are not related to the high-low method.

Question 18

As production increases what would you expect to happen to total fixed costs?

Accepted Answer

Total fixed costs do not change with changes in production levels.

Question 19

Which of these most accurately explains the behaviour of costs?

Accepted Answer

There is no norm for whether costs are fixed or variable. Some costs may be fixed, such as rent or salaries, while others may be variable, such as the cost of raw materials or commission for sales. Some costs may also be a combination of both, such as utilities or advertising expenses. Therefore, option B is the most accurate explanation.

Question 20

It is not an assumption of cost-volume-profit analysis that:

Accepted Answer

Cost-volume-profit analysis assumes that variable costs change proportionately with volume and fixed costs remain constant over the relevant range. However, it does not assume that there are no mixed costs, which are costs that have both fixed and variable components. In fact, cost-volume-profit analysis accounts for mixed costs by separating them into their fixed and variable components. The analysis also assumes that efficiency remains unchanged, meaning that each unit of output requires the same amount of resources to produce.

Quiz 11: Cost-Volume-Profit Analysis for Decision Making