Deck 3: Measurement of Cost Behavior

Question 1

Knowledge about relationships between costs and cost drivers is useful for managers to ________.

A)plan controls
B)provide feedback to managers
C)make decisions about the most efficient use of resources
D)all of the above

Answer 1

D

Question 2

The cost of using the telephone,which involves a flat rate per month plus a fee for every local and long-distance call would be a ________ cost.

A)step
B)fixed
C)variable
D)mixed

Answer 2

D

Question 3

It may be difficult to trace costs to products or services if the costs are ________.

A)volume-driven
B)affected by activities directly related to volume
C)affected by multiple cost drivers
D)none of the above

Answer 3

C

Question 4

The following three data points are available.This is an example of a ________ cost.

A)variable
B)fixed
C)mixed
D)semivariable

Question 5

A company rents a machine to be used in operations.The rental agreement calls for a flat rent payment of $2,000 per month plus $0.10 for each hour the machine is used.This is an example of a ________.

A)fixed cost
B)variable cost
C)mixed cost
D)step cost

Question 6

Understanding the relationship between costs and their cost drivers allows managers in all types of organizations to make proper short-run marketing decisions.

Question 7

Many organizations use a linear relationship with a single cost driver to describe a cost even though the cost may have multiple cost drivers.Why?

A)This approach is easier and less expensive.
B)The cost of developing a more complex function is greater than the benefit.
C)Cost estimates from the simple function are accurate enough for most decisions.
D)All of the above

Question 8

Measurement of cost behavior means understanding and quantifying how activities of an organization affect its level of costs.

Question 9

Which is NOT a step cost?

A)When oil and gas exploration activity reaches a certain level in a given area,a company leases an additional rig.The lease cost of the rigs is a step cost.
B)When ten nurses are added to a shift,a nursing supervisor is also added to the shift.The salaries of the nursing supervisors are a step cost.
C)When a telemarketing company adds ten workers to a shift,a supervisor is also added to the shift.The salaries of the supervisors are a step cost.
D)When a manufacturing company ceases production,a skeleton crew of maintenance workers continues to work,but the rest are terminated.When production resumes,maintenance workers are rehired in direct proportion to the amount of production.The wages of the maintenance workers are a step cost.

Question 10

Palmer Inc.currently produces 110,000 units at a cost of $440,000.The cost is variable.Next year Palmer Inc.expects to produce 115,000 units.Palmer's relevant range for production is 100,000 to 120,000 units.If 115,000 units are produced next year,what is the expected variable cost?

A)$420,000
B)$430,000
C)$440,000
D)$460,000

Question 11

Which of the following statements about step costs is FALSE?

A)If the individual chunks of cost are relatively large and apply to a specific,broad range of activity,the step cost is considered to be a fixed cost over that range of activity.
B)When individual chunks of cost are relatively small and apply to a narrow range of activity,step costs are considered to be variable costs.
C)Some step costs can be assumed to be variable costs for planning purposes with little loss of accuracy.
D)Step costs are the same as mixed costs.

Question 12

________ contain elements of both fixed and variable cost behavior.

A)Committed fixed costs
B)Discretionary fixed costs
C)Capacity costs
D)Mixed costs

Question 13

Costs that change abruptly at different levels of activity because the resources and their costs come in indivisible chunks are called ________.

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

Question 14

Volume-driven costs can be easily traced to products or services.

Question 15

A compensation plan where the sales force is paid salary plus commission is a ________.

A)purely variable cost
B)mixed cost
C)step cost
D)fixed cost

Question 16

Knowledge about the relationship between costs and cost drivers helps managers ________.

A)make short run decisions
B)plan the effects of future activities
C)make long-run decisions
D)all of the above

Question 17

A car lease payment is computed based solely on the number of miles driven.This is an example of a ________.

A)purely variable cost
B)mixed cost
C)step cost
D)stair cost

Question 18

In a small construction firm,a crew supervisor is added for every ten workers employed.The salaries of the crew supervisors are a ________.

A)variable cost
B)mixed cost
C)step cost
D)fixed cost

Question 19

Snead currently produces 120,000 units at a cost of $400,000.Of the $400,000 cost,$200,000 is a fixed cost.Next year Snead expects to produce 145,000 units.Snead's relevant range for production activities is 100,000 to 150,000 units.If 145,000 units are produced next year,what is the expected fixed cost for next year?

A)$200,000
B)$241,667
C)$265,833
D)$483,333

Question 20

Salaries of the telemarketers are set at $10,000 per month.The telemarketers also receive a commission for each donation they receive.They receive $5 per donation.The telemarketers salaries' and commission is a ________ cost.

A)fixed
B)variable
C)mixed
D)step

Question 21

Mixed costs are composed of only fixed costs.

Question 22

Costs arising from the possession of facilities,equipment and a basic organizational structure are ________.

A)capacity costs
B)discretionary costs
C)committed fixed costs
D)engineered costs

Question 23

Due to the economic downturn,a company has reduced charitable donations to community groups.This is an example of a ________.

A)variable cost
B)committed fixed cost
C)capacity cost
D)discretionary fixed cost

Question 24

In an economic downturn,a company could temporarily reduce or eliminate a(n)________.

A)lease payment
B)salaries of key personnel
C)employee training program
D)insurance on corporate offices

Question 25

In an economic downturn,a company could temporarily reduce or eliminate ________.

A)depreciation expense on corporate building
B)bond interest payment
C)property taxes on corporate building
D)advertising and promotion

Question 26

The Milwaukee Recreation Center is planning its annual fundraiser.The event committee has developed the following budget for the event.
The committee expects 3,000 people will attend the event.
Required:

A)Compute the fixed and variable costs for the event.
B)If Milwaukee Recreation charges $100 per person,how much money will be raised by this event?

Question 27

Only major changes in the scale or scope of operations can change ________ in future periods.Managers can very spending levels for ________ in the short run.

A)committed fixed costs; capacity costs
B)committed fixed costs; discretionary fixed costs
C)discretionary fixed costs; capacity costs
D)capacity costs; committed fixed costs

Question 28

In a corporate setting,property taxes are an example of a(n)________.

A)mixed cost
B)committed fixed cost
C)discretionary fixed cost
D)engineering cost

Question 29

In a corporate setting,a mortgage payment would be identified as a ________.

A)purely variable cost
B)discretionary fixed cost
C)committed fixed cost
D)mixed cost

Question 30

A telephone bill,which includes a monthly base rate plus an extra fee for each local and long-distance call is an example of a variable cost.

Question 31

Step costs change abruptly at different intervals of activity.

Question 32

The fixed costs required to achieve a desired level of production or to provide a desired level of service,while maintaining product or service attributes,are ________.

A)discretionary fixed costs
B)mixed costs
C)capacity costs
D)cost-reducing costs

Question 33

In an economic recession,a company could NOT eliminate ________.

A)employee training program
B)research and development projects
C)salaries of maintenance workers
D)depreciation of factory machines

Question 34

An example of a volume-driven cost in making a textbook is the salaries of the editorial staff.

Question 35

A lump sum amount of money set aside for research and development would be called a ________.

A)purely variable cost
B)discretionary fixed cost
C)committed fixed cost
D)mixed cost

Question 36

In an economic downturn,a company could temporarily reduce or eliminate a(n)________.

A)property taxes on factory building
B)insurance on factory building
C)lease payments on computers in corporate headquarters
D)public relations department

Question 37

________ have no obvious relationship to levels of output activity,but are determined as part of the periodic planning process.

A)Discretionary fixed costs
B)Committed fixed costs
C)Capacity costs
D)Engineered costs

Question 38

________ arise as a result of strategic decisions about the scale and scope of an organization's activities.

A)Capacity costs
B)Discretionary fixed costs
C)Mixed costs
D)Step costs

Question 39

Costs that may be essential to the long-run achievement of the organization's goals,but that managers can almost reduce to zero in the short-run,are called ________.

A)capacity costs
B)committed fixed costs
C)discretionary fixed costs
D)mixed costs

Question 40

Which statement regarding fixed costs is true?

A)Discretionary fixed costs preserve management's flexibility.
B)Committed fixed costs preserve management's flexibility.
C)Both discretionary and committed fixed costs preserve management's flexibility.
D)Discretionary fixed costs limit management's flexibility.

Question 41

Managers cannot eliminate discretionary fixed costs.

Question 42

The use of high-technology methods rather than labor in manufacturing products usually creates less risk for companies with wide variations in demand.

Question 43

Merkey Motel's cost function is given as: Y = $50,000 + $7.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Merkey Motel has 8,000 guest days.In the next year,Merkey Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected fixed custodial cost for next year?

A)$7.50
B)$50,000
C)$62,500
D)$75,000

Question 44

When developing cost functions,which of the following statement is FALSE?

A)The cost function must be believable.
B)The cost function should explain past cost behavior.
C)Personal observations of costs and activities provide the best evidence of a plausible relationship between a cost and its cost driver.
D)The cost function does not have to be reliable.

Question 45

Companies can recover fixed capacity costs when demand falls during an economic downturn.

Question 46

The decisions made by managers influence cost behavior throughout the entire value chain.

Question 47

The use of high-technology methods rather than labor in manufacturing products usually means a much greater fixed-cost component to total costs.

Question 48

Most companies make capacity decisions frequently.

Question 49

Committed fixed costs can be altered by management if management decides that different levels of spending are desirable.

Question 50

Moonlight Motel's cost function is given as: Y = $50,000 + $7.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Moonlight Motel has 8,000 guest days.In the next year,Moonlight Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected total variable custodial cost for next year?

A)$60,000
B)$75,000
C)$125,000
D)$137,500

Question 51

Discretionary fixed costs have direct relationships with levels of capacity or output activity.

Question 52

An algebraic equation used by managers to describe the relationship between a cost and its cost driver(s)is called a ________.

A)cost behavior
B)cost function
C)cost system
D)cost analysis

Question 53

Sunrise Motel's cost function is given as: Y = $50,000 + $7.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Sunrise Motel has 8,000 guest days.In the next year,Sunrise Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected total custodial cost for next year?

A)$50,000
B)$62,500
C)$125,000
D)$137,500

Question 54

Capacity costs are mixed costs related to a desired level of production or service.

Question 55

________ is the first step in estimating or predicting costs.

A)Cost measurement
B)Cost determination
C)Cost driver identification
D)Cost behavior investigation

Question 56

The first step in estimating or predicting costs is cost measurement.

Question 57

Identify the following planned costs as:
(A)purely variable costs
(B)discretionary fixed costs
(C)committed fixed costs
(D)mixed costs
(E)step costs
________ 1.Mortgage payment on factory building.
________ 2.Electricity used in operating equipment.The utility company charges a base rate of $100 per month plus $0.10 per hour.
________ 3.A lump sum amount of advertising costs planned by a local restaurant.
________ 4.Nursing supervisors' salaries (a supervisor is needed for every 10 nurses).
________ 5.Training costs for employees.
________ 6.Crew supervisor in small construction company.A new supervisor is needed for every 12 workers employed.
________ 7.Sales commissions based on amount of sales.
________ 8.Rental payment on a 30-year lease for office space in a private office building.
________ 9.Public relations department at a large consumer-oriented company.
________ 10.Management consulting services acquired to resolve company image Problems.
________ 11.Insurance on factory machines.
________ 12.Salaries of Chief Financial Officer and Chief Executive Officer.

Question 58

When managers graph a linear cost function with one cost driver,the intercept represents the ________ cost and the slope represents the ________ cost.

A)variable; fixed
B)fixed; variable
C)fixed; mixed
D)variable; mixed

Question 59

Committed fixed costs usually arise from the possession of facilities,equipment and a basic organizational structure.

Question 60

A cause and effect relationship between a ________ and a ________ is desirable in order to obtain accurate and useful cost functions.

A)cost driver; cost function
B)cost function; resource cost
C)cost driver; resource cost
D)step cost; capacity cost

Question 61

Managers apply two criteria to obtain accurate and useful cost functions.These criteria are ________.

A)plausibility and believability
B)plausibility and reliability
C)reliability and validity
D)believability and plausibility

Question 62

The cost of the Maintenance Department at Forest Manufacturing has always been charged to the production departments based on the number of employees.Recently,an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each production department.The Maintenance Department cost is $1,000,000.The following data is available:
Required:
Determine the amount of the maintenance department cost that should be allocated to Department X if the cost driver used is: (A)number of employees and (B)square feet of space.

Question 63

Consider the following linear mixed-cost function: Y = $72,000 + $7.70X
Where: Y = total annual custodial cost
What does the $7.70 represent?

A)variable cost per patient-day
B)total variable cost
C)fixed cost per patient-day
D)total fixed cost

Question 64

SK Company makes metal signs for businesses and residences.These signs are made of sheet metal,which the owner paints by hand.The owner is concerned that he does not have a good measure of support costs for the signs.Currently,he predicts support costs to be 30 percent of the cost of materials.Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure.SK Company has the following information available: Using cost of materials as the cost driver,what amount of support costs is assigned to the large sign?

A)$50
B)$80
C)$90
D)$210

Question 65

In relation to a cost function,the term reliability means ________.

A)whether the costs and activities can be easily observed
B)whether the cost function conforms to a given mathematical model
C)how well the cost function predicts future costs
D)how well the cost function explains past cost behavior

Question 66

The cost of a final product may have several cost drivers.

Question 67

Cat Company makes metal signs for businesses and residences.These signs are made of sheet metal,which the owner paints by hand.The owner is concerned that he does not have a good measure of support costs for the signs.Currently,he predicts support costs to be 30 percent of the cost of materials.Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure.Cat Company has the following information available: Using direct labor hours as the cost driver,what amount of support costs is assigned to the small sign?

A)$50
B)$110
C)$160
D)$200

Question 68

When referring to a cost function,plausibility refers to whether you can rely upon the cost function for predicting the future.

Question 69

The process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service is called ________.

A)account analysis
B)activity analysis
C)cost measurement
D)action analysis

Question 70

Consider the following linear mixed-cost function: Y = $72,000 + $7.70X
Where: Y = total annual maintenance cost
What does the $72,000 represent?

A)variable cost per patient-day
B)total variable cost
C)fixed cost per patient-day
D)total fixed cost

Question 71

A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s).

Question 72

Managers should apply plausibility and reliability to obtain accurate and useful cost functions.

Question 73

Goodness of fit pertains to how well a cost function predicts cost behavior.

Question 74

Skoda Company makes metal signs for businesses and residences.These signs are made of sheet metal,which the owner paints by hand.The owner is concerned that he does not have a good measure of support costs for the signs.Currently,he predicts support costs to be 30 percent of the cost of materials.Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure.Skoda Company has the following information available: Using cost of materials as the cost driver,what amount of support costs is assigned to the small sign?

A)$37
B)$50
C)$90
D)$210

Question 75

Activity analysis is used to ________.

A)identify relevant costs for decision making
B)classify costs
C)identify an appropriate cost driver
D)predict future costs

Question 76

Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service.

Question 77

In a mixed-cost linear function with one cost driver,the intercept is the ________ and the slope is the ________.

A)fixed cost; step cost
B)fixed cost; variable cost
C)variable cost; fixed cost
D)variable cost; step cost

Question 78

Dog Company makes metal signs for businesses and residences.These signs are made of sheet metal,which the owner paints by hand.The owner is concerned that he does not have a good measure of support costs for the signs.Currently,he predicts support costs to be 30 percent of the cost of materials.Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure.Dog Company has the following information available: Using direct labor hours as the cost driver,what amount of support costs is assigned to the large sign?

A)$33
B)$60
C)$110
D)$160

Question 79

In a linear mixed cost function,the slope of the function is the fixed cost per unit of the cost driver.

Question 80

Cleveland Recreation Center is planning its annual fundraiser.The event committee has developed the following budget for the event.
The committee expects 3,000 people will attend the event.
Required:

A)Compute the fixed and variable costs of the event.
B)Prepare the cost function.
C)If Cleveland Recreation charges $100 per person,how much money will be raised by this event?