Deck 19: Cost Behavior and Cost-Volume-Profit Analysis

Question 1

Direct materials and direct labor costs are examples of variable costs of production.

Answer 1

True

Question 2

A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost.

Answer 2

True

Question 3

Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours is an example of a fixed cost.

Answer 3

False

Question 4

The range of activity over which changes in cost are of interest to management is called the relevant range.

Question 5

Total variable costs change as the level of activity changes.

Question 6

Variable costs are costs that vary in total in direct proportion to changes in the activity level.

Question 7

Direct materials cost that varies with the number of units produced is an example of a fixed cost of production.

Question 8

The fixed cost per unit varies with changes in the level of activity.

Question 9

In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity.

Question 10

Total fixed costs change as the level of activity changes.

Question 11

Variable costs are costs that remain constant on a per-unit basis as the level of activity changes.

Question 12

A mixed cost has characteristics of both a variable and a fixed cost.

Question 13

Cost behavior refers to the manner in which a cost changes as the related activity changes.

Question 14

Variable costs are costs that remain constant in total dollar amount as the level of activity changes.

Question 15

The relevant range is useful for analyzing cost behavior for management decision-making purposes.

Question 16

Unit variable cost does not change as the number of units of activity changes.

Question 17

Variable costs are costs that vary on a per-unit basis with changes in the activity level.

Question 18

Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle.

Question 19

Cost behavior refers to the methods used to estimate costs for use in managerial decision making.

Question 20

The relevant activity base for a cost depends upon which base is most closely associated with the cost and the decision-making needs of management.

Question 21

If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is zero when sales revenue is $930,000.

Question 22

If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point.

Question 23

The data required for determining the break-even point for a business are the total estimated fixed costs for a period, stated as a percentage of net sales.

Question 24

Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.

Question 25

If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease.

Question 26

If direct materials cost per unit increases, the break-even point will increase.

Question 27

If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point.

Question 28

Break-even analysis is one type of cost-volume-profit analysis.

Question 29

For purposes of analysis, mixed costs can generally be separated into their variable and fixed components.

Question 30

If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease.

Question 31

The dollars available from each unit of sales to cover fixed cost and profit is the unit variable cost.

Question 32

A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost.

Question 33

If direct materials cost per unit increases, the break-even point will decrease.

Question 34

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%.

Question 35

If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease.

Question 36

The contribution margin ratio is the same as the profit-volume ratio.

Question 37

The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio.

Question 38

If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%.

Question 39

The point in operations at which revenues and expenses are exactly equal is called the break-even point.

Question 40

If fixed costs are $850,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold.

Question 41

If a business sells two products, it is not possible to estimate the break-even point.

Question 42

Companies with large amounts of fixed costs will generally have a high operating leverage.

Question 43

In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold.

Question 44

If a business sells four products, it is not possible to estimate the break-even point.

Question 45

If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units.

Question 46

Assuming no other changes, operating income will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold.

Question 47

Absorption costing is required for financial reporting under generally accepted accounting principles.

Question 48

If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units.

Question 49

A low operating leverage is normal for highly automated industries.

Question 50

Even if a business sells six products, it is possible to estimate the break-even point.

Question 51

The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced.

Question 52

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.

Question 53

Cost-volume-profit analysis can be presented in both equation form and graphic form.

Question 54

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart.

Question 55

The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be accurately divided into fixed and variable components.

Question 56

If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%.

Question 57

Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%.

Question 58

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units.

Question 59

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart.

Question 60

If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%.

Question 61

Which of the following describes the behavior of a variable cost per unit?

A) varies in increasing proportion with changes in the activity level
B) varies in decreasing proportion with changes in the activity level
C) remains constant with changes in the activity level
D) varies in direct proportion with the activity level

Question 62

Figure 21-1
Which of the graphs in Figure 21-1 illustrates the nature of a mixed cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 63

Costs that remain constant in total dollar amount as the level of activity changes are called

A) fixed costs
B) mixed costs
C) product costs
D) variable costs

Question 64

Most operating decisions of management focus on a narrow range of activity called the

A) relevant range of production
B) strategic level of production
C) optimal level of production
D) tactical operating level of production

Question 65

For purposes of analysis, mixed costs are

A) classified as fixed costs
B) classified as variable costs
C) classified as period costs
D) separated into their variable and fixed cost components

Question 66

The three most common cost behavior classifications are

A) variable costs, product costs, and sunk costs
B) fixed costs, variable costs, and mixed costs
C) variable costs, period costs, and differential costs
D) variable costs, sunk costs, and opportunity costs

Question 67

Which of the following is not an example of a cost that varies in total as the number of units produced changes?

A) electricity per KWH to operate factory equipment
B) direct materials cost
C) straight-line depreciation on factory equipment
D) wages of assembly worker

Question 68

Cost behavior refers to the manner in which

A) a cost changes as the related activity changes
B) a cost is allocated to products
C) a cost is used in setting selling prices
D) a cost is estimated

Question 69

Costs that vary in total in direct proportion to changes in an activity level are called

A) fixed costs
B) sunk costs
C) variable costs
D) differential costs

Question 70

A cost that has characteristics of both a variable cost and a fixed cost is called a

A) variable/fixed cost
B) mixed cost
C) discretionary cost
D) sunk cost

Question 71

Which of the following is not an example of a cost that varies in total as the number of units produced changes?

A) electricity per KWH to operate factory equipment
B) direct materials cost
C) insurance premiums on factory building
D) wages of assembly worker

Question 72

Figure 21-1
Which of the following describes the behavior of the fixed cost per unit?

A) decreases with increasing production
B) decreases with decreasing production
C) remains constant with changes in production
D) increases with increasing production

Question 73

Figure 21-1
Which of the graphs in Figure 21-1 illustrates the behavior of a total fixed cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 74

Figure 21-1
Which of the graphs in Figure 21-1 illustrates the behavior of a total variable cost?

A) Graph 2
B) Graph 3
C) Graph 4
D) Graph 1

Question 75

Figure 21-1
Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?

A) direct labor
B) salary of a factory supervisor
C) units-of-production depreciation on factory equipment
D) direct materials

Question 76

Which of the following costs is a mixed cost?

A) salary of a factory supervisor
B) electricity costs of $3 per kilowatt-hour
C) rental costs of $10,000 per month plus $0.30 per machine hour of use
D) straight-line depreciation on factory equipment

Question 77

Figure 21-1
Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service?

A) number of truck drivers
B) total of miles driven
C) how many trucks are in service
D) number of packages picked up

Question 78

Which of the following is an example of a cost that varies in total as the number of units produced changes?

A) salary of a production supervisor
B) direct materials cost
C) property taxes on factory buildings
D) straight-line depreciation on factory equipment

Question 79

Figure 21-1
Which of the following activity bases would be the most appropriate for food costs of a hospital?

A) number of nurses scheduled to work
B) how many MRI's are taken
C) number of patients who stay in the hospital
D) quantity of prescriptions filled

Question 80

The graph of a variable cost when plotted against its related activity base appears as a

A) circle
B) rectangle
C) straight line
D) curved line