Chapter 3

Question 1

Costs that do not increase as the volume of production increases are:
A.Total variable costs
B.Total fixed costs.
С.Total mixed costs.
D.Total step costs.

Answer 1

B.Total fixed costs.

Question 2

When graphing total fixed costs, using a horizontal axis representing units of production and the vertical axis representing total costs, the line on the graph would be shown as a(n):
A. horizontal line.
B. vertical line.
C. upward sloping line.
D. downward sloping line.

Answer 2

A. Horizontal line

Question 3

Which of the following statements is NOT true about costs within the relevant range!

A.Variable costs per unit stay constant with changes in volume.
B.Fixed costs per unit increase with increases in volume.
C.Fixed costs per unit decrease with increases in volume.
D.Mixed costs per unit decrease with increases in volume.

Answer 3

B

Question 4

How would the equation for total costs be written using the following?
y = total costs
v = variable cost per unit of activity
x = volume of activity
f = total fixed costs
A.y= f
B.y = XV
C.y=f+xV
D.y =xt

Answer 4

C.y=f+xV

Question 5

A cell phone bill consisting of a monthly base, plus an added amount when too many minutes are used can be classified as a:

Answer 5

Mixed cost

Question 6

company is analyzing its mixed costs. During March, its busiest month, a company had total labour hours of 13,000 and total costs of $33,000. During August, its slowest month, the company had labour hours of 7,000 and total costs of $21.000. The company is planning for 17,000 direct labour hours next March. How many dollars should the company budget for fixed costs during March?

Answer 6

$7000

Question 7

Total fixed costs for Yellow Boats, Inc. are $100,000. Total costs are $500,000 if 125,000 units are produced. The total variable costs at a level of 200,000 units would be?

Answer 7

640,000

Question 8

Which of the following statements is NOT true regarding regression analysis?

A.Regression analysis is a statistical procedure for determining the line that best fits the data
B. Regression analysis uses the high volume and low volume points to
determine the best fit between the two data Doints
C. Regression analysis helps generate a statistic, called the R-square, which tells how well the line fits the data points.
D.Regression analysis is more objective than scatterplot.

Answer 8

B

Question 9

Which of the following is a concern when using the high-low method?

Answer 9

The use of only two data points

Question 10

Which method can be used to separate mixed costs into fixed and variable components?
A.Scatterplot.
B.High-Low method.
C.Regression method.
D.All of the above

Answer 10

D

Question 11

What is meant by cost behaviour?

Answer 11

cost behaviour refers to the change in costs in response to changes in activity levels “production, sales, …etc. Cost behaviour is essential for budgeting and cost prediction.

Question 12

Variable costs

Answer 12

Costs that change in total in direct proportion to changes in volume

Ex.) All direct materials Rent. insurance.
direct abour costs, e.g., battery in a
Mac Pro. If you double volume, you double the batteries… etc

Question 13

Variable costs formula

Answer 13

Y=vx

V= variable cost per unit
X= volume of activity level

Question 14

What way do variable costs sit on the graph?

Answer 14

Straight line starting from the orgin

Question 15

I’m variable costs, What per unit cost behavior in response to changes in volume

Answer 15

Constant

Question 16

Fixed costs

Answer 16

Costs that do not change in total with changes in volume

Ex: rent, insurance

Question 17

Fixed costs formula

Answer 17

Y = F

F is the total fixed cost

Question 18

Fixed costs on graph

Answer 18

Horizontal parallel to the activity (x) axis

Question 19

Fixed costs per unit cost behavior in response to changes in volume

Answer 19

Inversely related to volume

Question 20

Fixed costs per unit cost behavior in response to changes in volume

Answer 20

Inversely related to volume

Question 21

Mixed costs

Answer 21

Costs that change in total ( but not in direct proportion) with changes in volume

Ex: utilities, other costs that include fixed variable and cost component

Question 22

Mixed cost formula

Answer 22

Y = f+vx

F is the total fixed cost
v is variable cost per unit
X is the volume level it activity level

Question 23

Mixed cost formula

Answer 23

Straight line starting from the fixed cost level

Question 24

What are the per unit cost behavior in response to changes in volume for mixed costs

Answer 24

Varies

Question 25

What are the type of fixed costs?

Answer 25

Fixed costs are divided into committed and discretionary fixed costs. Committed costs are those that cannot be changed without major disruptions in the company s operations (lease, depreciation. salaries. etc). Discretionary costs are those that can be easily curtailed at management discretion without having major immediate effect on company's operations (e.g., advertising, maintenance).

Question 26

What is meant by relevant range? Describe its importance in cost prediction.

Answer 26

Relevant range is the range of volume over which fixed costs and variable cost per unit remain constant. When predicting costs, managers have to consider whether they are planning for a level inside or outside the relevant range: outside the relevant range, managers cannot assume that total fixed costs or variable cost per unit will stay constant, i.e., assumptions of cost behaviour will be valid only within the relevant range.

Question 27

Scatterplot (method of separating mixed costs into their fixed and variable components)

Answer 27

Plots a series of historical (volume-cost) data points on a graph with volume on X axis and mixed costs on y axis. Then a line is fitted "visually' (by best guess) through the points so that equal number is above and below the points. The point where the line intersects the y-axis is the fixed cost and the slope of the line is the variable cost per unit. Its main disadvantage is that it's subiective comnared to other techniqnes

Question 28

High-Low method (method of separating mixed costs into their fixed and variable components)

Answer 28

Similar to scatterplot but uses only the points with the highest and lowest activity levels. Mathematically. it can be implemented as follows: 1) Pick the data points with the highest and lowest volumes. 2) Compute the variable cost per unit as the (difference in costs at the two points divided by the difference in volumes at the two data points). 3) Compute the fixed cost by substituting the variable cost per unit (found in (2)) in the cost equation at either the lowest or the highest activity level. 4) Use (2) and (3) to write the cost equation in the form y = f + vx. You can then use the equation to predict the cost at planned activity levels.

Question 29

Regression method (method of separating mixed costs into their fixed and variable components)

Answer 29

Is a rigorous statistical technique that uses the whole data set to fit a line. It's similar to the scatterplot but is more oblective as it's done by a computer sottware employing a method called the least-squares method (you should be able to read a regression output). The regression technique is particularly superior to other techniques since it provides the R-squared statistic (also called the goodness of fit statistic) which is used to determine how well the line fits the data (i.e., whether the activity picked by management is a good predictor of costs). The higher the R2 the better the activity in explaining the costs.

Question 30

method of separating mixed costs into their fixed and variable components

Answer 30

Scatterplot High low method Regression method