Question 1

Indirect costs, such as manufacturing overhead, are always fixed costs.

Accepted Answer

A) True 
 B)False

Question 2

Reference: 06-07
Gargymal Company would like to estimate the variable and fixed components of its electrical costs and has compiled the following data for the last five months of operations. $$\begin{array} { | l | l | l | } 
\hline & \text { Machine Hours } & \text { Electrical Cost } \
\hline \text { August } & 1,000 & \$ 1,550 \
\hline \text { September } & 900 & 1,510 \
\hline \text { October } & 1,500 & 1,750 \
\hline \text { November } & 2,000 & 1,950 \
\hline \text { December } & 1,300 & 1,670 \
\hline
\end{array}$$
-Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to?

Accepted Answer

A) $1,290.00. 
B) $1,150.00. 
C) $1,306.50. 
D) $870.00.

Question 3

In describing the cost formula equation Y = a + bX, which of the following statements i? correct:

Accepted Answer

A) "X" is the dependent variable. 
B) as "X" increases "Y" decreases. 
C) "a" is the fixed component. 
D) "b" is the fixed component.

Question 4

The following data pertains to activity and utility costs for two recent years: $$\begin{array} { | l | l | l | } 
\hline & \text { Year 2 } & \text { Year I } \
\hline \text { Activity level in units } & 10,000 & 6,000 \
\hline \text { Utilities cost observed } & \$ 12,000 & \$ 9,000 \
\hline
\end{array}$$ Using the high-low method, the cost formula for utilities is?

Accepted Answer

A) $4,500 plus $0.75 per unit. 
B) $3,000 plus $3.00 per unit. 
C) $1.20 per unit. 
D) $1.50 per unit.

Question 5

Reference: 06-02
Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below: $$\begin{array} { | l | l | l | } 
\hline & \text { July } & \text { August } \
\hline \text { Sales in Units } & 11,000 & 10,000 \
\hline & & \
\hline \text { Sales Revenue } & \$ 165,000 & \$ 150,000 \
\hline \text { Less Cost of Goods Sold } & 72,600 & 66,000 \
\hline \text { Gross Margin } & 92,400 & 84,000 \
\hline \text { Less Operating Expenses: } & & \
\hline \text { Rent } & 12,000 & 12,000 \
\hline \text { Sales Commissions } & 13,200 & 12,000 \
\hline \text { Maintenance Expenses } & 13,500 & 13,000 \
\hline \text { Clerical Expense } & 16,000 & 15,000 \
\hline \text { Total Operating Expenses } & 54,700 & 52,000 \
\hline \text { Net income } & \$ 37,700 & \$ 32,000 \
\hline
\end{array}$$ All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). The company is a merchandising company. Assume that the relevant range includes all of the activity levels mentioned in this problem.
-Which of the operating expenses of the company is variable

Accepted Answer

A) Clerical Expense. 
B) Maintenance Expense. 
C) Rent. 
D) Sales Commissions.

Question 6

The linear equation Y = a + bX is often used to express cost formulas.

Accepted Answer

A) the a term represents variable cost in total. 
B) the X term represents total cost. 
C) the b term represents variable cost per unit of activity. 
D) the Y term represents total fixed cost.

Question 7

Reference: 06-12
An income statement for Crandall's Bookstore for the first quarter of the current year is presented below:
Crandall's Bookstore
Income Statement
For the First Quarter of the Current Year $$\begin{array} { | l | l | l | } 
\hline \text { Sales } & & \$ 800,000 \
\hline \text { Less cost of goods sold } & & 560,000 \
\hline \text { Gross margin } & & 240,000 \
\hline \text { Less operating expenses: } & & \
\hline \text { Selling } & \$ 98,000 & \
\hline \text { Administrative } & 98,000 & \underline { 196,000 } \
\hline \text { Net income } & & \$ 44,000 \
\hline
\end{array}$$ On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed.
-The contribution margin for Crandall's Bookstore for the first quarter is

Accepted Answer

A) $688,000. 
B) $240,000. 
C) $152,000. 
D) $128,000.

Question 8

In preparing contribution margin income statements when will the total cost of goods sold be included as a variable cost?

Accepted Answer

A) When the business is a manufacturer. 
B) It is always included for all businesses selling products. 
C) When the business is a merchandising company. 
D) The total cost of goods sold is never included in variable cost.

Question 9

Discretionary fixed costs usually arise from annual decisions by management to spend in certain fixed cost areas.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) remain constant. 
B) vary inversely with the level of activity. 
C) change in some other way. 
D) increase in proportion with the level of activity.

Question 11

The following data pertain to activity and costs for two recent months: $$\begin{array} { | l | l | l | } 
\hline & \text { October } & \text { November } \
\hline \text { Activity level in units } & 5,000 & 10,000 \
\hline & & \
\hline \text { Variable costs } & \$ 10,000 & ? \
\hline \text { Fixed costs } & 30,000 & ? \
\hline \text { Mixed costs } & 20,000 & ? \
\hline \text { Total costs } & \underline { \$ 60,000 } & \$ 75,000 \
\hline
\end{array}$$ Assuming that these activity levels are within the relevant range, the mixed costs for November were?

Accepted Answer

A) $25,000. 
B) $30,000. 
C) $20,000. 
D) $40,000.

Question 12

Reference: 06-08
Wilson Company's activity for the first six months of the current year is as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Month } & \text { Machine Hours } & \text { Electrical Cost } \
\hline \text { January } & 2,000 & \$ 1,600 \
\hline \text { February } & 3,000 & \$ 2,200 \
\hline \text { March } & 2,400 & \$ 1,840 \
\hline \text { April } & 1,900 & \$ 1,540 \
\hline \text { May } & 1,800 & \$ 1,480 \
\hline \text { June } & 2,100 & \$ 1,660 \
\hline
\end{array}$$
-Using the high-low method, the variable cost per machine hour would be

Accepted Answer

A) $0.60. 
B) $0.68. 
C) $0.64. 
D) $0.40.

Question 13

Which of the statements is correct about using the scattergraph method in analyzing costs?

Accepted Answer

A) The resulting information will consistently be more accurate than that from other methods. 
B) The resulting information is precise, regardless of who performs the analysis. 
C) The unusual non-recurring cost behaviours are likely to be apparent. 
D) The regression line intersects all plotted cost points.

Question 14

Contribution margin is the excess of revenues over:

Accepted Answer

A) all variable costs. 
B) manufacturing cost. 
C) all direct costs. 
D) cost of goods sold.

Question 15

Selected information about Buehler Corporation's operations at high and at low levels of activity follows: $$\begin{array} { | l | l | l | } 
\hline &  { \text { Level of Activity } } \
\hline & \text { Low } & \text { High } \
\hline \text { Number of units produced } & 25,000 & 30,000 \
 \hline \text { Total manufacturing costs } & \$ 575,000 & \$ 680,000 \
\hline \text { Direct material cost per unit } & \$ 5 & \$ 5 \
\hline \text { Direct labour cost per unit } & \$ 6 & \$ 6 \
\hline
\end{array}$$ Using the high-low method, what is the cost formula for manufacturing overhead?

Accepted Answer

A) $50,000 per period plus $22 per unit. 
B) $50,000 per period plus $21 perD unit. 
C) $50,000 per period plus $10 per unit. 
D) $347,000 per period plus $0.10 per unit.

Question 16

Reference: 06-03
Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The following data describe the company's revenue and cost structure: $$\begin{array} { | l | l | } 
\hline \text { Selling price per unit } & \$ 40 \
\hline \text { Sales commission } & 5 \% \
\hline \text { Purchase price (cost) per unit } & \$ 18 \
\hline \text { Advertising expense } & \$ 4,000 \text { per month } \
\hline \text { Administrative expense } & \$ 4,500 \text { per month plus } 15 \% \text { of sales } \
\hline
\end{array}$$ Assume that all activity mentioned in this problem is within the relevant range.
-The expected net income next month is?

Accepted Answer

A) $5,100. 
B) $11,200. 
C) $2,700. 
D) $7,500.

Question 17

The high-low method is generally less accurate than the least-squares regression method
for analyzing the behaviour of mixed costs.

Accepted Answer

A) True 
 B)False

Question 18

Reference: 06-02
Comparative income statements for Boggs Sports Equipment Company for the last two months are presented below: $\begin{array}{|l|l|l|}
\hline & \text { July } & \text { August } \
\hline \text { Sales in Units } & 11,000 & 10,000 \
\hline & & \
\hline \text { Sales Revenue } & \$ 165,000 & \$ 150,000 \
\hline \text { Less Cost of Goods Sold } & 72,600 & 66,000 \
\hline \text { Gross Margin } & 92,400 & 84,000 \\hline \text { Less Operating Expenses: } & & \
\hline \text { Rent } & 12,000 & 12,000 \
\hline \text { Sales Commissions } & 13,200 & 12,000 \
\hline \text { Maintenance Expenses } & 13,500 & 13,000 \
\hline \text { Clerical Expense } & 16,000 & 15,000 \
\hline \text { Total Operating Expenses } & 54,700 & 52,000 \
\hline \text { Net income } & \underline{\$ 37,700} & \$ 32,000 \
\hline
\end{array}$ All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). The company is a merchandising company. Assume that the relevant range includes all of the activity levels mentioned in this problem.
-If sales are projected to be 8,000 units in September, total expected operating expenses would be?

Accepted Answer

A) $46,600. 
B) $44,750. 
C) $41,600. 
D) $49,300.

Question 19

Reference: 06-13
A comparative income statement for Jimbob Co., a merchandising company, for the three months ended June is presented below.
Jimbob Co.
Comparative Income Statement
For the Second Quarter $\begin{array}{|l|r|r|r|}
\hline & \text { April } & \text { May } & \text { June } \
\hline \text { Sales in units } & 4,500 & 5,250 & 6,000 \
\hline \text { Sales revenue } & \$ 630,000 & \$ 735,000 & \$ 840,000 \
\hline \text { Less cost of goods sold } & 252,000 & 294,000 & 336,000 \
\hline \text { Gross Margin } & 378,000 & 441,000 & 504,000 \\hline \text { Less operating expenses: } & & & \
\hline \text { Shipping expense } & 56,000 & 63,500 & 71,000 \
\hline \text { Advertising expense } & 70,000 & 70,000 & 70,000 \
\hline \text { Salaries and commissions } & 143,000 & 161,750 & 180,500 \
\hline \text { Insurance expense } & 9,000 & 9,000 & 9,000 \\hline \text { Depreciation expense } & {42,000} & 42,000 & 42,000 \
\hline \text { Total operating expenses } &{320,000} & {346,250}&372,500 \
\hline \text { Net income } & \underline{\$ 58,000} & \underline{\$ 94,750} & {\$ 131,500} \
\hline
\end{array}$
-What is the company's net income for the quarter?

Accepted Answer

A) $1,197,000. 
B) $284,250. 
C) $1,323,000. 
D) $835,500.

Question 20

Reference: 06-12
An income statement for Crandall's Bookstore for the first quarter of the current year is presented below:
Crandall's Bookstore
Income Statement
For the First Quarter of the Current Year $$\begin{array} { | l | l | l | } 
\hline \text { Sales } & & \$ 800,000 \
\hline \text { Less cost of goods sold } & & 560,000 \
\hline \text { Gross margin } & & 240,000 \
\hline \text { Less operating expenses: } & & \
\hline \text { Selling } & \$ 98,000 & \
\hline \text { Administrative } & 98,000 & \underline { 196,000 } \
\hline \text { Net income } & & \$ 44,000 \
\hline
\end{array}$$ On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed.
-The cost formula for operating expenses with "X" equal to the number of books sold is

Accepted Answer

A) Y = $98,000 + $7.00X. 
B) Y = $98,000 + $8.50X. 
C) Y = $84,000 + $7.00X. 
D) Y = $84,000 + $8.50X.

Exam 6: Cost Behaviour: Analysis and Use

Indirect costs, such as manufacturing overhead, are always fixed costs.

In describing the cost formula equation Y = a + bX, which of the following statements i? correct:

The linear equation Y = a + bX is often used to express cost formulas.

In preparing contribution margin income statements when will the total cost of goods sold be included as a variable cost?

Discretionary fixed costs usually arise from annual decisions by management to spend in certain fixed cost areas.

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

Which of the statements is correct about using the scattergraph method in analyzing costs?

Contribution margin is the excess of revenues over:

The high-low method is generally less accurate than the least-squares regression method for analyzing the behaviour of mixed costs.