Question 1

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

Accepted Answer

Economists recognize that some costs that are classified as variable by accountants may not increase or decrease in a linear fashion, but instead have a curvilinear relationship with the level of output or activity. Examples of such costs include labor costs, as workers may experience diminishing returns to their efforts at a certain point, causing the cost per unit of output to increase non-linearly.

Question 2

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 points of data to estimate the fixed and variable components of a mixed cost, while the least-squares regression method uses all available data points to generate a more accurate equation. Therefore, the least-squares regression method is generally more accurate.

Question 3

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

Accepted Answer

The contribution approach categorizes costs as either fixed or variable rather than organizing them by their functional role in the organization.

Question 4

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

The b term in the linear equation Y = a + bX represents the variable cost per unit of activity, while the a term represents the total fixed cost. The X term represents the level of activity, and the Y term represents the total cost (fixed cost plus variable cost). Therefore, choice A is the best answer as it correctly identifies the meaning of the b term.

Question 5

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 can be adjusted or eliminated by management decisions, such as management training. Insurance and taxes on real estate are typically mandatory fixed costs, while depreciation is a non-cash expense.

Question 6

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

Power to run production equipment is a variable cost because it changes with the amount of production being done. As more units are produced and sold, more power will be needed to run the machinery. Insurance on the headquarters building (A) is a fixed cost because it remains the same regardless of the amount of production being done. Supervisory salaries (C) and depreciation of factory facilities (D) are also fixed costs because they are not directly tied to the amount of production being done.

Question 7

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

A step-variable cost is a cost that does not change in proportion to changes in the activity level but instead changes in large steps in response to a wide range of activity level changes.

Question 8

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, variables costs per unit remain constant as the level of activity changes. This means that the cost per unit remains the same regardless of the number of units produced.

Question 9

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

The answer of An increase in the activity level within...

Question 10

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

Accepted Answer

Committed fixed costs have a longer planning horizon (usually years) compared to discretionary fixed costs which have a shorter planning horizon (usually a year or less).

Question 11

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

Accepted Answer

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

Question 12

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

Within the relevant range, fixed costs remain the same regardless of activity levels, so total fixed costs will not change with a decrease in activity. However, unit fixed costs can decrease with a decrease in activity because the total fixed costs are spread over fewer units. On the other hand, total variable costs will decrease with a decrease in activity since there are fewer units to produce, but unit variable costs will remain the same. Therefore, only Unit Fixed Costs and Total Variable Cost will change with a decrease in activity, making choice B the correct answer.

Question 13

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

The answer of Expense A is a fixed cost;expense B...

Question 14

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 the above.

Accepted Answer

Discretionary fixed costs are costs that are not directly tied to production or sales volume and can be adjusted or eliminated in the short term. They are generally associated with expenses such as advertising and promotional campaigns, research and development, and management training. Therefore, they do not vary directly and proportionately with the level of activity and are not made up of plant, equipment, and basic organizational costs. Additionally, their planning horizon is typically short-term, generally covering a year or less.

Question 15

With automation,fixed costs increase relative to variable costs.

Accepted Answer

Automation involves investing in fixed resources such as machinery and software, which increases fixed costs. Meanwhile, variable costs such as labor may decrease as a result of automation. Therefore, fixed costs increase relative to variable costs.

Question 16

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

Accepted Answer

In the traditional approach to preparing an income statement, costs are organized and presented according to function, such as cost of goods sold, selling and administrative expenses, and research and development expenses. This allows for a clear picture of the different types of costs incurred by the business.

Question 17

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

Accepted Answer

A cost formula is only accurate within a certain range of activity, known as the relevant range. If activity levels go beyond this range, the cost formula may become invalid and unreliable.

Question 18

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

Accepted Answer

The answer of Fixed cost per unit increases as activity...

Question 19

The relevant range concept is not applicable to mixed costs.

Accepted Answer

The relevant range concept is applicable to mixed costs, as it refers to the range of activity levels within which the behavior of the cost is consistent. In other words, the cost behaves differently at different levels of activity, and understanding the relevant range can help in predicting how the cost will change as activity levels change.

Question 20

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 only uses the highest and lowest data points to estimate the fixed and variable costs. This can lead to inaccurate results as it does not account for the impact of other data points and potential outliers. Therefore, using only two data points is considered a major defect of the method.

Quiz 3: Cost Behavior: Analysis and Use

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

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

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

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

An example of a discretionary fixed cost is:

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

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.

Within the relevant range,the variable cost per unit:

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

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

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

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

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:

Discretionary fixed costs: