Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 213
True/False Questions
1. A variable cost is a cost that remains constant in total throughout wide ranges of
activity.
Answer: False Level: Easy LO: 1
2. If the activity level increases, then one would expect the variable cost per unit to
increase as well.
Answer: False Level: Medium LO: 1
3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.
Answer: True Level: Medium LO: 1
4. Calculation of fixed costs on a per unit basis is critical for internal reporting to
managers.
Answer: False Level: Medium LO: 1
5. Management's strategy will determine to a large degree the classification of a fixed
cost as discretionary or committed.
Answer: True Level: Easy LO: 1
6. Committed fixed costs cannot be reduced to zero without seriously impairing the
company's long term goals.
Answer: True Level: Easy LO: 1
7. Unless the behavior pattern of each cost of a company is understood, the impact of a
company's activities on its costs will not be known until after the activity has occurred.
Answer: True Level: Medium LO: 1
8. When using the high-low method, if the high and low activity levels do not coincide
with the high and low levels of cost, then the analyst should use the points with the
high and low levels of cost.
Answer: False Level: Medium LO: 3
Chapter 5 Cost Behavior: Analysis and Use
214 Garrison, Managerial Accounting, 12th Edition
9. A traditional functional income statement organizes costs on the basis of behavior.
Answer: False Level: Easy LO: 4
10. The contribution income statement organizes costs according to behavior.
Answer: True Level: Easy LO: 4
11. The contribution margin represents the amount available to contribute toward covering
fixed expenses and toward profits for the period.
Answer: True Level: Easy LO: 4
12. Most companies use the contribution approach in preparing financial statements for
external reporting purposes.
Answer: False Level: Medium LO: 4
13. In the least-squares regression method, total cost is considered to be “Y”, the
dependent variable.
Answer: True Level: Easy LO: 5
14. The least-squares regression method computes the regression line that minimizes the
sum of the squared deviations from the plotted points to the line.
Answer: True Level: Medium LO: 5
15. Account analysis is a special form of least-squares regression in which more than one
account is analysed at the same time.
Answer: False Level: Easy LO: 6
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 215
Multiple Choice Questions
16. As the level of activity increases, how will a mixed cost in total and per unit behave?
In Total Per Unit
A) Increase Decrease
B) Increase Increase
C) Increase No effect
D) Decrease Increase
E) Decrease No effect
Answer: A Level: Hard LO: 1
17. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is,
therefore, always using natural gas. However, when there is no pizza in the oven, the
oven automatically lowers its flame and reduces its natural gas usage by 70%. The
cost of natural gas would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.
Answer: B Level: Easy LO: 1
18. When the activity level is expected to decline within the relevant range, what effects
would be anticipated with respect to each of the following?
Fixed costs
per unit
Variable
costs per unit
A) Increase Increase
B) Increase No change
C) No change No change
D) No change Increase
Answer: B Level: Medium LO: 1 Source: CPA, adapted
19. Within the relevant range, variable costs can be expected to:
A) vary in total in direct proportion to changes in the activity level.
B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases.
D) increase on a per unit basis as the activity level decreases.
E) none of these.
Answer: A Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
216 Garrison, Managerial Accounting, 12th Edition
20. Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on
management's strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time
without seriously impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable
costs.
Answer: D Level: Easy LO: 1
21. Which of the following statements is true when referring to fixed costs?
A) Committed fixed costs arise from the annual decisions by management.
B) As volume increases, unit fixed cost and total fixed cost will change.
C) Fixed costs increase in total throughout the relevant range.
D) Discretionary fixed costs can often be reduced to zero for short periods of time
without seriously impairing the long-run goals of the company.
Answer: D Level: Easy LO: 1
22. For the past 8 months, Jinan Corporation has experienced a steady increase in its cost
per unit even though total costs have remained stable This cost per unit increase may
be due to _____________ costs because the level of activity at Jinan is
_______________.
A) fixed, decreasing
B) fixed, increasing
C) variable, decreasing
D) variable, increasing
Answer: A Level: Medium LO: 1
23. Discretionary fixed costs:
A) cannot be changed since they are fixed.
B) have a long-term planning horizon, generally encompassing many years.
C) are made up of facilities, equipment, and basic organization.
D) responses b and c are both correct.
E) none of these.
Answer: E Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 217
24. An example of a committed fixed cost is:
A) management training seminars.
B) a long-term equipment lease.
C) research and development.
D) advertising.
Answer: B Level: Easy LO: 1
25. Which of the following would usually be considered a committed fixed cost for a
retail sales corporation?
A) lease payments made on its store buildings
B) the cost of the Caribbean trip given to the employee of the year
C) the cost of running an annual leadership seminar for managers
D) both a and c above
Answer: A Level: Medium LO: 1
26. Which of the following would usually be considered a discretionary fixed cost for a
financial planning company?
A) the cost of the annual employee picnic
B) property taxes on its corporate office building
C) the cost of internships for selected college seniors
D) both a and c above
Answer: D Level: Medium LO: 1
27. Which of the following is unlikely to be classified as a fixed cost with respect to the
number of units produced and sold?
A) Property taxes on a headquarters building.
B) Legal department salaries.
C) Cost of leasing the company's mainframe computer.
D) Production supplies.
Answer: D Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
218 Garrison, Managerial Accounting, 12th Edition
28. The following data have been collected for four different cost items.
Cost Item
Cost at 100
units
Cost at 140
units
W $8,000 $10,560
X $5,000 $5,000
Y $6,500 $9,100
Z $6,700 $8,580
Which of the following classifications of these cost items by cost behavior is correct?
Cost W Cost X Cost Y Cost Z
A) variable fixed mixed variable
B) mixed fixed variable mixed
C) variable fixed variable variable
D) mixed fixed mixed mixed
Answer: B Level: Hard LO: 1 Source: CIMA, adapted
29. Which of the following methods of analyzing mixed costs can be used to estimate an
equation for the mixed cost?
Least-
High-Low Squares
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Answer: A Level: Easy LO: 2,5
30. A multiple regression equation has:
A) more than one dependent variable.
B) more than one independent variable.
C) more than one amount for total fixed cost.
D) both A and B above.
Answer: B Level: Medium LO: 2,5
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 219
31. In describing the cost formula equation, Y = a + bX, which of the following is correct:
A) “Y” is the independent variable.
B) “a” is the variable cost per unit.
C) “a” and “b” are valid for all levels of activity.
D) in the high-low method, “b” equals the change in cost divided by the change in
activity.
Answer: D Level: Medium LO: 3
32. The high-low method is used with which of the following types of costs?
A) Variable.
B) Mixed.
C) Fixed.
D) Step-variable.
Answer: B Level: Medium LO: 3
33. The contribution approach income statement:
A) organizes costs on a functional basis.
B) provides owners with more cash flows.
C) is particularly helpful to the manager in planning and decision making.
D) provides a gross margin figure from which selling and administrative expenses are
deducted.
E) none of these.
Answer: C Level: Medium LO: 4
34. Contribution margin is:
A) Sales less cost of goods sold.
B) Sales less variable production, variable selling, and variable administrative
expenses.
C) Sales less variable production expense.
D) Sales less all variable and fixed expenses.
E) none of the above.
Answer: B Level: Easy LO: 4
Chapter 5 Cost Behavior: Analysis and Use
220 Garrison, Managerial Accounting, 12th Edition
35. The contribution approach to income statement preparation:
A) organizes costs according to the functions of production, administration, and sales.
B) is used for external reporting.
C) organizes costs according to their variable and fixed cost behavior.
D) both b and c are true.
E) both a and b are true
Answer: C Level: Easy LO: 4
36. Iaci Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the
product for $133.60 per unit.
Sales volume (units) .............................................. 4,000 5,000
Cost of sales .......................................................... $383,600 $479,500
Selling, general, and administrative costs ............. $124,400 $136,000
The best estimate of the total contribution margin when 4,300 units are sold is:
A) $112,230
B) $162,110
C) $28,380
D) $45,150
Answer: A Level: Medium LO: 1,3,4
37. Iacob Corporation is a wholesaler that sells a single product. Management has
provided the following cost data for two levels of monthly sales volume. The company
sells the product for $103.40 per unit.
Sales volume (units) ........................................................ 5,000 6,000
Cost of sales ..................................................................... $315,500 $378,600
Selling, general, and administrative costs ....................... $162,500 $177,600
The best estimate of the total contribution margin when 5,300 units are sold is:
A) $56,710
B) $133,560
C) $41,340
D) $213,590
Answer: B Level: Medium LO: 1,3,4
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 221
38. Shipping costs at Columbia Mining Company are a mixture of variable and fixed
components The company shipped 8,000 tons of coal for $400,000 in shipping costs in
February and 10,000 tons for $499,000 in March Assuming that this activity is within
the relevant range, expected shipping costs for 11,000 tons would be:
A) $544,500
B) $548,500
C) $422,222
D) $554,000
Answer: B Level: Easy LO: 1,3
39. Anderson Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume ......................... 4,000 units 5,000 units
Direct materials .............................. $99.20 per unit $99.20 per unit
Direct labor .................................... $45.50 per unit $45.50 per unit
Manufacturing overhead ................ $94.00 per unit $77.60 per unit
The best estimate of the total monthly fixed manufacturing cost is:
A) $388,000
B) $954,800
C) $376,000
D) $328,000
Answer: D Level: Hard LO: 1,3
40. Andom Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume ......................... 1,000 units 2,000 units
Direct materials .............................. $15.20 per unit $15.20 per unit
Direct labor .................................... $30.50 per unit $30.50 per unit
Manufacturing overhead ................ $54.10 per unit $37.40 per unit
The best estimate of the total monthly fixed manufacturing cost is:
A) $74,800
B) $54,100
C) $99,800
D) $33,400
Answer: D Level: Hard LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
222 Garrison, Managerial Accounting, 12th Edition
41. Baker Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume .......................... 1,000 units 3,000 units
Direct materials ............................... $30.90 per unit $30.90 per unit
Direct labor ..................................... $40.20 per unit $40.20 per unit
Manufacturing overhead ................. $64.60 per unit $33.80 per unit
The best estimate of the total variable manufacturing cost per unit is:
A) $89.50
B) $18.40
C) $71.10
D) $30.90
Answer: A Level: Hard LO: 1,3
42. Bakan Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume ........................... 3,000 units 4,000 units
Direct materials ................................ $86.30 per unit $86.30 per unit
Direct labor ....................................... $26.40 per unit $26.40 per unit
Manufacturing overhead ................... $75.90 per unit $60.40 per unit
The best estimate of the total variable manufacturing cost per unit is:
A) $126.60
B) $86.30
C) $13.90
D) $112.70
Answer: A Level: Hard LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 223
43. Cardiv Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume ............................. 4,000 units 5,000 units
Direct materials .................................. $85.80 per unit $85.80 per unit
Direct labor ......................................... $56.10 per unit $56.10 per unit
Manufacturing overhead ..................... $73.60 per unit $62.10 per unit
The best estimate of the total cost to manufacture 4,300 units is closest to:
A) $877,200
B) $909,400
C) $901,925
D) $926,650
Answer: B Level: Hard LO: 1,3
44. Caraco Corporation has provided the following production and average cost data for
two levels of monthly production volume. The company produces a single product.
Production volume .............................. 7,000 units 8,000 units
Direct materials ................................... $87.40 per unit $87.40 per unit
Direct labor .......................................... $20.20 per unit $20.20 per unit
Manufacturing overhead ...................... $101.50 per unit $90.80 per unit
The best estimate of the total cost to manufacture 7,300 units is closest to:
A) $1,487,375
B) $1,448,320
C) $1,500,750
D) $1,526,430
Answer: C Level: Hard LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
224 Garrison, Managerial Accounting, 12th Edition
45. Davis Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume .............................. 1,000 units 2,000 units
Direct materials ................................... $44,200 $88,400
Direct labor .......................................... $37,300 $74,600
Manufacturing overhead ...................... $48,500 $62,200
The best estimate of the total monthly fixed manufacturing cost is:
A) $130,000
B) $177,600
C) $34,800
D) $225,200
Answer: C Level: Medium LO: 1,3
46. Dacosta Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume .............................. 6,000 units 7,000 units
Direct materials ................................... $369,600 $431,200
Direct labor .......................................... $309,600 $361,200
Manufacturing overhead ...................... $919,800 $937,300
The best estimate of the total monthly fixed manufacturing cost is:
A) $1,599,000
B) $1,664,350
C) $814,800
D) $1,729,700
Answer: C Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 225
47. Eddy Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume ................................ 6,000 units 7,000 units
Direct materials ..................................... $582,600 $679,700
Direct labor ............................................ $136,200 $158,900
Manufacturing overhead ........................ $691,800 $714,700
The best estimate of the total variable manufacturing cost per unit is:
A) $22.90
B) $119.80
C) $142.70
D) $97.10
Answer: C Level: Medium LO: 1,3
48. Edal Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume ................................. 5,000 units 6,000 units
Direct materials ...................................... $266,500 $319,800
Direct labor ............................................. $52,000 $62,400
Manufacturing overhead ......................... $748,500 $769,200
The best estimate of the total variable manufacturing cost per unit is:
A) $63.70
B) $84.40
C) $53.30
D) $20.70
Answer: B Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
226 Garrison, Managerial Accounting, 12th Edition
49. Farmington Corporation has provided the following production and total cost data for
two levels of monthly production volume. The company produces a single product.
Production volume ................................... 6,000 units 7,000 units
Direct materials ........................................ $195,000 $227,500
Direct labor ............................................... $113,400 $132,300
Manufacturing overhead ........................... $913,200 $931,700
The best estimate of the total cost to manufacture 6,300 units is closest to:
A) $1,162,350
B) $1,242,570
C) $1,222,515
D) $1,282,680
Answer: B Level: Medium LO: 1,3
50. Farac Corporation has provided the following production and total cost data for two
levels of monthly production volume. The company produces a single product.
Production volume .................................... 4,000 units 5,000 units
Direct materials ......................................... $208,800 $261,000
Direct labor ................................................ $119,200 $149,000
Manufacturing overhead ............................ $319,200 $329,500
The best estimate of the total cost to manufacture 4,300 units is closest to:
A) $674,890
B) $665,855
C) $695,740
D) $635,970
Answer: A Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 227
51. Gambino Corporation is a wholesaler that sells a single product. Management has
provided the following cost data for two levels of monthly sales volume. The company
sells the product for $138.80 per unit.
Sales volume (units) ........................................ 6,000 7,000
Cost of sales ..................................................... $369,000 $430,500
Selling, general, and administrative costs ....... $407,400 $418,600
The best estimate of the total monthly fixed cost is:
A) $776,400
B) $340,200
C) $812,750
D) $849,100
Answer: B Level: Medium LO: 1,3
52. Gamach Corporation is a wholesaler that sells a single product. Management has
provided the following cost data for two levels of monthly sales volume. The company
sells the product for $104.50 per unit.
Sales volume (units) .............................................. 5,000 6,000
Cost of sales ........................................................... $295,000 $354,000
Selling, general, and administrative costs ............. $186,000 $202,800
The best estimate of the total monthly fixed cost is:
A) $102,000
B) $518,900
C) $556,800
D) $481,000
Answer: A Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
228 Garrison, Managerial Accounting, 12th Edition
53. Harris Corporation is a wholesaler that sells a single product. Management has
provided the following cost data for two levels of monthly sales volume. The company
sells the product for $84.40 per unit.
Sales volume (units) .............................................. 5,000 6,000
Cost of sales ........................................................... $285,000 $342,000
Selling, general, and administrative costs ............. $107,500 $120,000
The best estimate of the total variable cost per unit is:
A) $77.00
B) $57.00
C) $69.50
D) $78.50
Answer: C Level: Medium LO: 1,3
54. Hara Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the
product for $159.80 per unit.
Sales volume (units) .............................................. 6,000 7,000
Cost of sales ........................................................... $363,600 $424,200
Selling, general, and administrative costs ............. $531,000 $547,400
The best estimate of the total variable cost per unit is:
A) $77.00
B) $60.60
C) $149.10
D) $138.80
Answer: A Level: Medium LO: 1,3
55. Given the cost formula Y = $12,500 + $5.00X, total cost for an activity level of 4,000
units would be:
A) $20,000
B) $12,500
C) $16,000
D) $32,500
Answer: D Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 229
56. Given the cost formula Y = $13,000 + $7.00X, the total cost for an activity level of
3,000 units would be:
A) $13,000
B) $21,000
C) $18,000
D) $34,000
Answer: D Level: Easy LO: 1
57. The following data pertains to activity and maintenance costs for two recent years:
Year 2 Year 1
Activity level in units .................... 11,125 6,000
Maintenance cost ........................... $6,250 $4,200
If the high-low method is used to separate fixed and variable components of the cost,
which of the following statements is correct?
A) The variable cost is $0.70 per unit of activity
B) The fixed cost is $2,050
C) The variable cost is $2.50 per unit of activity
D) The fixed cost is $1,800
Answer: D Level: Easy LO: 3
58. The following data relate to two levels of activity at an out-patient clinic in a hospital:
Number of patient-visits ............. 4,500 5,750
General overhead ........................ $269,750 $289,125
The best estimate of the variable general overhead cost per patient-visit is closest to:
A) $15.50
B) $44.44
C) $59.94
D) $50.28
Answer: A Level: Easy LO: 3 Source: CIMA, adapted
Chapter 5 Cost Behavior: Analysis and Use
230 Garrison, Managerial Accounting, 12th Edition
59. At a sales level of $365,000, Lewis Company's gross margin is $20,000 less than its
contribution margin, its net operating income is $70,000, and its selling and
administrative expenses total $130,000 At this sales level, its contribution margin
would be:
A) $295,000
B) $180,000
C) $220,000
D) $200,000
Answer: C Level: Hard LO: 4
60. Your boss would like you to estimate the fixed and variable components of a
particular cost Actual data for this cost over four recent periods appear below.
Activity Cost
Period 1 .................. 25 $363
Period 2 .................. 22 $345
Period 3 .................. 23 $348
Period 4 .................. 20 $322
Using the least-squares regression method, what is the cost formula for this cost?
A) Y = $164.50 + $8.00X
B) Y = $0.00 + $15.31X
C) Y = $160.36 + $8.18X
D) Y = $168.08 + $5.27X
Answer: A Level: Hard LO: 5 Appendix: 5
61. Your boss would like you to estimate the fixed and variable components of a
particular cost Actual data for this cost over four recent periods appear below.
Activity Cost
Period 1 .................... 22 235
Period 2 .................... 23 243
Period 3 .................... 25 255
Period 4 .................... 20 227
Using the least-squares regression method, what is the cost formula for this cost?
A) Y = $107.45 + $5.89X
B) Y = $0.00 + $10.67X
C) Y = $111.92 + $5.69X
D) Y = $120.81 + $3.56X
Answer: C Level: Hard LO: 5 Appendix: 5
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 231
Use the following to answer questions 62-64:
Callis Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
$141.60 per unit.
Sales volume (units) .............................................. 5,000 6,000
Cost of sales .......................................................... $265,500 $318,600
Selling, general, and administrative costs ............. $393,500 $406,800
62. The best estimate of the total monthly fixed cost is:
A) $692,200
B) $725,400
C) $659,000
D) $327,000
Answer: D Level: Medium LO: 1,3
63. The best estimate of the total variable cost per unit is:
A) $131.80
B) $53.10
C) $66.40
D) $120.90
Answer: C Level: Medium LO: 1,3
64. The best estimate of the total contribution margin when 5,300 units are sold is:
A) $51,940
B) $469,050
C) $109,710
D) $398,560
Answer: D Level: Medium LO: 1,3,4
Use the following to answer questions 65-67:
Call Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
$140.50 per unit.
Sales volume (units) .............................................. 6,000 7,000
Cost of sales .......................................................... $497,400 $580,300
Selling, general, and administrative costs ............. $273,600 $294,700
Chapter 5 Cost Behavior: Analysis and Use
232 Garrison, Managerial Accounting, 12th Edition
65. The best estimate of the total monthly fixed cost is:
A) $875,000
B) $147,000
C) $771,000
D) $823,000
Answer: B Level: Medium LO: 1,3
66. The best estimate of the total variable cost per unit is:
A) $82.90
B) $128.50
C) $104.00
D) $125.00
Answer: C Level: Medium LO: 1,3
67. The best estimate of the total contribution margin when 6,300 units are sold is:
A) $75,600
B) $97,650
C) $362,880
D) $229,950
Answer: D Level: Medium LO: 1,3,4
Use the following to answer questions 68-71:
Comparative income statements for Tudor Retailing Company for the last two months are
presented below:
September October
Sales in units ................................... 5,000 7,000
Sales revenue ................................... $100,000 $140,000
Less cost of goods sold ................... 40,000 56,000
Gross margin ................................... 60,000 84,000
Less operating expenses ................. :
Shipping expense ......................... 7,500 10,500
Clerical expense ........................... 10,000 12,000
Maintenance expense ................... 17,000 17,000
Total operating expense .................. 34,500 39,500
Net operating income ...................... $ 25,500 $ 44,500
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 233
68. Which of the following classifications best describes the behavior of shipping
expense?
A) Mixed
B) Variable
C) Fixed
D) none of the above
Answer: B Level: Easy LO: 1
69. Which of the following classifications best describes the behavior of clerical expense?
A) Mixed
B) Variable
C) Fixed
D) none of the above
Answer: A Level: Easy LO: 1
70. Assuming that Tudor Retailing Company uses the high-low method of analysis, the
total monthly fixed cost for Tudor Retailing Company would be estimated to be:
A) $34,500
B) $17,000
C) $27,000
D) $22,000
Answer: D Level: Medium LO: 3
71. Assuming that Tudor Retailing Company uses the high-low method of analysis, the
total operating expense if Tudor Retailing Company sells 6,500 units during a month
would be estimated to be:
A) $37,000
B) $44,850
C) $38,250
D) $36,679
Answer: C Level: Medium LO: 3
Chapter 5 Cost Behavior: Analysis and Use
234 Garrison, Managerial Accounting, 12th Edition
Use the following to answer questions 72-73:
The management of Casablanca Manufacturing Corporation believes that machine-hours is an
appropriate measure of activity for overhead cost Shown below are machine-hours and total
overhead costs for the past six months:
Machine- Overhead
Hours Cost
Jan 150,000 $339,000
Feb 140,000 $328,000
Mar 160,000 $350,000
Apr 130,000 $319,500
May 170,000 $362,500
Jun 200,000 $400,000
Assume that the relevant range includes all of the activity levels mentioned in this problem.
72. If Casablanca expects to incur 185,000 machine hours next month, what will the
estimated total overhead cost be using the high-low method?
A) $212,750
B) $359,750
C) $382,750
D) $381,700
Answer: C Level: Medium LO: 3
73. What is Casablanca's independent variable?
A) the year
B) the machine hours
C) the total overhead cost
D) the relevant range
Answer: B Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 235
Use the following to answer questions 74-75:
The management of the Medulla Fitness Club believes that the attendance by its members is
an appropriate activity measure for total operating cost Shown below are attendance figures
and total operating costs for the past six months:
Members Operating
Attendance Cost
Jan 150,000 $786,000
Feb 130,000 $735,000
Mar 160,000 $792,000
Apr 120,000 $706,000
May 170,000 $799,000
Jun 190,000 $874,000
Assume that the relevant range includes all of the activity levels mentioned in this problem.
74. If Medulla expects to have 180,000 members attend the club in July, what will the
estimated total operating cost be using the high-low method?
A) $836,500
B) $837,000
C) $850,000
D) $852,000
Answer: C Level: Medium LO: 3
75. What is Medulla's dependent variable?
A) the month
B) the members' attendance
C) the total operating cost
D) the relevant range
Answer: C Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
236 Garrison, Managerial Accounting, 12th Edition
Use the following to answer questions 76-77:
Cosco, Inc. has accumulated the following data for the cost of maintenance on its machinery
for the last four months:
Month Maintenance Cost Machine Hours
September $26,020 21,000
October $24,600 18,500
November $22,300 15,000
December $25,100 19,000
Assume that the relevant range includes all of the activity levels mentioned in this problem
76. Assuming Cosco Company uses the high-low method of analysis, the fixed cost of
maintenance would be estimated to be:
A) $14,500
B) $ 5,020
C) $13,000
D) $12,320
Answer: C Level: Medium LO: 1,3
77. Assuming Cosco Company uses the high-low method of analysis, if machine hours are
budgeted to be 20,000 hours then the budgeted total maintenance cost would be
expected to be:
A) $25,400
B) $25,560
C) $23,700
D) $24,720
Answer: A Level: Medium LO: 1,3
Use the following to answer questions 78-80:
The following production and average cost data for two levels of monthly production volume
have been supplied by a company that produces a single product:
Production volume .................................... 1,000 units 3,000 units
Direct materials ......................................... $13.20 per unit $13.20 per unit
Direct labor ................................................ $14.50 per unit $14.50 per unit
Manufacturing overhead ........................... $65.40 per unit $29.40 per unit
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 237
78. The best estimate of the total monthly fixed manufacturing cost is:
A) $65,400
B) $88,200
C) $93,100
D) $54,000
Answer: D Level: Hard LO: 1,3
79. The best estimate of the total variable manufacturing cost per unit is:
A) $39.10
B) $27.70
C) $11.40
D) $13.20
Answer: A Level: Hard LO: 1,3
80. The best estimate of the total cost to manufacture 1,200 units is closest to:
A) $68,520
B) $100,920
C) $111,720
D) $90,120
Answer: B Level: Hard LO: 1,3
Use the following to answer questions 81-83:
The following production and average cost data for two levels of monthly production volume
have been supplied by a company that produces a single product:
Production volume ........................ 2,000 units 4,000 units
Direct materials ............................. $88.40 per unit $88.40 per unit
Direct labor .................................... $20.60 per unit $20.60 per unit
Manufacturing overhead ............... $86.90 per unit $55.30 per unit
81. The best estimate of the total monthly fixed manufacturing cost is:
A) $221,200
B) $391,800
C) $173,800
D) $126,400
Answer: D Level: Hard LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
238 Garrison, Managerial Accounting, 12th Edition
82. The best estimate of the total variable manufacturing cost per unit is:
A) $132.70
B) $88.40
C) $23.70
D) $109.00
Answer: A Level: Hard LO: 1,3
83. The best estimate of the total cost to manufacture 2,200 units is closest to:
A) $396,220
B) $430,980
C) $361,460
D) $418,340
Answer: D Level: Hard LO: 1,3
Use the following to answer questions 84-86:
Baker Corporation has provided the following production and total cost data for two levels of
monthly production volume. The company produces a single product.
Production volume ........................ 6,000 units 7,000 units
Direct materials ............................. $194,400 $226,800
Direct labor .................................... $74,400 $86,800
Manufacturing overhead ............... $758,400 $779,800
84. The best estimate of the total monthly fixed manufacturing cost is:
A) $1,027,200
B) $1,060,300
C) $1,093,400
D) $630,000
Answer: D Level: Medium LO: 1,3
85. The best estimate of the total variable manufacturing cost per unit is:
A) $32.40
B) $44.80
C) $66.20
D) $21.40
Answer: C Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 239
86. The best estimate of the total cost to manufacture 6,300 units is closest to:
A) $984,060
B) $1,031,310
C) $1,047,060
D) $1,078,560
Answer: C Level: Medium LO: 1,3
Use the following to answer questions 87-89:
Babson Corporation has provided the following production and total cost data for two levels
of monthly production volume. The company produces a single product.
Production volume ........................ 5,000 units 6,000 units
Direct materials ............................. $103,500 $124,200
Direct labor .................................... $282,500 $339,000
Manufacturing overhead ............... $667,000 $679,800
87. The best estimate of the total monthly fixed manufacturing cost is:
A) $1,098,000
B) $1,053,000
C) $1,143,000
D) $603,000
Answer: D Level: Medium LO: 1,3
88. The best estimate of the total variable manufacturing cost per unit is:
A) $90.00
B) $77.20
C) $12.80
D) $20.70
Answer: A Level: Medium LO: 1,3
89. The best estimate of the total cost to manufacture 5,300 units is closest to:
A) $1,116,180
B) $1,062,915
C) $1,080,000
D) $1,009,650
Answer: C Level: Medium LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
240 Garrison, Managerial Accounting, 12th Edition
Use the following to answer questions 90-93:
Solo Company is a small merchandising firm. During the next month, the company expects to
sell 500 units. The company has the following revenue and cost structure:
Selling price per unit ..................... $60
Cost per unit .................................. $15
Sales commission .......................... 10% of sales
Advertising expense ...................... $5,000 per month
Administrative expense ................. $3,000 per month plus 20% of sales
90. The expected gross margin next month is:
A) $ 5,500
B) $22,500
C) $13,500
D) $ 7,500
Answer: B Level: Medium LO: 4
91. The expected contribution margin next month is:
A) $13,500
B) $ 5,500
C) $ 7,300
D) $22,500
Answer: A Level: Medium LO: 4
92. The expected total administrative expense next month is:
A) $3,000
B) $4,000
C) $9,000
D) $6,000
Answer: C Level: Easy LO: 1
93. The expected net operating income is:
A) $22,500
B) $ 5,500
C) $ 7,500
D) $13,500
Answer: B Level: Medium LO: 1
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 241
Use the following to answer questions 94-97:
The University Store, Inc. is the major bookseller for four nearby colleges An income
statement for the first quarter of the year is presented below:
University Store, Inc.
Income Statement
For the Quarter Ended March 31
Sales ................................................ $800,000
Cost of goods sold ........................... 560,000
Gross margin ................................... 240,000
Less operating expenses ................. :
Selling ............................................. $100,000
Administrative ................................. 110,000 210,000
Net operating income ...................... $ 30,000
On average, a book sells for $40.00. Variable selling expenses are $3.00 per book; the
remaining selling expenses are fixed. The variable administrative expenses are 5% of sales;
the remainder of the administrative expenses are fixed.
94. The contribution margin for the University Store for the first quarter is:
A) $660,000
B) $700,000
C) $180,000
D) $140,000
Answer: D Level: Medium LO: 4
95. The net operating income computed using the contribution approach for the first
quarter is:
A) $ 30,000
B) $180,000
C) $140,000
D) $0
Answer: A Level: Easy LO: 4
Chapter 5 Cost Behavior: Analysis and Use
242 Garrison, Managerial Accounting, 12th Edition
96. The cost formula for operating expenses with “X” equal to the number of books sold
is:
A) Y = $105,000 + $3X
B) Y = $105,000 + $5X
C) Y = $110,000 + $5X
D) Y = $110,000 + $33X
Answer: C Level: Medium LO: 1
97. If 25,000 books are sold during the second quarter and this activity is within the
relevant range, the company's expected contribution margin would be:
A) $875,000
B) $300,000
C) $175,000
D) $ 65,000
Answer: C Level: Medium LO: 1,4
Use the following to answer questions 98-101:
Dizzy Amusement Park is open from 8:00 am till midnight every day of the year. Dizzy
charges its patrons a daily entrance fee of $30 per person which gives them unlimited access
to all of the park's 35 rides.
98. Dizzy gives out a free T-shirt to every 100th customer entering the park. The cost of
this T-shirt would best be described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) true variable cost
Answer: C Level: Medium LO: 1
99. For liability insurance, Dizzy pays a set monthly fee plus a small additional amount
for every patron entering the park. The cost of liability insurance would best be
described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) true variable cost
Answer: B Level: Easy LO: 1
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 243
100. Dizzy employees a certified operator for each of its 35 rides. Each operator is paid $20
per hour. The cost of the certified operators would best be described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) true variable cost
Answer: A Level: Easy LO: 1
101. Dizzy donates $2 of every entrance fee to a local homeless shelter. This charitable
contribution would best be described as a:
A) fixed cost
B) mixed cost
C) step-variable cost
D) true variable cost
Answer: D Level: Easy LO: 1
Use the following to answer questions 102-106:
Donner Company would like to estimate the variable and fixed components of its
maintenance costs and has compiled the following data for the last five months of operations.
Labor Maintenance
Hours Cost
January 160 $617
February 130 $553
March 180 $596
April 190 $623
May 110 $532
102. Using the high-low method of analysis, the estimated variable cost per labor hour for
maintenance is closest to:
A) $0.83
B) $1.84
C) $1.30
D) $1.14
Answer: D Level: Medium LO: 3
Chapter 5 Cost Behavior: Analysis and Use
244 Garrison, Managerial Accounting, 12th Edition
103. Using the high-low method of analysis, the estimated total fixed cost per month for
maintenance is closest to:
A) $440
B) $407
C) $470
D) $0
Answer: B Level: Medium LO: 3
104. Using the least-squares regression method, the estimated variable cost per labor hour
for maintenance is closest to:
A) $1.88
B) $1.52
C) $1.09
D) $1.96
Answer: C Level: Hard LO: 5 Appendix: 5
105. Using the least-squares regression method, the estimated total fixed cost per month for
maintenance is closest to:
A) $470
B) $416
C) $400
D) $378
Answer: B Level: Hard LO: 5 Appendix: 5
106. Using the least-squares regression equation, the total maintenance cost for March is:
A) above the regression line
B) on the regression line
C) below the regression line
D) outside the relevant range
Answer: C Level: Hard LO: 5 Appendix: 5
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 245
Use the following to answer questions 107-108:
Golden Dragon Restaurant would like to estimate the variable and fixed components of its
utilities costs and has compiled the following data for the last five months of operations.
Month Meals served Utilities costs
December 550 $401.00
January 300 $360.00
February 250 $347.50
March 400 $385.50
April 600 $414.00
107. Using the high-low method of analysis, the estimated variable utilities cost per meal
served is:
A) $0.22
B) $0.73
C) $0.69
D) $0.19
Answer: D Level: Medium LO: 3
108. Using the high-low method of analysis, the estimated monthly fixed component of
utility cost is:
A) $ 66.50
B) $300.00
C) $303.00
D) $331.00
Answer: B Level: Medium LO: 3
Chapter 5 Cost Behavior: Analysis and Use
246 Garrison, Managerial Accounting, 12th Edition
Essay Questions
109. The owner of the Diamondhead restaurant in Honolulu would like to determine the
fixed and variable components of the restaurant's utility expenses. The owner believes
that the variable component of the utilities cost is driven by the number of meals
served.
Meals Utilities
served cost
January 3,000 $450
February 4,000 $480
March 3,500 $490
April 4,500 $530
May 5,000 $570
June 6,000 $620
July 5,500 $560
Required:
a. Plot the data on the graph below.
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 247
b. Using the quick-and-dirty scattergraph method, derive a cost formula for utilities
cost.
c. c Use your cost formula to predict the utilities cost if 5,200 meals are served.
Level: Medium LO: 1,2
Answer:
There is not a single correct answer to these questions. Students' answers to these
questions will vary and must be carefully graded. We recommend that you evaluate
the students' techniques rather than the numerical accuracy of their answers.
a. Check that students followed the steps for plotting data.
b. Answers will differ based upon how the line is fitted to the data. The answer
should be something like Y = $300 + $0.05X. (The least-squares regression line is
Y = $291 + $.053X.)
c. Answers will differ based upon the cost formula that the student derived in (2)
above. With our cost formula, the predicted cost is $560 = $300 + $0.05 × 5,200.
(Using least-squares regression, the cost estimate would be $567.)
110. Arlo's T-shirt Shop only has three costs: T-shirt cost, rent cost on the shop, and
utilities cost. Arlo's sells the T-shirt for $14.50 each. Management has prepared the
following estimated cost information for next month:
At 8,000 At 10,000
T-shirts T-shirts
T-shirt cost ......................... $48,000 $60,000
Rent cost ............................ $3,600 $3,600
Utilities cost ....................... $6,800 $8,300
Assume that all of the activity levels mentioned in this problem are within the relevant
range.
Required:
a. Calculate what Arlo's should expect for total variable cost if 9,000 T-shirts are sold
next month.
b. Prepare Arlo's contribution approach income statement for a monthly sales volume
level of 10,000 T-shirts.
Level: Hard LO: 1,3,4
Chapter 5 Cost Behavior: Analysis and Use
248 Garrison, Managerial Accounting, 12th Edition
Answer:
a.
T-shirt {[($60,000 - $48,000)/2,000] × 9,000} .................... $54,000
Utilities cost {[($8,300 - $6,800)/2,000] × 9,000} ............... $6,750
Total variable cost ................................................................ $60,750
b.
Arlo’s T-Shirt Shop
Contribution Approach Income Statement
Monthly Sales Volume of 10,000 T-Shirts
Sales ($14.50 × 10,000) .................................... $145,000
Less variable expenses:
T-shirt cost ..................................................... $60,000
Utilities cost ($0.75 × 10,000) ....................... 7,500 67,500
Contribution margin ......................................... 77,500
Less fixed expenses ..........................................
Rent cost ........................................................ 3,600
Utilities cost ($8,300 - $7,500)...................... 800 4,400
Net operating income ....................................... $ 73,100
111.Rapid Delivery, Inc., operates a parcel delivery service across the nation. The company
keeps detailed records relating to operating costs of trucks, and has found that if a truck
is driven 150,000 miles per year the average operating cost is 10 cents per mile. This cost
increases to 11 cents per mile if a truck is driven only 100,000 miles per year.
Assume that all of the activity levels mentioned in this problem are within the relevant
range.
Required:
a. Using the high-low method, derive the cost formula for truck operating costs.
b. Using the cost formula you derived above, what total cost would you expect the
company to incur in connection with the truck if it is driven 130,000 miles in a
year?
Level: Easy LO: 1,3
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 249
Answer:
a.
Miles Cost
High level 150,000 (150,000 miles × $.10 =) $15,000
Low level 100,000 (100,000 miles × $.11 =) 11,000
Change 50,000 $ 4,000
$4,000 ÷ 50,000 miles = $0.08 per mile variable cost
Total cost at high level .................................................... $15,000
Less variable element: 150,000 miles × $0.08 ................ 12,000
Fixed element .................................................................. $ 3,000
Cost formula: $3,000 plus $0.08 per mile or
Y = $3,000 + $0.08X
b.
Variable cost: 130,000 miles × $0.08 per mile................ $10,400
Fixed cost ........................................................................ 3,000
Total cost ......................................................................... $13,400
112. Butler Sales Company is a distributor that has an exclusive franchise to sell a
particular product made by another company. Butler Sales Company's income
statements for the last two years are given below:
This Year Last Year
Units sold ................................................... 200,000 160,000
Sales revenue ............................................. $1,000,000 $800,000
Less cost of goods sold .............................. 700,000 560,000
Gross margin ............................................. 300,000 240,000
Less operating expenses ............................ 210,000 198,000
Net operating income ................................ $ 90,000 $ 42,000
Operating expenses are a mixture of fixed costs and variable and mixed costs that vary
with respect to the number of units sold.
Required:
a. Estimate the company's variable operating expenses per unit, and its total fixed
operating expenses per year.
b. Compute the company's contribution margin for this year.
Level: Medium LO: 3,4
Chapter 5 Cost Behavior: Analysis and Use
250 Garrison, Managerial Accounting, 12th Edition
Answer:
a.
Cost Activity
High level of activity ............... $210,000 200,000
Low level of activity ................ 198,000 160,000
Change observed ..................... $ 12,000 40,000
$12,000 ÷ 40,000 units = $0.30 per unit variable cost
Total cost at the high level ............................................. $210,000
Less variable element (200,000 units × $0.30 per unit) . 60,000
Fixed element ................................................................. $150,000
b.
Sales revenue ....................................... $1,000,000
Less variable expenses:
Cost of goods sold ............................ $700,000
Operating expenses (above) ............. 60,000 760,000
Contribution margin ............................ $ 240,000
113. SomethingNew is a small one-person company that provides elaborate and
imaginative wedding cakes to order for very large wedding receptions. The owner of
the company would like to understand the cost structure of the company and has
compiled the following records of activity and costs incurred. The owner believes that
the number of weddings catered is the best measure of activity.
Month Weddings Costs Incurred
January 3 $3,800
February 2 $3,600
March 6 $4,000
April 9 $4,300
May 12 $4,500
June 20 $5,200
Required:
a. Using the high-low method, estimate the variable cost per wedding and the total
fixed cost per month. (Round off the variable cost per wedding to the nearest cent
and the total fixed cost to the nearest dollar.)
b. Using the least-squares regression method, estimate the variable cost per wedding
and the total fixed cost per month. (Round off the variable cost per wedding to the
nearest cent and the total fixed cost to the nearest dollar.)
Level: Hard LO: 3,5 Appendix: 5
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 251
Answer:
a. High-Low Method
Activity Costs
June (high activity level) 20 $5,200
February (low activity level) 2 3,600
Change observed 18 $1,600
Variable cost = Change in cost ÷ Change in activity
= $1,600 ÷ 18 weddings
= $88.89 per wedding
Fixed cost element = Total cost - Variable cost element
= $5,200 - ($88.89 per wedding × 20 weddings)
= $3,422
Cost formula: $3,422 fixed cost per month plus $88.89 per wedding, or
Y = $3,422 + $88.89X.
b. Least-Squares Regression Method
Using statistical software or hand calculation, the cost formula is approximately
$3,490 per month, plus $85.82 per wedding, or
Y = $3,490 + $85.82X
114. The management of Buff Sports Stadium believes that the number of sporting events
each month is a measure of activity for total clean up cost. Shown below are event
figures and total clean up costs for the past four months:
Number of Total
Sporting Clean-up
Events Cost
July 28 $30,900
August 34 $34,200
September 16 $20,700
October 22 $28,200
Required:
a. Estimate Buff's cost formula for monthly clean up cost using the high-low method.
b. Estimate Buff's cost formula for monthly clean up cost using the least-squares
regression method.
Level: Hard LO: 3,5 Appendix: 5
Chapter 5 Cost Behavior: Analysis and Use
252 Garrison, Managerial Accounting, 12th Edition
Answer:
a. High-Low: Y = $8,700 + $750X
($34,200 - $20,700)/(34 - 16) = $750 per event; $750 × 34 = $25,500;
$34,200 - $25,500 = $8,700
b. Least Squares: Y = $10,500 + $720X
115. CapeAir flies a medium-sized passenger jet on a route between Washington, D.C., and
Cape Cod. The manager of the airline would like to estimate the relationship between
the plane's payload (i.e., total weight of passengers and cargo) and total fuel costs. On
five recent flights, the payload varied between 22 tons and 35 tons.
Payload Fuel
(tons) Cost
Flight 1 35 $780
Flight 2 26 $720
Flight 3 33 $765
Flight 4 28 $735
Flight 5 22 $700
Required:
Using the least-squares regression method, estimate the variable cost per ton and the
fixed cost per flight. (Round off the variable cost per ton to the nearest cent and the
fixed cost per flight to the nearest dollar.)
Level: Hard LO: 5 Appendix: 5
Answer:
Using statistical software or hand calculation, the cost formula is about $562 per flight
plus $6.18 per ton.
Chapter 5 Cost Behavior: Analysis and Use
Garrison, Managerial Accounting, 12th Edition 253
116. Below are cost and activity data for a particular cost over the last four periods. Your
boss has asked you to analyze this cost so that management will have a better
understanding of how this cost changes in response to changes in activity.
Activity Cost
Period 1 47 $474
Period 2 44 $460
Period 3 42 $450
Period 4 40 $440
Required:
Using the least-squares regression method, estimate the cost formula for this cost.
Level: Medium LO: 5 Appendix: 5
Answer:
Using statistical software or hand calculation, the cost formula is approximately Y =
$246 + $4.86X.
117. Below are cost and activity data for a particular cost over the last four periods. Your
boss has asked you to analyze this cost so that management will have a better
understanding of how this cost changes in response to changes in activity.
Activity Cost
Period 1 46 $483
Period 2 42 $465
Period 3 45 $477
Period 4 49 $500
Required:
Using the least-squares regression method, estimate the cost formula for this cost.
Level: Medium LO: 5 Appendix: 5
Answer:
Using statistical software or hand calculation, the cost formula is approximately Y =
$253 + $5.02X.
No comments:
Post a Comment