Chapter 5

Cost Behavior: Analysis and Use

True/False

1. Modern technology is causing shifts away from variable costs toward more fixed costs
in many industries.

2. In order for a cost to be variable it must vary with either units produced or units sold.

3. A cost that is obtainable in large chunks and that increases or decreases only in
response to fairly wide changes in the activity level is known as a step-variable cost.

4. The concept of the relevant range does not apply to fixed costs.

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

6. A cost formula may not be valid outside the relevant range of activity.

7. Discretionary fixed costs arise from annual decisions by management to spend in

certain fixed cost areas.

8. Significant reductions in committed fixed costs can usually be made on a temporary

basis without seriously impairing the long-run goals of a firm.

9. The planning horizons for committed fixed costs and discretionary fixed costs are
generally the same.

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

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11. In a scattergraph, the line fitted to the plotted points is known as a regression line.

12. The adjusted R2 (i.e., R-squared) indicates the proportion of a mixed cost that is
variable.

13. In least-squares regression, independent variables are not included in the computations
of the slope and intercept.

14. The contribution approach to the income statement classifies costs by behavior rather
than by function.

15. A mixed cost is partially variable and partially fixed.

Multiple Choice

16. Expense A is a fixed cost; expense B is a variable cost. During the current year the
activity level has increased, but is still within the relevant range. In terms of cost per
unit of activity, we would expect that:
a. expense A has remained unchanged.
b. expense B has decreased.
c. expense A has decreased.
d. expense B has increased.

17. Which costs will change with a decrease in activity within the relevant range?
a. Total fixed costs and total variable cost.
b. Unit fixed costs and total variable cost.
c. Unit variable cost and unit fixed cost.
d. Unit fixed cost and total fixed cost.

18. Within the relevant range of activity, variable cost per unit will:
a. increase in proportion with the level of activity.
b. remain constant.
c. vary inversely with the level of activity.
d. none of these.

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19. An increase in the activity level within the relevant range results in:
a. an increase in fixed cost per unit.
b. a proportionate increase in total fixed costs.
c. an unchanged fixed cost per unit.
d. a decrease in fixed cost per unit.

20. The term "relevant range" means the range over which:
a. costs may fluctuate.
b. a particular cost formula is valid.
c. production may vary.
d. relevant costs are incurred.

21. The linear equation Y = a + bX is often used to express cost formulas. In this
equation:
a. the b term represents variable cost per unit of activity.
b. the a term represents variable cost in total.
c. the X term represents total cost.
d. the Y term represents total fixed cost.

22. An example of a discretionary fixed cost is:

a. insurance.
b. taxes on real estate.
c. management training.
d. depreciation of buildings and equipment.

23. 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.

24. Discretionary fixed costs:

a. vary directly and proportionately with the level of activity.
b. have a long-term planning horizon, generally encompassing many years.
c. are made up of plant, equipment, and basic organizational costs.
d. none of the above.

25. 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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26. The contribution approach to the income statement:
a. organizes costs on a functional basis.
b. is useful to managers in planning and decision making.
c. shows a contribution margin rather than a net income figure at the bottom of the
statement.
d. can be used only by manufacturing companies.

27. Contribution margin is the excess of revenues over:

a. cost of goods sold.
b. manufacturing cost.
c. all direct costs.
d. all variable costs.

28. An example of a cost that is variable with respect to the number of units produced and
sold is:
a. insurance on the headquarters building.
b. power to run production equipment.
c. supervisory salaries.
d. depreciation of factory facilities.

29. A cost driver is:

a. the largest single category of cost in a company.
b. a fixed cost that cannot be avoided.
c. a factor that causes variations in a cost.
d. an indirect cost that is essential to the business.

30. The following data pertain to activity and costs for two recent months:

October November
Activity level in units 5,000 10,000

Variable costs ............ P10,000 ?

Fixed costs ............... 30,000 ?
Mixed costs ............... 20,000 ? _
Total costs ............... P60,000 P75,000

Assuming that these activity levels are within the relevant range, the mixed costs for
November were:
a. P40,000.
b. P35,000.
c. P25,000.
d. P20,000.

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31. The following data pertains to activity and costs for two months:

June July
Activity level in units 10,000 20,000

Variable costs ................ P20,000 P ?

Fixed costs ................... 15,000 ?
Mixed costs ................... 10,000 ? _
Total costs ................... P45,000 P70,000

Assuming that these activity levels are within the relevant range, the mixed costs for
July were:
a. P10,000.
b. P35,000.
c. P15,000.
d. P40,000.

32. At an activity level of 10,000 units, variable costs totaled P35,000 and fixed costs
totaled P20,800. If 16,000 units are produced and this activity is within the relevant
range, then:
a. total cost would equal P89,280.
b. total unit cost would equal P4.80.
c. fixed cost per unit would equal P5.58.
d. total costs would equal P55,800.

33. Anaconda Mining Company shipped 9,000 tons of copper concentrate for P450,000 in
March and 11,000 tons for P549,000 in April. Shipping costs for 12,000 tons to be
shipped in May would be expected to be:
a. P548,780.
b. P549,020.
c. P594,000.
d. P598,500.

34. An analysis of past maintenance costs indicates that maintenance cost is an average of
P0.20 per machine-hour at an activity level of 10,000 machine-hours and P0.25 per
machine-hour at an activity level of 8,000 machine-hours. Assuming that this activity
is within the relevant range, what is the total expected maintenance cost if the activity
level is 8,700 machine-hours?
a. P2,000
b. P400
c. P2,250
d. P1,740

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35. Shipping expense is P9,000 for 8,000 pounds shipped and P11,250 for 11,000 pounds
shipped. Assuming that this activity is within the relevant range, if the company ships
9,000 pounds, its expected shipping expense is closest to:
a. P10,125.
b. P8,583.
c. P9,972.
d. P9,750.

36. Average maintenance costs are P1.50 per machine-hour at an activity level of 8,000
machine-hours and P1.20 per machine-hour at an activity level of 13,000 machine-
hours. Assuming that this activity is within the relevant range, total expected
maintenance cost for a budgeted activity level of 10,000 machine-hours would be
closest to:
a. P16,128.
b. P15,000.
c. P13,440.
d. P11,433.

37. The controller of JoyCo has requested a quick estimate of the manufacturing supplies
needed for the month of July when production is expected to be 470,000 units. Below
are actual data from the prior three months of operations.

Production Manufacturing
in units supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560

Using these data and the high-low method, what is the best estimate of the cost of
manufacturing supplies that would be needed for July? (Assume that this activity is
within the relevant range.)
a. P805,284
b. P1,188,756
c. P755,196
d. P752,060

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38. (Appendix) The following activity and cost data were provided by Hammer Corp.,
which would like help in estimating its future maintenance costs:

Units Maintenance Cost

3 P450
7 P530
11 P640
15 P700

Using the least-squares regression method to estimate the cost formula, the expected
total cost for an activity level of 10 units would be closest to:
a. P612.50.
b. P581.82.
c. P595.84.
d. P601.50.

39. Given the cost formula Y = P15,000 + P5X, total cost at an activity level of 8,000
units would be:
a. P23,000.
b. P15,000.
c. P55,000.
d. P40,000.

40. Given the cost formula Y = P12,000 + P6X, total cost at an activity level of 8,000
units would be:
a. P20,000.
b. P60,000.
c. P12,000.
d. P48,000.

41. Reddy Company has the following cost formulas for overhead:

Cost Cost Formula

Indirect materials P2,000 plus P0.40 per machine hour
Maintenance P1,500 plus P0.60 per machine hour
Machine setup P0.30 per machine hour
Utilities P200 plus P0.10 per machine hour
Depreciation P800

Based on these cost formulas, the total overhead cost at 600 machine hours is
expected to be:
a. P4,500.
b. P5,200.
c. P5,620.
d. P5,340.

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42. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be
P42,500?
a. 10,625 units.
b. 4,375 units.
c. 6,250 units.
d. 5,250 units.

43. The following data pertains to activity and utility costs for two recent years:

Year 2 Year 1
Activity level in units 12,000 8,000
Utilities cost P15,000 P12,000

Using the high-low method, the cost formula for utilities is:
a. P1.50 per unit.
b. P8,000 plus P0.50 per unit.
c. P1.25 per unit.
d. P6,000 plus P0.75 per unit.

44. The following data pertains to activity and utility costs for two recent years:

Year 2 Year 1
Activity level in units 10,000 6,000
Utilities cost observed P12,000 P9,000

Using the high-low method, the cost formula for utilities is:
a. P1.50 per unit.
b. P1.20 per unit.
c. P3,000 plus P3.00 per unit.
d. P4,500 plus P0.75 per unit.

45. At an activity level of 6,000 units the cost for maintenance is P7,200 and at 10,000
units the cost for maintenance is P11,600. Using the high-low method, the cost
formula for maintenance is:
a. P1.20 per unit.
b. P1.16 per unit.
c. P1,200 plus P1.10 per unit.
d. P600 plus P1.10 per unit.

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46. Bell Company has provided the following data for maintenance costs:

April May
Machine hours incurred 12,000 16,000
Maintenance cost incurred P24,000 P26,000

Using the high-low method, the cost formula for maintenance cost would be:
a. P2.00 per machine hour.
b. P1.625 per machine hour.
c. P18,000 plus P0.50 per machine hour.
d. P24,000 plus P0.50 per machine hour.

47. Buckeye Company has provided the following data for maintenance cost:

Prior Year Current Year

Machine hours ..... 12,500 15,000
Maintenance cost .. P27,000 P31,000

The best estimate of the cost formula for maintenance would be:
a. P21,625 per year plus P0.625 per machine hour.
b. P7,000 per year plus P0.625 per machine hour.
c. P7,000 per year plus P1.60 per machine hour.
d. P27,000 per year plus P1.60 per machine hour.

48. Selected information about Buehler Corporation's operations at high and at low levels
of activity follow:

Level of Activity
Low High
Number of units produced ............ 25,000 30,000
Total manufacturing costs ........... P575,000 P680,000
Direct material cost per unit ....... P5 P5
Direct labor cost per unit .......... P6 P6

Using the high-low method, what is the cost formula for manufacturing overhead?
a. P50,000 per period plus P10 per unit
b. P50,000 per period plus P21 per unit
c. P50,000 per period plus P22 per unit
d. P347,000 per period plus P0.10 per unit

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49. At a sales level of P300,000, James Company's gross margin is P15,000 less than its
contribution margin, its net income is P50,000, and its selling and administrative
expenses total P120,000. At this sales level, its contribution margin would be:
a. P250,000.
b. P155,000.
c. P170,000.
d. P185,000.

50. (Appendix) Your boss would like you to estimate the fixed and variable components
of a particular cost. Actual data for this cost for four recent periods appear below.

Activity Cost
Period 1 24 P174
Period 2 25 179
Period 3 20 165
Period 4 22 169

Using the least-squares regression method, what is the cost formula for this cost?
a. Y = P 0.00 + P7.55X
b. Y = P110.44 + P2.70X
c. Y = P103.38 + P3.00X
d. Y = P113.35 + P0.89X

Reference: 5-1
Rymore Company would like to classify the following costs according to their cost behavior:

July August
Sales in units.. 1,500 1,600

Cost A ......... P35,000 P36,000

Cost B ......... 16,000 16,000
Cost C ......... 67,500 72,000

51. Which of the following classifications best describes the behavior of Cost A?
a. Mixed.
b. Variable.
c. Fixed
d. none of the above.

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52. Which of the following classifications best describes the behavior of Cost B?
a. Mixed.
b. Variable.
c. Fixed.
d. none of the above.

53. Which of the following classifications best describes the behavior of Cost C?
a. Mixed.
b. Variable.
c. Fixed.
d. none of the above.

Reference: 5-2
Comparative income statements for Boggs Sports Equipment Company for the last two months are
presented below:

July August
Sales in Units ............. 11,000 10,000

Sales Revenue .............. P165,000 P150,000

Less Cost of Goods Sold .... 72,600 66,000
Gross Margin ............... 92,400 84,000
Less Operating Expenses:
Rent ..................... 12,000 12,000
Sales Commissions ........ 13,200 12,000
Maintenance Expenses ..... 13,500 13,000
Clerical Expense ......... 16,000 15,000
Total Operating Expenses ... 54,700 52,000
Net income ................. P 37,700 P 32,000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that
the relevant range includes all of the activity levels mentioned in this problem.

54. Which of the operating expenses of the company is variable?

a. Rent.
b. Sales Commissions.
c. Maintenance Expense.
d. Clerical Expense.

55. The total monthly fixed cost for Boggs Sporting Equipment Company is:
a. P12,000.
b. P22,500.
c. P25,000.
d. P40,000.

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56. If sales are projected to be 8,000 units in September, total expected operating
expenses would be:
a. P49,300.
b. P41,600.
c. P44,750.
d. P46,600.

Reference: 5-3
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:

Selling price per unit ....... P40

Sales commission ............. 5%
Purchase price (cost) per unit P18
Advertising expense .......... P4,000 per month
Administrative expense ....... P4,500 per month plus 15% of sales

Assume that all activity mentioned in this problem is within the relevant range.

57. The expected gross margin next month is:

a. P17,600.
b. P11,200.
c. P14,400.
d. P16,000.

58. The expected total administrative expense next month is:

a. P 4,800.
b. P13,300.
c. P 9,300.
d. P14,900.

59. The expected contribution margin next month is:

a. P17,600.
b. P11,200.
c. P14,400.
d. P16,000.

60. The expected net income next month is:

a. P 7,500.
b. P 5,100.
c. P 2,700.
d. P11,200.

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Reference: 5-4
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead
costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000
(all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000
machine hours, maintenance costs were P130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.

61. The variable cost for maintenance per machine hour is:
a. P1.30.
b. P1.44.
c. P0.75.
d. P1.35.

62. The total fixed overhead cost for O'Donnell is:

a. P115,000.
b. P130,000.
c. P 60,000.
d. P 55,000.

63. If 110,000 machine hours of activity are projected for next period, total expected
overhead cost would be:
a. P256,000
b. P263,500.
c. P306,625.
d. P242,500.

Reference: 5-5
Maxwell Company has a total expense per unit of P2.00 per unit at the 16,000 level of activity and total
expense per unit of P1.95 at the 21,000 unit level of activity.

64. The best estimate of the variable cost per unit for Maxwell Company is:
a. P0.56.
b. P1.79.
c. P2.00.
d. P1.95.

65. The best estimate of the total fixed cost per period for Maxwell Company is:
a. P40,950.
b. P32,000.
c. P3,360.
d. P29,190.

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66. The best estimate of the total expected costs at the 19,000 level of activity for
Maxwell Company is:
a. P37,050.
b. P38,000.
c. P37,370.
d. P39,830.

Reference: 5-6
Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication Cost

January .... 120 P750
February ... 160 P800
March ...... 200 P870
April ...... 150 P790
May ........ 170 P840

67. Using the high-low method of analysis, the estimated variable lubrication cost per
machine hour is closest to:
a. P1.40.
b. P1.25.
c. P0.67.
d. P1.50.

68. Using the high-low method of analysis, the estimated monthly fixed component of
lubrication cost is closest to:
a. P570.
b. P560.
c. P585.
d. P565.

69. (Appendix) Using the least-squares regression method of analysis, the estimated
variable lubrication cost per machine hour is closest to:
a. P0.80.
b. P1.56.
c. P1.40.
d. P1.28.

70. (Appendix) Using the least-squares regression method of analysis, the estimated
monthly fixed component of lubrication cost is closest to:
a. P561.
b. P580.
c. P525.
d. P572.

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Reference: 5-7
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.

Machine Electrical
Hours Cost
August ...... 1,000 P1,620
September ... 900 1,510
October ..... 1,500 1,870
November .... 2,000 1,950
December .... 1,300 1,730

71. Using the high-low method of analysis, the estimated variable cost per machine hour
for electricity is closest to:
a. P0.40.
b. P2.50.
c. P0.98.
d. P1.68.

72. Using the high-low method of analysis, the estimated fixed cost per month for
electricity is closest to:
a. P1,306.50.
b. P 870.00.
c. P1,290.00.
d. P1,150.00.

Reference: 5-8
Wilson Company's activity for the first six of the current year is as follows:

Machine Electrical
Month Hours Cost
January .... 2,000 P1,560
February ... 3,000 P2,200
March ...... 2,400 P1,750
April ...... 1,900 P1,520
May ........ 1,800 P1,480
June ....... 2,100 P1,600

73. Using the high-low method, the variable cost per machine hour would be:
a. P0.67.
b. P0.64.
c. P0.40.
d. P0.60.

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74. Using the high-low method, the fixed portion of the electrical cost each month would
be:
a. P400.
b. P760.
c. P280.
d. P190.

Reference: 5-9
Prater Company has provided the following data:

This Year Last Year

Units sold ................ 300,000 250,000
Sales revenue ............. P1,300,000 P1,050,000
Less cost of goods sold ... 910,000 735,000
Gross margin .............. 390,000 315,000
Less operating expenses ... 272,000 260,000
Net income ................ P 118,000 P 55,000

75. The best estimate of the company's variable operating expense per unit is:
a. P0.24 per unit.
b. P4.17 per unit.
c. P0.91 per unit.
d. P0.96 per unit.

76. The best estimate of the company's total fixed operating expense per year is:
a. P188,000.
b. P72,000.
c. P200,000.
d. P212,000.

Reference: 5-10
The following data have been provided by a retailer that sells a single product.
This Year Last Year
Units sold ................. 200,000 150,000
Sales revenue .............. P1,000,000 P750,000
Less cost of goods sold .... 700,000 525,000
Gross margin ............... P 300,000 P225,000
Less operating expenses .... 222,000 210,000
Net income ................. P 78,000 P 15,000

77. What is the best estimate of the company's variable operating expenses per unit?
a. P4.17 per unit
b. P0.24 per unit
c. P0.90 per unit
d. P0.71 per unit

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78. What is the best estimate of the company's total fixed operating expenses per year?
a. P0
b. P80,000
c. P44,000
d. 174,000

79. What is the best estimate of the company's contribution margin for this year?
a. P252,000
b. P300,000
c. P158,000
d. P120,000

Reference: 5-11
The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of
the year:

Sales............................. P350,000
Variable selling expense......... . 35,000
Fixed selling expenses............ 25,000
Cost of goods sold................ 160,000
Fixed administrative expenses... 55,000
Variable administrative expenses 15,000

80. The gross margin of Evans Retail Stores, Inc. for the first quarter is:
a. P210,000.
b. P140,000.
c. P220,000.
d. P190,000.

81. The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
a. P300,000.
b. P140,000.
c. P210,000.
d. P190,000.

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Reference: 5-12
Porter Company has provided the following data for the second quarter of the most recent year:

Sales .............................. P300,000

Fixed manufacturing overhead ....... 55,000
Direct labor ....................... 72,500
Fixed selling expense .............. 46,250
Variable manufacturing overhead .... 41,000
Variable administrative expense .... 48,000
Direct materials ................... 51,500
Fixed administrative expense ....... 44,500
Variable selling expense ........... 49,750

Assume that direct labor is a variable cost and that there were no beginning or ending inventories.

82. The total contribution margin of Porter Company for the second quarter was:
a. P37,250.
b. P87,000.
c. P176,000.
d. P211,000.

83. The gross margin for Porter Company for the second quarter was:
a. P(12,500).
b. P80,000.
c. P131,500.
d. P135,000.

Reference: 5-13
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

Sales ...................... P800,000

Less cost of goods sold .... 560,000
Gross margin ............... 240,000
Less operating expenses:
Selling ................. P98,000
Administrative .......... 98,000 196,000
Net income ................. P 44,000

On average, a book sells for P50. Variable selling expenses are P5.50 per book, with the remaining
selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder
being fixed.

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84. The contribution margin for Crandall's Bookstore for the first quarter is:
a. P688,000.
b. P128,000.
c. P152,000.
d. P240,000.

85. The net income using the contribution approach for the first quarter is:
a. P240,000.
b. P152,000.
c. P44,000.
d. P128,000.

86. The cost formula for operating expenses with "X" equal to the number of books sold
is:
a. Y = P84,000 + P7.00X.
b. Y = P84,000 + P8.50X.
c. Y = P98,000 + P7.00X.
d. Y = P98,000 + P8.50X.

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