Question 1

Discretionary fixed costs are fixed costs that cannot be changed over the short run.

Accepted Answer

Discretionary fixed costs are fixed costs that can be changed over the short run,

Question 2

A variable cost is one that varies in proportion to a business activity.

Accepted Answer

This statement is true. Variable costs are costs that change in proportion to the level of activity or production in a business. Examples include materials used in production, wages and salaries, and shipping costs.

Question 3

Since a mixed cost has both a fixed and a variable component, both the total cost and the unit cost will vary with changes in the level of activity.

Accepted Answer

This is because the fixed component of the mixed cost remains constant while the variable component changes with the level of activity. So as the level of activity increases, the total cost will increase and hence the unit cost will also increase. Conversely, as the level of activity decreases, the total cost will decrease and hence the unit cost will also decrease.

Question 4

A scattergraph is simply a graph that shows total costs in relation to volume, or activity level.

Accepted Answer

A scattergraph is used to show the relationship between two variables, typically total costs and activity level. It uses dots to represent data points and helps to identify patterns or trends in the data.

Question 5

Regression is a more precise method of estimating the fixed and variable components of a mixed cost than the high-low method or a scattergraph.

Accepted Answer

Regression analysis uses mathematical formulas to estimate the fixed and variable components of a mixed cost, whereas the high-low method and scattergraphs involve more subjective methods of estimation. Therefore, regression analysis is considered a more precise method of cost estimation.

Question 6

Like the high-low method of estimating the fixed and variable components of a mixed cost, regression analysis uses a statistical technique that identifies the line of best fit.

Accepted Answer

The high-low method is not a statistical technique,

Question 7

With a variable cost, as the level of activity decreases, the total cost remains the same.

Accepted Answer

With a variable cost, as the level of activity decreases, the total cost decreases by the same proportion,

Question 8

To estimate the unit variable cost using the high-low method, identify the highest and lowest level of activity and compute the slope of the line.

Accepted Answer

The high-low method involves using the highest and lowest levels of activity to calculate the variable cost per unit. The slope of the line between these two points represents the unit variable cost.

Question 9

The high-low method of estimating the fixed and variable components of a mixed cost is a precise approach that uses a statistical technique.

Accepted Answer

The high-low method is a "quick and dirty" method.It does not use a statistical technique,

Question 10

Once you know how a particular cost behaves, estimating the total cost is relatively simple.

Accepted Answer

Once you have an understanding of how a cost behaves (e.g. fixed, variable, mixed), it can be easier to predict the total cost based on changes in volume or other factors. However, accurately estimating total costs still requires careful analysis and consideration of other factors that may impact costs.

Question 11

All costs are either fixed or variable.That is, a cost cannot have a fixed and a variable component.

Accepted Answer

Some costs have both a fixed and a variable component.These costs are referred to as a mixed cost,

Question 12

An example of a committed fixed cost is when a company signs a 10-year lease on an office building.

Accepted Answer

A committed fixed cost is a cost that cannot be easily changed, and signing a 10-year lease on an office building is an example of this type of cost.

Question 13

With a fixed cost, the cost per unit varies proportionately with changes in the level of activity.

Accepted Answer

With a fixed cost, the cost per unit varies inversely with changes in the level of activity,

Question 14

Step costs are fixed over only a small range of activity.

Accepted Answer

Step costs are fixed costs that remain constant over a small range of activity or volume, but then increase in steps when activity or volume exceeds a certain threshold. After each step increase, the cost remains fixed over the next small range of activity or volume.

Question 15

Three methods used for estimating the fixed and variable portions of a cost include: cost-cover graphs, the high-low method and regression analysis.

Accepted Answer

Three methods used for estimating the fixed and variable portions of a cost include scattergraphs, the high-low method and regression analysis,

Question 16

A committed fixed cost is one that cannot be changed over the short run.

Accepted Answer

Committed fixed costs are those that are necessary for the long-term survival of the company and cannot be easily changed or eliminated in the short run. Examples include rent, insurance, and salaries of top executives.

Question 17

Companies should reduce fixed costs whenever possible during times of falling profits.

Accepted Answer

Companies should be careful about reducing their discretionary fixed costs during times of falling profits.For example, reducing advertising is likely to reduce sales further, exacerbating the problem of falling profits,

Question 18

An example of a step cost is the electric bill you receive for heating your apartment.

Accepted Answer

Your natural gas bill would be an example of a mixed cost.The base charge would be fixed and the additional charge per cubic foot of gas would be variable,

Question 19

Unlike the scattergraph, the high-low method requires only two data points - the lowest point of activity and the highest point of activity.

Accepted Answer

The high-low method does require more than two data points. It requires at least three data points: the lowest point, the highest point, and one additional point in between.

Question 20

A fixed cost is a cost that does not change in total with the activity level.

Accepted Answer

A fixed cost remains constant regardless of changes in activity or production levels. Examples of fixed costs include rent, property taxes, and insurance premiums.

Quiz 2: Cost Behavior and Cost Estimation