Deck 4: Techniques for Estimating Fixed and Variable Costs

Question 1

Capacity costs are controllable in the short term.

Answer 1

False

Question 2

The contribution margin is the amount that contributes toward recovering fixed costs and earning a profit.

Answer 2

True

Question 3

Most firms rely on future data to estimate their cost structure.

Answer 3

False

Question 4

The account classification is both time-consuming and subjective in nature.

Question 5

The high-low method uses two observations of aggregate cost data to estimate total fixed costs and the unit variable cost.

Question 6

The major disadvantage of the account classification method is that it uses few observations of aggregate cost data to estimate total fixed and variable costs.

Question 7

Because account classification requires us to examine each account in detail, it often provides inaccurate estimates.

Question 8

Using the high-low method, we know the true cost line.

Question 9

The contribution margin is well suited to evaluate short-term decision options.

Question 10

The regression analysis method results in the least error between the estimated and true total cost line.

Question 11

We obtain the data for the account classification method from the contribution margin statement.

Question 12

The high-low method avoids the need to classify individual cost items as fixed or variable.

Question 13

Using the high-low method, managers use the two observations pertaining to the highest and lowest activity levels because these values are most likely to define any abnormal costs.

Question 14

A major drawback of using regression analysis is that the technique makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions.

Question 15

With advances in computer and information technologies, the account classification task may still be a daunting task.

Question 16

A disadvantage of using the regression analysis method is that it provides only one statistic to evaluate the data.

Question 17

The regression analysis method of estimating fixed and variable costs uses all available observations to come up with a line that best "fits" the data.

Question 18

R-square will always lie between negative one and positive one.

Question 19

An advantage of using the high-low method is that we can apply it if we know only total revenues, total costs, and activity volume.

Question 20

The contribution margin statement groups costs by their function.

Question 21

The high-low method:

A) Utilizes the average and the mean values of costs to determine fixed and variable costs.
B) Utilizes the high and low values of aggregate costs to estimate total fixed costs and the unit variable costs.
C) Utilizes regression analysis to estimate total fixed costs and the unit variable costs.
D) Requires cost items to be specifically classified as fixed costs or variable costs to be utilized.

Question 22

The high-low method:

A) Provides a true fixed cost line and a true variable cost line.
B) Provides a true fixed cost line and an estimated variable cost line.
C) Provides an estimated fixed cost line and a true variable cost line.
D) Provides an estimated fixed cost line and an estimated variable cost line.

Question 23

Which of the following is not a technique used to construct contribution margin statements?

A) Account classification
B) Capacity analysis
C) High-low method
D) Regression analysis
E) All of the above are techniques used to construct contribution margin statements.

Question 24

Contribution margin statements:

A) Can be utilized to evaluate the effect of possible activity changes on profit before taxes.
B) Cannot be utilized to evaluate the effect of possible activity changes if those changes also change fixed costs.
C) Will not provide an alert if cost behaviors vary from those expected.
D) Identify variable and fixed costs but will not address changes in revenues.

Question 25

If fixed costs are $15,000, profit before income taxes is $55,000, revenues are $160,000, variable costs are $90,000, contribution margin is:

A) $105,000.
B) $90,000.
C) $70,000.
D) $55,000.

Question 26

The term "contribution margin" denotes:

A) The value attained by subtracting variable and fixed costs from revenues.
B) The value attained by subtracting variable and fixed costs from net income.
C) The value attained by subtracting fixed costs from revenues.
D) The value attained by subtracting variable costs from revenues.

Question 27

Contribution margin equals revenues less variable costs.

Question 28

The major disadvantage of the account classification method is

A) While some cost items will exactly correspond to a fixed or variable cost, other cost items will not.
B) The difficulty associated with implementing it.
C) Small companies may have an expansive account list making the task hard.
D) Incorrectly classifying costs could lead to minor errors in cost estimates.

Question 29

The contribution margin statement focuses attention on:

A) Revenues and variable costs.
B) Revenues and fixed costs.
C) Revenues and costs of goods sold.
D) Revenues only.
E) Revenues and total costs.

Question 30

Common fixed costs do not relate to any product in particular but to the entire business.

Question 31

In the short run:

A) Most fixed costs are controllable
B) Most fixed costs are not controllable
C) Most variable costs are not controllable
D) Both fixed costs and variable costs are controllable
E) Neither fixed costs nor variable costs are controllable

Question 32

The high-low method requires:

A) The identification of fixed costs so variable costs can be estimated.
B) The identification of variable costs so fixed costs can be estimated.
C) The use of all data levels within the timeframe.
D) Two activity levels within the timeframe.

Question 33

The change in variable costs is calculated as:

A) The sum of the variable costs divided by the volume of activities which is then multiplied by the change in activity levels.
B) The sum of the variable costs multiplied by the change in activity levels.
C) The sum of the variable costs divided by the activity levels which is then multiplied by the change in volume of activities.
D) The sum of the variable revenues divided by the volume of activities which is then multiplied by the change in activity levels.

Question 34

Fixed costs are relevant for decisions involving increasing or decreasing production volumes.

Question 35

A useful step for estimating controllable costs is:

A) Separating product costs from administrative costs.
B) Separating contribution costs from product costs.
C) Separating variable costs from fixed costs.
D) Separating variable costs from product costs.
E) Separating fixed costs from product costs.

Question 36

Account classification involves categorizing cost accounts as:

A) Product costs and administrative costs.
B) Contribution costs and product costs.
C) Variable costs and fixed costs.
D) Variable costs and product costs.
E) Fixed costs from product costs.

Question 37

The "segmented" contribution margin statement is one way firms modify the contribution margin statement to reflect GAAP.

Question 38

Contribution margin denotes:

A) The amount that remains after subtracting costs of goods sold from revenue.
B) The amount that remains after subtracting fixed costs from revenue.
C) The amount that remains after subtracting fixed costs from costs of goods sold.
D) The amount that remains after subtracting variable costs from revenue.
E) The amount that remains after subtracting variable costs from costs of goods sold.

Question 39

Account classification involves systematically:

A) Classifying a company's list of revenue accounts into fixed and variable categories.
B) Classifying a company's list of accounts into asset, liability, shareholders' equity, revenue, and expense accounts.
C) Classifying a company's list of cost accounts into fixed and variable categories.
D) Classifying a company's list of accounts into revenue and expense accounts only.

Question 40

When constructing segmented statements, we use the term segment in a narrow sense.

Question 41

Using the account classification method, estimating the change in variable costs involve three steps. Which of the following is correct?

A) I. Sum the costs classified as fixed to obtain the total fixed costs for the most recent period. II. Multiply the amount in (I) by the volume of activity for the corresponding period to estimate the unit fixed cost.
III) Divide (2) by the change in activity to estimate the total controllable cost.
B) I. Sum the costs classified as fixed to obtain the total fixed costs for the most recent period. II. Divide the amount in (I) by the volume of activity for the corresponding period to estimate the unit fixed cost.
III) Multiply (2) by the change in activity to estimate the total controllable cost.
C) I. Sum the costs classified as variable to obtain the total variable costs for the most recent period. II. Multiply the amount in (I) by the volume of activity for the corresponding period to estimate the unit variable cost.
III) Divide (2) by the change in activity to estimate the total controllable cost.
D) I. Sum the costs classified as variable to obtain the total variable costs for the most recent period. II. Divide the amount in (I) by the volume of activity for the corresponding period to estimate the unit variable cost.
III) Multiply (2) by the change in activity to estimate the total controllable cost.

Question 42

Relevant range is defined as:

A) The proportion of total costs that are fixed and variable.
B) A statistical method that uses the normal range of operations to estimate fixed and variable costs.
C) A non-statistical method that uses the normal range of operations to estimate fixed and variable costs.
D) A firm's normal range of operations in which we expect a stable relation between activity and cost.
E) None of the above.

Question 43

Which of the following statements is not true concerning the segmented contribution margin statement?

A) The contribution margin statement may be organized by product.
B) The statement begins with sales volume and revenue.
C) The statement does not present cost of goods sold.
D) Variable and fixed costs are shown separately.
E) All of the above statements are true.

Question 44

Trish's Quilt Connection is an on-line company specializing in high-quality quilt frames and accessories. Trish does not charge customers shipping charges for quilt frame orders. She has provided the following information; Using the high-low method, estimate Trish's total variable and fixed costs are at if she sells 1,280 frames:

A) Total variable cost=$5,120; Total Fixed Cost $4,880
B) Total variable cost=$320; Total Fixed Cost $9,680
C) Total variable cost=$10,000; Total Fixed Cost $0
D) Total variable cost=$2,000; Total Fixed Cost $8,000
E) Total variable cost=$7,500; Total Fixed Cost $500

Question 45

Which of the following statements is not true?

A) Using the account classification method requires us to examine each cost account in detail.
B) Using the account classification method frequently requires considerable knowledge and experience.
C) Using the account classification method may be a daunting task for very large firms that offer a wide range of products and have expansive account lists.
D) Using the account classification method requires us to use statistical analysis.
E) All of the above are correct statements.

Question 46

Regression analysis:

A) Determines it has a good fit with high R-Square values near 1 and high confidence p-values with values near 1.
B) Determines it has a good fit with high R-Square values near 0 and high confidence p-values with values near 1.
C) Determines it has a good fit with high R-Square values near 0 and high confidence p-values with values near 0.
D) Determines it has a good fit with high R-Square values near 1 and high confidence p-values with values near 0.

Question 47

P-value:

A) Is not useful in interpreting the results of regression analysis.
B) Indicates the goodness-of-fit.
C) Is a residual number obtained when using the high-low method.
D) Indicates the confidence that the coefficient estimates reliably differ from zero.
E) Both b and c.

Question 48

Common fixed costs:

A) Are also referred to as facility-level costs.
B) Do not relate to any product in particular but to the entire business.
C) Are not controllable at the product level.
D) Both a and b.
E) a, b, and c.

Question 49

Regression analysis is:

A) The proportion of total costs that are fixed and variable.
B) A statistical method for estimating fixed and variable costs.
C) A non-statistical method that uses the normal range of operations to estimate fixed and variable costs.
D) A firm's normal range of operations in which we expect a stable relation between activity and cost.
E) None of the above.

Question 50

Which of the following statements is not true?

A) The high-low method is a non-statistical method, regression analysis is a statistical method.
B) The high-low method and regression analysis use only two observations to estimate fixed and variable costs.
C) The mechanics of regression analysis are complex, the mechanics of the high-low method are simple.
D) Both A and B are untrue.
E) A, B and C are untrue.

Question 51

Many firms do not choose to use the account classification method because:

A) It is time consuming to implement.
B) It is subjective in nature.
C) It does not provide very accurate estimates.
D) Both a and b.
E) Both b and c.

Question 52

Segmented contribution margin statements can:

A) Be utilized to present both product and region information.
B) Only be utilized to present product or region information.
C) Requires the use of high-low or regression analysis modeling for information.
D) Not be utilized by small companies with few products or services.

Question 53

Which of the following is a drawback of using regression analysis?

A) It is difficult to implement.
B) It makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions.
C) It is not a well-defined statistical method.
D) It provides only one statistic to evaluate the data.
E) None of the above are drawbacks of using regression analysis.

Question 54

Segmented contribution margin statements:

A) Require that all cost be associated with a product or region.
B) Cannot be utilized to determine sales value per unit or costs per unit.
C) Can present common fixed costs.
D) Cannot be utilized in the decision process of special pricing.

Question 55

Regression analysis:

A) Extracts the minimum amount of information from the data provided to answer the relevant questions.
B) Extracts the maximum amount of information from the data provided to answer the relevant questions.
C) Has not major drawbacks due to the complexity of the Excel function effectiveness.
D) Requires the high and low data to be specifically identified to improve its accuracy.

Question 56

When provided data in an Excel format, regression analysis:

A) Will provide total fixed costs as the Coefficient/Intercept and total variable costs as Coefficient/# of members.
B) Will provide total fixed costs as the Coefficient/Intercept and unit variable costs as Coefficient/# of members.
C) Will provide individual member fixed costs as the Coefficient/Intercept and individual variable costs as Coefficient/# of members.
D) Will provide total fixed costs as the Coefficient/Intercept and unit variable costs as p-value/# of members.

Question 57

For any volume of activity, total costs are:

A) Fixed costs + (Unit variable costs x Volume of activity).
B) Fixed costs + (Total variable costs/volume of activity).
C) Variable costs + (Unit fixed costs x Volume of activity).
D) Variable cost + (Total fixed costs/volume of activity).
E) None of the above.

Question 58

An advantage of estimating variable costs by the account classification method is

A) It is less demanding than other methods
B) It provides statistical analysis
C) It is easy to implement.
D) It can provide very accurate estimates.
E) None of the above is an advantage.

Question 59

Segmented contribution margin statements:

A) Can combine one or more products or regions into a single column presentation.
B) Can present individual product information for a single region.
C) Can be tailored to the requirements of the company.
D) All of the possibilities, A, B, and, C, are correct answers.

Question 60

Segment (product) margin is calculated by:

A) Subtracting common fixed costs from its contribution margin.
B) Subtracting variable costs traceable to that product from contribution margin.
C) Subtracting fixed costs traceable to that product from its contribution margin.
D) Summing all contribution margins, then subtracting common fixed costs.
E) None of the above.

Question 61

In a contribution margin statement, profit before taxes is calculated by:

A) Subtracting common fixed costs from segment (product) margin.
B) Subtracting traceable fixed costs from contribution margin.
C) Subtracting variable costs from contribution margin.
D) Subtracting contribution margin from Segment (product) margin.
E) Subtracting common fixed costs from contribution margin.

Question 62

Which of the following is not an example of a segment?

A) Product.
B) Customer.
C) Geographical region.
D) A Store
E) All of the above could be segments of a firm.