All costs incurred in a merchandising firm are considered to be period costs.
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False
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35. Depreciation is always considered a product cost for external financial reporting purposes in a manufacturing firm.
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False
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36. Selling and administrative expenses are product costs under generally accepted accounting principles.
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False
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37. A variable cost is a cost whose cost per unit varies as the activity level rises and falls.
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False
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38. When the level of activity increases, total variable cost will increase.
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True
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39. A decrease in production will ordinarily result in an increase in fixed production costs per unit.
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True
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40. Variable cost: A. increases on a per unit basis as the number of units produced increases. B. remains constant on a per unit basis as the number of units produced increases. C. remains the same in total as production increases. D. decreases on a per unit basis as the number of units produced increases.
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B. remains constant on a per unit basis as the number of units produced increases.
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41. Which of the following statements regarding fixed costs is incorrect? A. Expressing fixed costs on a per unit basis usually is the best approach for decision making. B. Fixed costs expressed on a per unit basis will decrease with increases in activity. C. Total fixed costs are constant within the relevant range. D. Fixed costs expressed on a per unit basis will increase with decreases in activity.
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A. Expressing fixed costs on a per unit basis usually is the best approach for decision making.
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42. The salary paid to the production manager in a factory is: A. a variable cost. B. part of prime cost. C. part of conversion cost. D. both a variable cost and a prime cost.
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C. part of conversion cost.
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43. Within the relevant range, variable cost per unit will: A. increase as the level of activity increases. B. remain constant. C. decrease as the level of activity increases. D. none of these.
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B. remain constant.
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44. The term “relevant range” means the range of activity over which: A. relevant costs are incurred. B. costs may fluctuate. C. production may vary. D. the assumptions about fixed and variable cost behavior are reasonably valid.
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D. the assumptions about fixed and variable cost behavior are reasonably valid.
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45. 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.
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C. property taxes on the factory building.
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46. In describing the cost formula equation Y = a + bX, which of the following statements is correct? 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.
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B. “a” is the fixed component.
Learning Objective 4
Analyze a mixed cost using the high-low method.
Learning objective number 4 is to analyze a mixed cost using a scattergraph plot and the high-low method.
The High-Low Method
The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.
The formula for a mixed cost is Y = a + bX.
In cost analysis, the “a” term represents the fixed cost and the “b” term represents the variable cost per unit of activity.
The High-Low Method – An Example
The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours.
= $6.00/hour
$2,400 400
The first step is to choose the data points pertaining to the highest and lowest activity levels. In this case, the high level of activity was in June at 850 hours of maintenance and the low level of activity is in February with 450 hours of maintenance. Notice that this method relies upon two data points to estimate the fixed and variable portions of a mixed cost, as opposed to one data point with the scattergraph method.
The second step is to determine the total costs associated with the two chosen points. We incurred costs of $9,800 at the high level of activity and $7,400 at the low level of activity.
The third step is to calculate the change in cost between the two data points. The change in maintenance hours was 400 hours and the change in maintenance dollars was $2,400. Notice, this method relies upon two data points to estimate the fixed and variable portions of a mixed costs, as opposed to one data point with the scattergraph method.
For this example, we divide $2,400 by 400 and determine that the variable cost per hour of maintenance is $6.00.
The High-Low Method – An Example
Total Fixed Cost = Total Cost – Total Variable Cost
Total Fixed Cost = $9,800 – ($6/hour × 850 hours)
Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = $4,700
The fourth step is to take the total cost at either activity level (in this case, $9,800).
Deduct the variable cost component ($6 per hour times 850 hours) for the total cost of $5,100.
The difference represents the estimate of total fixed costs ($4,700).
The High-Low Method – An Example
Y = $4,700 + $6.00X
The Cost Equation for Maintenance
The fifth step is to construct an equation that can be used to estimate the total cost at any activity level (Y = $4,700 + $6.00X). The basic equation of Y is equal to $4,700 (the total fixed cost) plus $6 times the actual level of activity.
You can verify the equation by calculating total maintenance costs at 450 hours, the low level of activity. It will be worth your time to make the calculation.
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Using the high-low method, the cost formula for utilities is: A. $1.50 per unit B. $1.20 per unit C. $3,000 plus $3.00 per unit D. $4,500 plus $0.75 per unit
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D. $4,500 plus $0.75 per unit
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The best estimate of the total month 1 variable cost for cleaning and maintenance is: A. $300 B. $500 C. $800 D. $100
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C. $800
Cleaning and maintenance Variable cost per unit = Change in cost Change in activity = ($1,100 – $900) (2,500 units – 2,000 units) = $200 500 units = $0.40 per unit Total variable cost at 22,000 units = 2,000 units $0.40 per unit = $800
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Assuming that these activity levels are within the relevant range, the mixed cost for July was: A. $10,000 B. $35,000 C. $15,000 D. $40,000
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C. $15,000 Variable cost per unit = $20,000 10,000 units = $2 per unit Total variable cost in July = $2 per unit 20,000 units = $40,000 per unit Fixed cost = $15,000 (given) Total cost = Variable cost + Fixed cost + Mixed cost $70,000 = $40,000 + $15,000 + Mixed cost Mixed cost = $70,000 – ($40,000 + $15,000) = $70,000 – $55,000 = $15,000
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50. At an activity level of 9,200 machine-hours in a month, Nooner Corporation’s total variable production engineering cost is $761,300 and its total fixed production engineering cost is $154,008. What would be the total production engineering cost per unit, both fixed and variable, at an activity level of 9,300 machine-hours in a month? Assume that this level of activity is within the relevant range. A. $98.42 B. $99.49 C. $99.31 D. $98.96
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C. $99.31 Variable cost per unit = $761,300 9,200 units = $82.75 per unit Fixed cost per unit at 9,300 units = $154,008 9,300 units = $16.56 per unit Total cost = Variable cost + Fixed cost = $82.75 per unit + $16.56 per unit = $99.31 per unit
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51. At an activity level of 4,400 units in a month, Goldbach Corporation’s total variable maintenance and repair cost is $313,632 and its total fixed maintenance and repair cost is $93,104. What would be the total maintenance and repair cost, both fixed and variable, at an activity level of 4,600 units in a month? Assume that this level of activity is within the relevant range. A. $420,992 B. $425,224 C. $415,980 D. $406,736
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A. $420,992 Variable cost per unit = $313,632 4,400 units = $71.28 unit Total cost = Total fixed cost + Total variable cost = $93,104 + $71.28 per unit 4,600 units = $93,104 + $327,888 = $420,992
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52. Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to: A. $3.15 B. $0.32 C. $3.40 D. $13.91
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A. $3.15
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53. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to: A. $8,743 B. $8,887 C. $8,683 D. $6,869
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D. $6,869
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Variable cost per unit = Change in cost Change in activity = $293 93 units = $3.15 per unit Total fixed cost = Total cost – Variable cost element = $9,036 – ($3.15 per unit 688 units) = $9,036 – $2,167 = $6,869
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Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.
54. Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to: A. $101.08 B. $59.12 C. $17.11 D. $17.15