test bank chapter 5 cost behavior analysis

Unit fixed costs and total variable cost.. B Medium Within the relevant range of activity, variable cost per unit will: a.. is within the relevant range, what is the total expected maint

Chapter 5 Cost Behavior: Analysis and Use

a expense A has remained unchanged.

b expense B has decreased

c expense A has decreased

d expense B has increased

17

B

Easy

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

18

B

Medium

Within the relevant range of activity, variable cost per unit will:

a increase in proportion with the level of activity

b remain constant

c vary inversely with the level of activity

D

Medium

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

20

B

Easy

CPA adapted

The term "relevant range" means the range over which:

a costs may fluctuate

b a particular cost formula is valid

c production may vary

d relevant costs are incurred

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

An example of a committed fixed cost is:

a a training program for salespersons

b executive travel expenses

c property taxes on the factory building

d new product research and development

24

D

Easy

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

a "X" is the dependent variable

b "a" is the fixed component

c In the high-low method, "b" equals change in activity divided by change in costs

d As "X" increases "Y" decreases

B

Easy

The contribution approach to the income statement:

a organizes costs on a functional basis

b is useful to managers in planning and decision making

c shows a contribution margin rather than a net income figure at the bottom of the statement

d can be used only by manufacturing companies

Contribution margin is the excess of revenues over:

a cost of goods sold

b manufacturing cost

c all direct costs

d all variable costs

a insurance on the headquarters building

b power to run production equipment

A cost driver is:

a the largest single category of cost in a company

b a fixed cost that cannot be avoided

c a factor that causes variations in a cost

d an indirect cost that is essential to the business

a P40,000

b P35,000

c P25,000

d P20,000

a total cost would equal P89,280.

b total unit cost would equal P4.80

c fixed cost per unit would equal P5.58

d total costs would equal P55,800

is within the relevant range, what is the total expected maintenance cost if the activity level is 8,700 machine-hours?

a P2,000

b P400

c P2,250

d P1,740

Production Manufacturing

in units supplies March 450,000 P723,060 April 540,000 853,560 May 480,000 766,560Using these data and the high-low method, what is the best estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range.)

a P805,284

b P1,188,756

c P755,196

d P752,060

Reddy Company has the following cost formulas for overhead:

Cost Cost Formula Indirect materials P2,000 plus P0.40 per machine hour Maintenance P1,500 plus P0.60 per machine hour Machine setup P0.30 per machine hour

Utilities P200 plus P0.10 per machine hour Depreciation P800

Based on these cost formulas, the total overhead cost at 600 machine hours is expected to be:

a P4,500

b P5,200

c P5,620

d P5,340

a P1.50 per unit.

b P1.20 per unit

c P3,000 plus P3.00 per unit

d P4,500 plus P0.75 per unit

a P1.20 per unit

b P1.16 per unit

c P1,200 plus P1.10 per unit

d P600 plus P1.10 per unit

a P2.00 per machine hour.

b P1.625 per machine hour

c P18,000 plus P0.50 per machine hour

d P24,000 plus P0.50 per machine hour

47

C

Medium

Buckeye Company has provided the following data for maintenance cost:

Prior Year Current Year Machine hours 12,500 15,000 Maintenance cost P27,000 P31,000The best estimate of the cost formula for maintenance would be:

a P21,625 per year plus P0.625 per machine hour

b P7,000 per year plus P0.625 per machine hour

c P7,000 per year plus P1.60 per machine hour

d P27,000 per year plus P1.60 per machine hour

a P50,000 per period plus P10 per unit

b P50,000 per period plus P21 per unit

c P50,000 per period plus P22 per unit

d P347,000 per period plus P0.10 per unit

(Appendix) Your boss would like you to estimate the fixed and variable components

of a particular cost Actual data for this cost for four recent periods appear below Activity Cost

Period 1 24 P174 Period 2 25 179 Period 3 20 165 Period 4 22 169

Using the least-squares regression method, what is the cost formula for this cost?

Purchase price (cost) per unit P18

Advertising expense P4,000 per month

Administrative expense P4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range

Reference: 5-4

In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were P223,000 Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000(all fixed) The balance of the overhead cost consisted of maintenance cost (mixed) At 100,000

machine hours, maintenance costs were P130,000

Assume that all of the activity levels mentioned in this problem are within the relevant range

Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication Cost

Prater Company has provided the following data:

This Year Last Year

The following data have been provided by a retailer that sells a single product

This Year Last Year

Variable selling expense 35,000

Fixed selling expenses 25,000

Cost of goods sold 160,000

Fixed administrative expenses 55,000

Variable administrative expenses 15,000

Fixed selling expense 46,250

Variable manufacturing overhead 41,000

Variable administrative expense 48,000

Direct materials 51,500

Fixed administrative expense 44,500

Variable selling expense 49,750

Assume that direct labor is a variable cost and that there were no beginning or ending inventories

The following information summarizes the company's cost structure:

Variable cost per unit P1.30 Fixed cost per unit 4.50 Total cost per unit P5.80 Units produced and sold 48,000Assume that all of the activity levels mentioned in this problem are within the relevantrange

Required:

Prepare a schedule showing predictions for the following items at the 40,000 unit level of activity:

a Total variable cost

b Total fixed cost

c Variable cost per unit

Note: The total fixed cost is P4.50 x 48,000 = P216,000

Total costs:

Variable (P1.30 x 40,000 units) P 52,000 Fixed 216,000Costs per unit:

Variable (unchanged) P1.30 Fixed (P216,000 ÷ 40,000 units) 5.4088

Predict the following items for Mateo Company:

a Variable cost per unit

b Total fixed cost per period

c Total expected costs at the 18,000 unit level of activity

Answer:

Cost UnitsHigh level of activity (20,000 units x P1.38) P27,600 20,000Low level of activity (16,000 units x P1.425) 22,800 16,000 Change P 4,800 4,000

a P4,800 ÷ 4,000 units = P1.20 per unit variable cost

b Total cost at the high level P27,600 Less variable element (P1.20 x 20,000 units) 24,000 Fixed element P 3,600

c Variable cost (P1.20 x 18,000 units) P21,600 Fixed cost 3,600 Total cost P25,200

Utilities (V) P 54,000 Supervisory salaries (F) 62,000 Maintenance (M) 78,000 Total overhead costs P194,000

V = Variable; F = Fixed; M = Mixed

The company wants to break down the maintenance cost into its basic variable and fixed cost elements

Required:

a Estimate the maintenance cost for June

b Use the high-low method to estimate the cost formula for maintenance cost

c Estimate the total overhead cost at an activity level of 55,000 machine hours

maintenance P114,000

b High-low analysis of maintenance cost:

Maintenance Cost Machine-Hours High point P114,000 80,000 Low point 78,000 50,000 Change observed P 36,000 30,000

Variable rate:

Change in cost = P36,000 = P1.20 per machine hr Change in activity 30,000 MH

Total fixed cost:

Total maintenance cost at the low point P78,000 Less variable cost element (50,000 x P1.20) 60,000 Fixed cost element P18,000 The cost formula is: Y = P18,000 + P1.20X

c Total overhead at 55,000 machine hours:

Utilities (P54,000  50,000) x 55,000 P 59,400 Supervisory salaries 62,000 Maintenance cost:

Variable: (55,000 x P1.20) P66,000 Fixed 18,000 84,000 Total overhead cost at 55,000 MH P205,40090

Fixed cost:

High units: P710,000 - P8.00(70,000) = P150,000 Low units: P550,000 - P8.00(50,000) = P150,000 Variable component of operating expenses:

Variable rate = Change in costs/Change in units Variable rate = (P190,000 - P150,000)/(70,000 - 50,000) Variable rate = P2.00 per unit

Fixed cost:

High units: P190,000 - P2.00(70,000) = P50,000 Low units: P150,000 - P2.00(50,000) = P50,000 Total variable cost per unit:

P8.00 + P2.00 = P10.00 per unit Total fixed cost:

P150,000 + P50,000 = P200,000

b Sales revenue P1,120,000 Less variable expenses:

Variable cost of goods sold P560,000 Variable operating expenses 140,000 700,000 Contribution margin P 420,00091

Shipping expense 56,000 63,500 71,000 Advertising expense 70,000 70,000 70,000 Salaries and commissions 143,000 161,750 180,500 Insurance expense 9,000 9,000 9,000

a Determine which expenses are mixed and, by use of the high- low method, separate each mixed expense into its variable and fixed components State the cost formula for each mixed expense

b Compute the company's total contribution margin for May

Answer:

a The cost of goods sold for this company is a variable cost and is P56 per unit The Shipping Expense and the Salaries and Commissions Expense are mixed All other expenses are constant for each of the months shown and are therefore fixed

Shipping Expense:

P71,000 - P56,000 = P15,000 = P10 per unit 6,000 - 4,500 1,500

P56,000 - (4,500 x P10) = P11,000

Cost formula = P11,000 per month plus P10 per unit

Salaries and Commissions:

P180,500 - 143,000 = P37,500 = P25 per unit 6,000 - 4,500 1,500

P143,000 - (4,500 x P25) = P30,500 Cost formula = P30,500 per month plus P25 per unit

b Contribution margin for May:

Sales in units 5,250 Sales revenue P735,000 Variable expenses:

Cost of goods sold P294,000 Shipping expense (P10 x 5,250) 52,500 Salaries & commissions

(P25 x 5,250) 131,250 477,750 Contribution margin P257,250

High level of activity P 75,000 15,000 units

Low level of activity 57,000 10,000 units

Change P 18,000 5,000 units

P18,000 ÷ 5,000 units = P3.60 per unit variable cost

Total cost at the high level of activity P 75,000

Less variable element (P3.60 x 15,000 units) 54,000

Fixed cost element P 21,000

Therefore, the cost formula for manufacturing overhead is P21,000 per period plus P3.60 per unit produced, or

Y = P21,000 + P3.60X

Medium

Unified Parcel, Inc., operates a local parcel delivery service The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 110,000 miles per year the operating cost is 7.5 cents per mile This cost increases to 8.75 cents per mile if a truck is driven 60,000 miles per year

High 110,000 P8,250Low 60,000 5,250 Change 50,000 P3,000

Variable cost = Change in cost ÷ Change in activity = P3,000 ÷ 50,000 miles

= P0.06 per mileFixed cost element = P8,250 - (P0.06 x 110,000) = P1,650

The cost formula is P1,650 per year plus P0.06 per mile

94

Hard

(Appendix) The Stephens Leadership Center provides training seminars in personal development and time management The company is relatively new and management is seeking information regarding the Center's cost structure The following information has been gathered since the inception of the business in January of the current year:

Month Seminars Offered Costs Incurred January 10 P17,000

February 12 18,800 March 15 20,900 April 18 23,762 May 16 21,800 June 13 19,400Required:

a Using the high-low method, estimate the variable cost per seminar and the total fixed cost per month

b Using the least-squares method, estimate the variable cost per seminar and the total fixed cost per month

Fixed cost element = Total cost - Variable cost element = P23,762 - (18 x P845.25)

= P8,547.50Cost formula for seminar costs: P8,547.50 per month plus P845.25 per seminar held

b Least-Squares Method:

Month Seminars Costs Incurred XY _ X^2 _ January 10 P 17,000 170,000 100 February 12 18,800 225,600 144 March 15 20,900 313,500 225 April 18 23,762 427,716 324 May 16 21,800 348,800 256 June 13 19,400 252,200 169

84 P121,662 1,737,816 1,218n=6

95

Medium

The 4 x 4 Shop is a large retailer of equipment for pickup trucks An income statementfor the company's bed liner department for the most recent quarter is presented below: The 4 x 4 Shop

Income Statement Liner Department For First Quarter of Current Year Sales P700,000 Less cost of goods sold 250,000 Gross margin P450,000 Less operating expenses:

Selling expenses P195,000