Chapter 3

Question 1

Three Classifications of Cost

Answer 1

Fixed
Variable
Mixed

Question 2

Step Variable Cost

Answer 2

Costs that stay constant within a production range but increase when you exceed that range. Think of it as climbing a staircase: costs stay level on each step until you move up to the next one.

Question 3

True Variable Cost

Answer 3

Changes proportionally with production. If you make more, this cost goes up in a predictable way.

Question 4

Committed Fixed Costs

Answer 4

Long-term, necessary expenses from past commitments (e.g., leases, depreciation) that are hard to change quickly

Question 5

Discretionary Fixed Costs

Answer 5

Costs that come from management choices (e.g., advertising, R&D) and can be adjusted more easily based on current needs and strategies.

Question 6

Mixed Costs

Answer 6

A blend of both variable and fixed elements. It’s represented by the linear equation: y = mx + b, where y is the cost, b is the fixed cost component, m is the variable cost per unit of activity, and x is the level of activity.

Question 7

High-low Method

Answer 7

Separating Mixed Costs:

Scatter Plot Analysis: Create a scatter plot to visualize the cost-activity relationship. Look for a roughly linear pattern in the data.

Variable Cost Identification: If the cost-activity relationship appears linear, the slope of the line represents the variable cost per unit of activity.

Fixed Cost Calculation: Calculate the fixed cost by subtracting the variable cost (determined in step 2) from the total cost. Fixed cost = Total cost - Variable cost.