Sie sind auf Seite 1von 86

Chapter 06 Cost Behaviour: Analysis and Use

1. 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, you would
expect which of the following statements to be true?

A. Expense A has remained unchanged.

B. Expense B has decreased.
C. Expense A has decreased.
D. Expense B has increased.

2. Which costs will change with a decrease in activity within the relevant range?

A. Total fixed costs and total variable costs.

B. Unit fixed cost and total variable costs.
C. Unit variable cost and unit fixed cost.
D. Unit fixed cost and total fixed costs.

3. Within the relevant range of activity, how will variable cost per unit behave?

A. It will increase in proportion with the level of activity.

B. It will remain constant.
C. It will vary inversely with the level of activity.
D. Its behaviour cannot be determined without additional information.

4. What will result from an increase in the activity level within the relevant range?

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.

A. The range within which costs may fluctuate.

B. The range within which a particular cost formula is valid.
C. The range within which production may vary.
D. The range within which the relevant costs are incurred.
6. The linear equation Y = a + bX is often used to express cost formulas. Which of the following
representations in this equation is correct?

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 costs.
D. The Y term represents total fixed costs.

7. Which of the following is an example of a discretionary fixed cost?

A. Insurance.
B. Taxes on real estate.
C. Management training.
D. Amortization of buildings and equipment.

A. A training program for salespersons.

B. Executive travel expenses.
C. Property taxes on the factory building.
D. New product research and development.

A. They vary directly and proportionately with the level of activity.

B. They have a long-term planning horizon, generally encompassing many years.
C. They are made up of plant, equipment, and basic organizational costs.
D. None of these options.

10. In describing the cost formula equation Y = a + bX, which of the following statements is correct?

A. The X term is the dependent variable.

B. The a term is the fixed component.
C. In the high-low method, the b term equals change in activity divided by change in costs.
D. As the X term increases, the Y term decreases.

11. Which of the following best describes the contribution approach to the income statement?

A. It organizes costs on a functional basis.

B. It is useful to managers in planning and decision making.
C. It shows a contribution margin rather than an operating income figure at the bottom of the
statement.
D. It can be used only by manufacturing companies.
12. Contribution margin is the excess of revenues over which of the following?

A. Cost of goods sold.

B. Manufacturing cost.
C. All direct costs.
D. All variable costs.

13. Which of the following is an example of a cost that is variable with respect to the number of units
produced and sold?

A. Insurance on the headquarters building.

B. Power to run production equipment.
C. Supervisory salaries.
D. Amortization of factory facilities.

A. It is the largest single category of cost in a company.

B. It is a fixed cost that cannot be avoided.
C. It is a factor that causes variations in a cost.
D. It is an indirect cost that is essential to the business.

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

Assuming that these activity levels are within the relevant range, what were the mixed costs for
November?

A. \$20,000.
B. \$25,000.
C. \$35,000.
D. \$40,000.
16. The following data pertain to activity and costs for two months:

Assuming that these activity levels are within the relevant range, what were the mixed costs for
July?

A. \$10,000.
B. \$15,000.
C. \$35,000.
D. \$40,000.

17. At an activity level of 10,000 units, total variable costs were \$35,000 while total fixed costs were
\$20,800. If 16,000 units are produced and this activity is within the relevant range, which of the
following statements is correct?

A. Total costs would equal \$89,280.

B. Total unit cost would equal \$4.80.
C. Fixed cost per unit would equal \$5.58.
D. Total costs would equal \$55,800.

18. Anaconda Mining Company shipped 9,000 tons of copper concentrate for \$450,000 in March and
11,000 tons for \$549,000 in April. Use the high-low method to estimate the shipping costs for
12,000 tons to be shipped in May.

A. \$548,780.
B. \$549,020.
C. \$594,000.
D. \$598,500.

19. An analysis of past maintenance costs indicates that maintenance cost is an average of \$0.20 per
machine hour at an activity level of 10,000 machine hours and \$0.25 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. \$400.
B. \$1,740.
C. \$2,000.
D. \$2,250.
20. Shipping expense is \$9,000 for 8,000 kilograms shipped and \$11,250 for 11,000 kilograms
shipped. Assuming that this activity is within the relevant range, if the company ships 9,000
kilograms, its expected shipping expense would be closest to which of the following?

A. \$8,583.
B. \$9,750.
C. \$9,972.
D. \$10,125.

21. Average maintenance costs are \$1.50 per machine hour at an activity level of 8,000 machine
hours and \$1.20 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 which of the following?

A. \$11,433.
B. \$13,440.
C. \$15,000.
D. \$16,128.

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

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. \$752,060.
B. \$755,196.
C. \$805,284.
D. \$1,188,756.

23. Which of the following concepts used in estimating cost behaviour is unique to the least-squares
regression method?

A. Independent variable.
B. Dependent variable.
C. R-squared.
D. Variable cost per unit.
24. Given the cost formula Y = \$15,000 + \$5X, what is the total cost at an activity level of 8,000
units?

A. \$15,000.
B. \$23,000.
C. \$40,000.
D. \$55,000.

25. Given the cost formula Y = \$12,000 + \$6X, what is the total cost at an activity level of 8,000
units?

A. \$12,000.
B. \$20,000.
C. \$48,000.
D. \$60,000.

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

Based on these cost formulas, what is the expected total overhead cost at 600 machine hours?

A. \$4,500.
B. \$5,200.
C. \$5,620.
D. \$5,340.

27. Given the cost formula Y = \$17,500 + \$4X, at what level of activity will total cost be \$42,500?

A. 4,375 units.
B. 5,250 units.
C. 6,250 units.
D. 10,625 units.
28. The following data pertain to activity and utilities costs for two recent years:

Using the high-low method, what is the variable cost per unit for utilities?

A. \$1.25 per unit.

B. \$1.50 per unit.
C. \$1.33 per unit.
D. \$0.75 per unit.

29. The following data pertain to activity and utilities costs for two recent years:

Using the high-low method, what is the cost formula for utilities?

A. \$1.20 per unit.

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

30. At an activity level of 6,000 units, the cost for maintenance is \$7,200; at 10,000 units, the cost for
maintenance is \$11,600. Using the high-low method, what is the cost formula for maintenance?

A. \$1.16 per unit.

B. \$1.20 per unit.
C. \$600 plus \$1.10 per unit.
D. \$1,200 plus \$1.10 per unit.

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

Using the high-low method, what is the cost formula for maintenance cost?

A. \$2.00 per machine hour.

B. \$1.625 per machine hour.
C. \$18,000 plus \$0.50 per machine hour.
D. \$24,000 plus \$0.50 per machine hour.
32. Buckeye Company has provided the following data for maintenance cost:

Using the high-low method, what is the cost formula for maintenance cost?

A. \$7,000 per year plus \$0.625 per machine hour.

B. \$7,000 per year plus \$1.60 per machine hour.
C. \$21,625 per year plus \$0.625 per machine hour.
D. \$27,000 per year plus \$1.60 per machine hour.

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

Using the high-low method, what is the total variable cost per unit of product?

A. \$11.05.
B. \$21.00.
C. \$32.00.
D. \$35.00.

34. At a sales level of \$300,000, James Company's gross margin is \$15,000 less than its contribution
margin, its operating income is \$50,000, and its total selling and administrative expenses are
\$120,000. At this sales level, what is the company's contribution margin?

A. \$155,000.
B. \$170,000.
C. \$185,000.
D. \$250,000.

35. Which of the following statements about the methods for estimating a cost formula is incorrect?

A. A scattergram plot should precede the high-low method.

B. A scattergram plot should precede the least-squares regression method.
C. The preferred method is high-low.
D. The preferred method is least-squares regression.
Rymore Company would like to classify the following costs according to their cost behaviour:

36. Which of the following classifications best describes the behaviour of Cost A?

A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.

37. Which of the following classifications best describes the behaviour of Cost B?

A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.

38. Which of the following classifications best describes the behaviour of Cost C?

A. Mixed.
B. Variable.
C. Fixed.
D. Differential cost.

Comparative income statements for Boggs Sporting Equipment Company for the last two months
are presented below:

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

A. Rent.
B. Sales commissions.
C. Maintenance expenses.
D. Clerical expenses.

40. What is the total monthly fixed cost for Boggs Sporting Equipment Company?

A. \$12,000.
B. \$22,500.
C. \$25,000.
D. \$40,000.

41. If sales are projected to be 8,000 units in September, what would be total operating expenses?

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

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:

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

A. \$11,200.
B. \$14,400.
C. \$16,400.
D. \$17,600.

43. What is the expected total administrative expense next month?

A. \$4,800.
B. \$9,300.
C. \$13,300.
D. \$14,900.
44. What is the expected contribution margin next month?

A. \$11,200.
B. \$14,400.
C. \$16,000.
D. \$17,600.

45. What is the expected operating income next month?

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

In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total
overhead costs were \$223,000. Of this amount, utilities were \$48,000 (all variable) and
amortization was \$60,000 (all fixed). The balance of the overhead costs consisted of
maintenance cost (mixed). At 100,000 machine hours, maintenance costs were \$130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.

46. What is the variable cost for maintenance per machine hour?

A. \$0.75.
B. \$1.30.
C. \$1.35.
D. \$1.44.

47. What is the total fixed overhead cost for O'Donnell?

A. \$55,000.
B. \$60,000.
C. \$115,000.
D. \$130,000.

48. If 110,000 machine hours of activity are projected for next period, what would be total expected

A. \$242,500.
B. \$256,000.
C. \$263,500.
D. \$306,625.

Maxwell Company has a total expense per unit of \$2.00 per unit at the 16,000-unit level of
activity, and total expense per unit of \$1.95 at the 21,000-unit level of activity.
49. What is the best estimate of the variable cost per unit for Maxwell Company?

A. \$0.56.
B. \$1.79.
C. \$1.95.
D. \$2.00.

50. What is the best estimate of the total fixed cost per period for Maxwell Company?

A. \$3,360.
B. \$29,190.
C. \$32,000
D. \$40,950.

51. What is the best estimate of the total expected costs at the 19,000 level of activity for Maxwell
Company?

A. \$37,050.
B. \$37,370.
C. \$38,000.
D. \$39,830.

Johnson Company has provided the following data for the first five months of the year:

52. Using the high-low method, the estimated variable lubrication cost per machine hour is closest to
which of the following?

A. \$0.67.
B. \$1.25.
C. \$1.40.
D. \$1.50.

53. Using the high-low method, the estimated monthly fixed component of lubrication cost is closest
to which of the following?

A. \$560.
B. \$565.
C. \$570.
D. \$585.
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:

54. Using the high-low method, the estimated variable cost per machine hour for electricity is closest
to which of the following?

A. \$0.40.
B. \$0.98.
C. \$1.68.
D. \$2.50.

55. Using the high-low method, the estimated fixed cost per month for electricity is closest to which of
the following?

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

Wilson Company's activity for the first six months of the current year is as follows:

56. Using the high-low method, what is the variable cost per machine hour?

A. \$0.40.
B. \$0.60.
C. \$0.64.
D. \$0.67.

57. Using the high-low method, what is the fixed portion of the electrical cost each month?

A. \$190.
B. \$280.
C. \$400.
D. \$760.
Prater Company has provided the following data:

58. What is the best estimate of the company's variable operating expense per unit?

A. \$0.24 per unit.

B. \$0.91 per unit.
C. \$0.96 per unit.
D. \$4.17 per unit.

59. What is the best estimate of the company's total fixed operating expense per year?

A. \$72,000.
B. \$188,000.
C. \$200,000.
D. \$212,000.

The following data have been provided by a retailer that sells a single product:

60. What is the best estimate of the company's variable operating expenses per unit?

A. \$0.24 per unit.

B. \$0.71 per unit.
C. \$0.90 per unit.
D. \$4.17 per unit.

61. What is the best estimate of the company's total fixed operating expenses per year?

A. \$0.
B. \$44,000.
C. \$80,000.
D. \$174,000.
62. What is the best estimate of the company's contribution margin for this year?

A. \$252,000.
B. \$300,000.
C. \$158,000.
D. \$225,000.

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

63. What is the gross margin of Evans Retail Stores, Inc., for the first quarter?

A. \$140,000.
B. \$190,000.
C. \$210,000.
D. \$220,000.

64. What is the contribution margin of Evans Retail Stores, Inc., for the first quarter?

A. \$140,000.
B. \$190,000.
C. \$210,000.
D. \$300,000.

Porter Company has provided the following data for the second quarter of the most recent year:

Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.
65. What was the total contribution margin of Porter Company for the second quarter?

A. \$37,250.
B. \$87,000.
C. \$176,000.
D. \$211,000.

66. What was the gross margin for Porter Company for the second quarter?

A. \$(12,500).
B. \$80,000.
C. \$131,500.
D. \$135,000.

An income statement for Crandall's Bookstore for the first quarter of the current year is presented
below:

On average, a book sells for \$50. Variable selling expenses are \$5.50 per book, with the
remaining selling expenses being fixed. The variable administrative expenses are 3% of sales,
with the remainder being fixed.

67. What is the contribution margin for Crandall's Bookstore for the first quarter?

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

68. Using the contribution approach, what is the operating income for the first quarter?

A. \$44,000.
B. \$128,000.
C. \$152,000.
D. \$240,000.
69. What is the cost formula for operating expenses with X equal to the number of books sold?

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

Sorter Company has provided the following data for the third quarter of the most recent year:

Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.

70. At the level of sales for the third quarter, how much in additional fixed selling expenses could
Sorter Company have afforded to spend and still would have reported \$41,500 operating
income?

A. \$50,000.
B. \$87,750.
C. \$91,500.
D. \$96,250.

71. Suppose the sales for the third quarter was the equivalent of 1,000 units and that the fixed
manufacturing and non-manufacturing costs were valid between the relevant range of 800 and
1,200 units. If Sorter Company had sold 100 additional units, it would have reported what
amount of additional operating income?

A. \$9,150.
B. \$23,725.
C. \$50,000.
D. \$100,650.

72. Which of the following items of Sorter Company's expenses and/or costs can be misleading if
reported on a per unit of production and/or sales basis?

A. Direct labour
B. Direct materials.
C. Variable administrative expenses.
D. Fixed manufacturing overhead.
73. Which of the following should be the first step in the analysis of cost behaviour?

A. Estimating the slope coefficient.

B. Estimating the intercept term.
C. Estimating the R-squared in the case of least-squares regression.
D. Scattergram plot.

74. Which of the following assumptions is implicit in the simplified contribution approach income
statement?

A. There are two cost drivers, both units of production and units of sales.
B. The fixed expenses do vary with either units of production or units of sales.
C. Units of production and units of sales are equal.
D. Inventory levels in units do change.

75. Which of the following is generally true for the cost of goods sold amount that a merchandising
company would report on its income statement?

A. It is a mixed cost.
B. It is a variable cost.
C. It is a fixed cost.
D. It has no effect on the contribution margin.

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

True False

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

True False

78. 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.

True False

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

True False

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

True False

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

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

True False

83. Significant reductions in committed fixed costs can usually be made on a temporary basis without
seriously impairing the long-term goals of a firm.

True False

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

True False

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

True False

86. The contribution approach to constructing and income statement emphasizes the functions of
production, administration and sales.

True False

87. The "goodness of fit" statistic (that is, R-squared) associated with the least-squares regression
method indicates the proportion of a mixed cost that is variable.

True False

88. Because the least-squares regression method is more accurate, a scattergram plot is
unnecessary.

True False

89. The contribution approach to the income statement classifies costs by behaviour rather than by
function.

True False

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

True False
91. The following information summarizes the company's cost structure:

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

Prepare a schedule showing predictions for the following items at the 40,000 unit level of activity:

a) Total variable cost.

b) Total fixed cost.
c) Variable cost per unit.
d) Fixed cost per unit.

92. Mateo Company's average cost per unit is \$1.425 at the 16,000-unit level of activity and \$1.38 at
the 20,000-unit level of activity.

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

(a) Variable cost per unit.

(b) Total fixed cost per period.
(c) Total expected costs at the 18,000-unit level of activity.
93. ABC Company's total overhead costs at various levels of activity are presented below:

Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance.
At the 50,000-machine-hour level of activity, these costs are presented below:

The company wants to break down the maintenance cost into its basic variable and fixed cost
elements.

Required:

a) Estimate the maintenance cost for June.

b) Use the high-low method to estimate the cost formula for maintenance cost.
c) Estimate the total overhead cost at an activity level of 55,000 machine hours, using the
separate estimates you obtained for its components.
d) Estimate the total overhead cost at an activity level of 55,000 machine hours, independent of
the separate estimates you obtained for its components.
94. Stuart Manufacturing produces metal picture frames. The company's income statements for the
last two years are presented below:

The company has no beginning or ending inventories.

Required:

a. Estimate the company's total variable cost per unit, and its total fixed costs per year.
(Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.
95. The Central Valley Company is a merchandising firm that sells a single product. The company's
revenues and expenses for the last three months are presented below:

Required:

a. Determine which expenses are mixed and, by use of the high-low method, separate each
mixed expense into its variable and fixed components. State the cost formula for each mixed
expense.
b. Compute the company's total contribution margin for May.
96. Selected data about Pitkin Company's manufacturing operations at two levels of activity are
presented below:

Required: Using the high-low method, estimate the cost formula for manufacturing overhead.
Assume that both direct material and direct labour are variable costs.

97. Unified Parcel, Inc. operates a local parcel delivery service. The company keeps detailed records
relating to operating costs of trucks, and has found that if a truck is driven 110,000 kilometres per
year, the operating cost is 7.5 cents per kilometre. This cost increases to 8.75 cents per kilometre
if a truck is driven 60,000 kilometres per year.

Required:

Estimate the cost formula for truck operating costs using the high-low method.
98. (Appendix 6A) The Stephens Leadership Centre provides training seminars in personal
development and time management. The company is relatively new and management is seeking
information regarding the Centre's cost structure. The following information has been gathered
since the inception of the business in January of the current year:

Required:

a. Using the high-low method, estimate the variable cost per seminar and the total fixed cost per
month.
b. Using the least-squares regression method and the equations for a and b, estimate the
variable cost per seminar and the total fixed cost per month.
99. The 4 x 4 Shop is a large retailer of equipment for pickup trucks. An income statement for the
company's Bed Liner Department for the most recent quarter is presented below:

The liners sell, on average, for \$350 each. The department's variable selling expenses are \$35
per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25%
variable and 75% fixed. The company purchases its liners from a supplier at a cost of \$125 per
liner.

Required:

Prepare an income statement for the quarter, using the contribution approach.
100.(Appendix 6A) The Accounting Department of Archer Company, a merchandising company, has
prepared the following analysis:

The Accounting Department feels that billing expense is a mixed cost, containing both fixed and
variable cost elements. A tabulation has been made of billing expense and sales in units over the
last several months, as follows:

The Accounting Department now plans to develop a cost formula for billing expense so that a
contribution-type income statement can be prepared for management's use.

Required:

a. Using the least-squares regression method and the equations for a and b, estimate the cost
formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling price of \$100 per
unit. Prepare a budgeted income statement for the month, using the contribution format.
101.(Appendix 6A) 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.

Required:

Using the least-squares regression method and the equations for a and b, estimate the cost
formula for this cost.

102.Suppose a firm reports the following results using the least-squares regression method:

Y = \$750 - \$2.56X

Y is the daily repair and maintenance cost and X is the daily units of production in hundreds. The
daily observations were over a one-month period. The results do not make sense to the manager
of the repair and maintenance department.

Required:

What is the most plausible explanation for the apparently meaningless results?
103.The cost structure of Sackville Manufacturing Company (SMC) at two levels of production is as
follows:

Required:

a. Classify and explain each production cost as either strictly variable or strictly fixed or mixed
b. Determine the total production cost equation for SMC, using the units of production as the cost
driver. (Be sure to identify clearly all the separate components of the equation.)
c. Explain what causes the drop in average cost per unit from \$7.10 to \$6.60 when production is
increased from 60,000 to 80,000 units. Show all supporting calculations.
104.The Great Toy Company (GTC) produces a radio-controlled toy that it wholesales to retailers. For
the month of September 2008, GTC reported a before-tax profit of \$4,400 when it produced and
sold 7,500 units of the toy.

GTC's controller has provided the following information about the company's cost structure:

Note 1: These are additional total variable costs to produce (sell) the additional 4,000 units.
Note 2: Each is calculated as additional fixed cost divided by the 4,000 additional units.

The marketing manager states that the average selling price per unit for the 7,500 units that were
sold in September 2008 is valid for the first 8,000 units. She, however, estimates that the average
unit selling price for the additional 4,000 units will be 7.5% lower.

Required:

a. Calculate the following for the two levels of production and sales:

(i) Average variable manufacturing cost per unit

(ii) Average selling and administrative cost per unit
(iii) Total fixed manufacturing cost
(iv) Total fixed selling and administrative cost

b. Using the contribution margin format, prepare the following:

(i). An income statement for month ended September 30, 2008 when GTC produced and sold
7,500 units.
(ii). Prepare a contribution for the month when GTC expects to produce and sell 12,000 units.
105.The following is Allison Corporation's contribution format income statement for December 2008:

The company had no beginning or ending inventories. The company produced and sold 10,000
units in December 2008.

Required:

Assuming no change in either the cost structure or the average selling price, complete the
following contribution format income statement for a month Allison Corporation reports no before-
tax profit or loss:

106.Suppose X Company uses ABC for internal decision-making.

Required:

Explain some of the implications of the ABC system for this firm in using traditional classification
of costs as either variable or fixed.
107.Suppose Y Company uses ABC for internal decision-making and employs least-squares
regression to analyze mixed costs.

Required:

Realistically, would you expect the company to use simple regression or multiple regression
analysis? Explain.
Chapter 06 Cost Behaviour: Analysis and Use Key
1. 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, you
would expect which of the following statements to be true?

A. Expense A has remained unchanged.

B. Expense B has decreased.
C. Expense A has decreased.
D. Expense B has increased.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #1
Learning Objective: 1

2. Which costs will change with a decrease in activity within the relevant range?

A. Total fixed costs and total variable costs.

B. Unit fixed cost and total variable costs.
C. Unit variable cost and unit fixed cost.
D. Unit fixed cost and total fixed costs.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #2
Learning Objective: 1

3. Within the relevant range of activity, how will variable cost per unit behave?

A. It will increase in proportion with the level of activity.

B. It will remain constant.
C. It will vary inversely with the level of activity.
D. Its behaviour cannot be determined without additional information.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #3
Learning Objective: 1

4. What will result from an increase in the activity level within the relevant range?

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.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #4
Learning Objective: 1
5. What does the term "relevant range" mean?

A. The range within which costs may fluctuate.

B. The range within which a particular cost formula is valid.
C. The range within which production may vary.
D. The range within which the relevant costs are incurred.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #5
Learning Objective: 1

6. The linear equation Y = a + bX is often used to express cost formulas. Which of the following
representations in this equation is correct?

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 costs.
D. The Y term represents total fixed costs.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #6
Learning Objective: 1

7. Which of the following is an example of a discretionary fixed cost?

A. Insurance.
B. Taxes on real estate.
C. Management training.
D. Amortization of buildings and equipment.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #7
Learning Objective: 1

A. A training program for salespersons.

B. Executive travel expenses.
C. Property taxes on the factory building.
D. New product research and development.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #8
Learning Objective: 1
9. What are discretionary fixed costs?

A. They vary directly and proportionately with the level of activity.

B. They have a long-term planning horizon, generally encompassing many years.
C. They are made up of plant, equipment, and basic organizational costs.
D. None of these options.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #9
Learning Objective: 1

10. In describing the cost formula equation Y = a + bX, which of the following statements is
correct?

A. The X term is the dependent variable.

B. The a term is the fixed component.
C. In the high-low method, the b term equals change in activity divided by change in costs.
D. As the X term increases, the Y term decreases.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #10
Learning Objective: 1

11. Which of the following best describes the contribution approach to the income statement?

A. It organizes costs on a functional basis.

B. It is useful to managers in planning and decision making.
C. It shows a contribution margin rather than an operating income figure at the bottom of the
statement.
D. It can be used only by manufacturing companies.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #11
Learning Objective: 3

12. Contribution margin is the excess of revenues over which of the following?

A. Cost of goods sold.

B. Manufacturing cost.
C. All direct costs.
D. All variable costs.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #12
Learning Objective: 3
13. Which of the following is an example of a cost that is variable with respect to the number of
units produced and sold?

A. Insurance on the headquarters building.

B. Power to run production equipment.
C. Supervisory salaries.
D. Amortization of factory facilities.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #13
Learning Objective: 1

A. It is the largest single category of cost in a company.

B. It is a fixed cost that cannot be avoided.
C. It is a factor that causes variations in a cost.
D. It is an indirect cost that is essential to the business.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #14
Learning Objective: 1

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

Assuming that these activity levels are within the relevant range, what were the mixed costs
for November?

A. \$20,000.
B. \$25,000.
C. \$35,000.
D. \$40,000.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #15
Learning Objective: 1
16. The following data pertain to activity and costs for two months:

Assuming that these activity levels are within the relevant range, what were the mixed costs
for July?

A. \$10,000.
B. \$15,000.
C. \$35,000.
D. \$40,000.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #16
Learning Objective: 1

17. At an activity level of 10,000 units, total variable costs were \$35,000 while total fixed costs
were \$20,800. If 16,000 units are produced and this activity is within the relevant range, which
of the following statements is correct?

A. Total costs would equal \$89,280.

B. Total unit cost would equal \$4.80.
C. Fixed cost per unit would equal \$5.58.
D. Total costs would equal \$55,800.

(35,000/10,000*16,000 + 20,800)/16,000

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #17
Learning Objective: 1
Learning Objective: 2
18. Anaconda Mining Company shipped 9,000 tons of copper concentrate for \$450,000 in March
and 11,000 tons for \$549,000 in April. Use the high-low method to estimate the shipping costs
for 12,000 tons to be shipped in May.

A. \$548,780.
B. \$549,020.
C. \$594,000.
D. \$598,500.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #18
Learning Objective: 1
Learning Objective: 2

19. An analysis of past maintenance costs indicates that maintenance cost is an average of \$0.20
per machine hour at an activity level of 10,000 machine hours and \$0.25 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. \$400.
B. \$1,740.
C. \$2,000.
D. \$2,250.

Total Cost = \$2,000 at both levels therefore all the costs are fixed.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #19
Learning Objective: 1
Learning Objective: 2

20. Shipping expense is \$9,000 for 8,000 kilograms shipped and \$11,250 for 11,000 kilograms
shipped. Assuming that this activity is within the relevant range, if the company ships 9,000
kilograms, its expected shipping expense would be closest to which of the following?

A. \$8,583.
B. \$9,750.
C. \$9,972.
D. \$10,125.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #20
Learning Objective: 1
Learning Objective: 2

21. Average maintenance costs are \$1.50 per machine hour at an activity level of 8,000 machine
hours and \$1.20 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 which of the following?

A. \$11,433.
B. \$13,440.
C. \$15,000.
D. \$16,128.

VC = (13,000*1.20 - 8,000*1.50)/(13,000 - 8,000) = \$0.72/hr. FC = 15,600 - 13,000*.72 =

\$6,240; Total Cost = 6,240 + 10,000*.72

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #21
Learning Objective: 1
Learning Objective: 2

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

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. \$752,060.
B. \$755,196.
C. \$805,284.
D. \$1,188,756.

VC = (853,560 - 723,060)/(540,000 - 450,000) = \$1.45; FC = 853,560 - 540,000*\$1.45 =

\$70,560. July = 70,560 + 470,000*\$1.45

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #22
Learning Objective: 1
Learning Objective: 2
23. Which of the following concepts used in estimating cost behaviour is unique to the least-
squares regression method?

A. Independent variable.
B. Dependent variable.
C. R-squared.
D. Variable cost per unit.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #23
Learning Objective: 4

24. Given the cost formula Y = \$15,000 + \$5X, what is the total cost at an activity level of 8,000
units?

A. \$15,000.
B. \$23,000.
C. \$40,000.
D. \$55,000.

15,000 + 5*8,000

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #24
Learning Objective: 1
Learning Objective: 2

25. Given the cost formula Y = \$12,000 + \$6X, what is the total cost at an activity level of 8,000
units?

A. \$12,000.
B. \$20,000.
C. \$48,000.
D. \$60,000.

12,000 + 6*8,000

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #25
Learning Objective: 1
Learning Objective: 2
26. Reddy Company has the following cost formulas for overhead:

Based on these cost formulas, what is the expected total overhead cost at 600 machine
hours?

A. \$4,500.
B. \$5,200.
C. \$5,620.
D. \$5,340.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #26
Learning Objective: 1
Learning Objective: 2

27. Given the cost formula Y = \$17,500 + \$4X, at what level of activity will total cost be \$42,500?

A. 4,375 units.
B. 5,250 units.
C. 6,250 units.
D. 10,625 units.

(42,500 - 17,500)/4

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #27
Learning Objective: 1
Learning Objective: 2
28. The following data pertain to activity and utilities costs for two recent years:

Using the high-low method, what is the variable cost per unit for utilities?

A. \$1.25 per unit.

B. \$1.50 per unit.
C. \$1.33 per unit.
D. \$0.75 per unit.

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #28
Learning Objective: 2
Learning Objective: 3

29. The following data pertain to activity and utilities costs for two recent years:

Using the high-low method, what is the cost formula for utilities?

A. \$1.20 per unit.

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

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #29
Learning Objective: 1
Learning Objective: 2
30. At an activity level of 6,000 units, the cost for maintenance is \$7,200; at 10,000 units, the cost
for maintenance is \$11,600. Using the high-low method, what is the cost formula for
maintenance?

A. \$1.16 per unit.

B. \$1.20 per unit.
C. \$600 plus \$1.10 per unit.
D. \$1,200 plus \$1.10 per unit.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #30
Learning Objective: 1
Learning Objective: 2

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

Using the high-low method, what is the cost formula for maintenance cost?

A. \$2.00 per machine hour.

B. \$1.625 per machine hour.
C. \$18,000 plus \$0.50 per machine hour.
D. \$24,000 plus \$0.50 per machine hour.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #31
Learning Objective: 1
Learning Objective: 2
32. Buckeye Company has provided the following data for maintenance cost:

Using the high-low method, what is the cost formula for maintenance cost?

A. \$7,000 per year plus \$0.625 per machine hour.

B. \$7,000 per year plus \$1.60 per machine hour.
C. \$21,625 per year plus \$0.625 per machine hour.
D. \$27,000 per year plus \$1.60 per machine hour.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #32
Learning Objective: 1
Learning Objective: 2

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

Using the high-low method, what is the total variable cost per unit of product?

A. \$11.05.
B. \$21.00.
C. \$32.00.
D. \$35.00.

32

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #33
Learning Objective: 1
Learning Objective: 2
34. At a sales level of \$300,000, James Company's gross margin is \$15,000 less than its
contribution margin, its operating income is \$50,000, and its total selling and administrative
expenses are \$120,000. At this sales level, what is the company's contribution margin?

A. \$155,000.
B. \$170,000.
C. \$185,000.
D. \$250,000.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #34
Learning Objective: 3

35. Which of the following statements about the methods for estimating a cost formula is
incorrect?

A. A scattergram plot should precede the high-low method.

B. A scattergram plot should precede the least-squares regression method.
C. The preferred method is high-low.
D. The preferred method is least-squares regression.
Blooms Level: Understand
Difficulty: Hard
Garrison - Chapter 06 #35
Learning Objective: 2

Rymore Company would like to classify the following costs according to their cost behaviour:

Garrison - Chapter 06

36. Which of the following classifications best describes the behaviour of Cost A?

A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #36
Learning Objective: 1
37. Which of the following classifications best describes the behaviour of Cost B?

A. Mixed.
B. Variable.
C. Fixed.
D. Opportunity cost.
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #37
Learning Objective: 1

38. Which of the following classifications best describes the behaviour of Cost C?

A. Mixed.
B. Variable.
C. Fixed.
D. Differential cost.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #38
Learning Objective: 1

Comparative income statements for Boggs Sporting Equipment Company for the last two
months are presented below:

All of the company's costs are either fixed, variable, or a mixture of the two (that is, mixed).
Assume that the relevant range includes all of the activity levels mentioned in this problem.
Garrison - Chapter 06

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

A. Rent.
B. Sales commissions.
C. Maintenance expenses.
D. Clerical expenses.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #39
Learning Objective: 1

40. What is the total monthly fixed cost for Boggs Sporting Equipment Company?

A. \$12,000.
B. \$22,500.
C. \$25,000.
D. \$40,000.

Maintenance; VC = (13,500 - 13,000)/1,000 = \$0.50 FC = 13,500 - 11,000*.5 = 8,000. Clerical

VC = (16,000 - 15,000)/(11,000 - 10,000) = \$1.00 FC = \$5,000
Total FC = 12,000 + 8,000 + 5,000

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #40
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

41. If sales are projected to be 8,000 units in September, what would be total operating
expenses?

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

Blooms Level: Analyze

Difficulty: Medium
Garrison - Chapter 06 #41
Learning Objective: 1
Learning Objective: 2
Learning Objective: 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:

Assume that all activity mentioned in this problem is within the relevant range.
Garrison - Chapter 06
42. What is the expected gross margin next month?

A. \$11,200.
B. \$14,400.
C. \$16,400.
D. \$17,600.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #42
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

43. What is the expected total administrative expense next month?

A. \$4,800.
B. \$9,300.
C. \$13,300.
D. \$14,900.

4,500 + 800*.15*\$40

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #43
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

A. \$11,200.
B. \$14,400.
C. \$16,000.
D. \$17,600.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #44
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
45. What is the expected operating income next month?

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

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #45
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total
overhead costs were \$223,000. Of this amount, utilities were \$48,000 (all variable) and
amortization was \$60,000 (all fixed). The balance of the overhead costs consisted of
maintenance cost (mixed). At 100,000 machine hours, maintenance costs were \$130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
Garrison - Chapter 06

46. What is the variable cost for maintenance per machine hour?

A. \$0.75.
B. \$1.30.
C. \$1.35.
D. \$1.44.

Maintenance cost = 223,000 - 48,000 - 60,000 = \$115,000 at 80,000 hrs.

VC/hr. = (130,000 - 115,000)/(100,000 - 80,000)

Blooms Level: Analyze

Difficulty: Medium
Garrison - Chapter 06 #46
Learning Objective: 1
Learning Objective: 2

A. \$55,000.
B. \$60,000.
C. \$115,000.
D. \$130,000.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #47
Learning Objective: 1
Learning Objective: 2

48. If 110,000 machine hours of activity are projected for next period, what would be total

A. \$242,500.
B. \$256,000.
C. \$263,500.
D. \$306,625.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #48
Learning Objective: 1
Learning Objective: 2

Maxwell Company has a total expense per unit of \$2.00 per unit at the 16,000-unit level of
activity, and total expense per unit of \$1.95 at the 21,000-unit level of activity.
Garrison - Chapter 06

49. What is the best estimate of the variable cost per unit for Maxwell Company?

A. \$0.56.
B. \$1.79.
C. \$1.95.
D. \$2.00.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #49
Learning Objective: 1
Learning Objective: 2

50. What is the best estimate of the total fixed cost per period for Maxwell Company?

A. \$3,360.
B. \$29,190.
C. \$32,000
D. \$40,950.

40,950 - 21,000*1.79

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #50
Learning Objective: 1
Learning Objective: 2

51. What is the best estimate of the total expected costs at the 19,000 level of activity for Maxwell
Company?

A. \$37,050.
B. \$37,370.
C. \$38,000.
D. \$39,830.

3,360(#65) + 19,000*1.79(#64)

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #51
Learning Objective: 1
Learning Objective: 2

Johnson Company has provided the following data for the first five months of the year:

Garrison - Chapter 06

52. Using the high-low method, the estimated variable lubrication cost per machine hour is closest
to which of the following?

A. \$0.67.
B. \$1.25.
C. \$1.40.
D. \$1.50.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #52
Learning Objective: 1
Learning Objective: 2
53. Using the high-low method, the estimated monthly fixed component of lubrication cost is
closest to which of the following?

A. \$560.
B. \$565.
C. \$570.
D. \$585.

870 - 200*1.50(#67)

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #53
Learning Objective: 1
Learning Objective: 2

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:

Garrison - Chapter 06

54. Using the high-low method, the estimated variable cost per machine hour for electricity is
closest to which of the following?

A. \$0.40.
B. \$0.98.
C. \$1.68.
D. \$2.50.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #54
Learning Objective: 1
Learning Objective: 2
55. Using the high-low method, the estimated fixed cost per month for electricity is closest to
which of the following?

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

1,950 - 2,000*.40

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #55
Learning Objective: 1
Learning Objective: 2

Wilson Company's activity for the first six months of the current year is as follows:

Garrison - Chapter 06

56. Using the high-low method, what is the variable cost per machine hour?

A. \$0.40.
B. \$0.60.
C. \$0.64.
D. \$0.67.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #56
Learning Objective: 1
Learning Objective: 2
57. Using the high-low method, what is the fixed portion of the electrical cost each month?

A. \$190.
B. \$280.
C. \$400.
D. \$760.

2,200 - 3,000*.60

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #57
Learning Objective: 1
Learning Objective: 2

Prater Company has provided the following data:

Garrison - Chapter 06

58. What is the best estimate of the company's variable operating expense per unit?

A. \$0.24 per unit.

B. \$0.91 per unit.
C. \$0.96 per unit.
D. \$4.17 per unit.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #58
Learning Objective: 1
Learning Objective: 2
59. What is the best estimate of the company's total fixed operating expense per year?

A. \$72,000.
B. \$188,000.
C. \$200,000.
D. \$212,000.

272,000 - 300,000*.24

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #59
Learning Objective: 1
Learning Objective: 2

The following data have been provided by a retailer that sells a single product:

Garrison - Chapter 06

60. What is the best estimate of the company's variable operating expenses per unit?

A. \$0.24 per unit.

B. \$0.71 per unit.
C. \$0.90 per unit.
D. \$4.17 per unit.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #60
Learning Objective: 1
Learning Objective: 2
61. What is the best estimate of the company's total fixed operating expenses per year?

A. \$0.
B. \$44,000.
C. \$80,000.
D. \$174,000.

222,000 - 200,000*.24

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #61
Learning Objective: 1
Learning Objective: 2

62. What is the best estimate of the company's contribution margin for this year?

A. \$252,000.
B. \$300,000.
C. \$158,000.
D. \$225,000.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #62
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

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

Garrison - Chapter 06
63. What is the gross margin of Evans Retail Stores, Inc., for the first quarter?

A. \$140,000.
B. \$190,000.
C. \$210,000.
D. \$220,000.

350,000 - 160,000

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #63
Learning Objective: 3

64. What is the contribution margin of Evans Retail Stores, Inc., for the first quarter?

A. \$140,000.
B. \$190,000.
C. \$210,000.
D. \$300,000.

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #64
Learning Objective: 3

Porter Company has provided the following data for the second quarter of the most recent
year:

Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.
Garrison - Chapter 06
65. What was the total contribution margin of Porter Company for the second quarter?

A. \$37,250.
B. \$87,000.
C. \$176,000.
D. \$211,000.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #65
Learning Objective: 1
Learning Objective: 3

66. What was the gross margin for Porter Company for the second quarter?

A. \$(12,500).
B. \$80,000.
C. \$131,500.
D. \$135,000.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #66
Learning Objective: 1
Learning Objective: 3

An income statement for Crandall's Bookstore for the first quarter of the current year is
presented below:

On average, a book sells for \$50. Variable selling expenses are \$5.50 per book, with the
remaining selling expenses being fixed. The variable administrative expenses are 3% of sales,
with the remainder being fixed.
Garrison - Chapter 06
67. What is the contribution margin for Crandall's Bookstore for the first quarter?

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

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #67
Learning Objective: 1
Learning Objective: 3

68. Using the contribution approach, what is the operating income for the first quarter?

A. \$44,000.
B. \$128,000.
C. \$152,000.
D. \$240,000.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #68
Learning Objective: 1
Learning Objective: 3

69. What is the cost formula for operating expenses with X equal to the number of books sold?

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

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #69
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
Sorter Company has provided the following data for the third quarter of the most recent year:

Assume that direct labour is a variable cost and that there was no beginning or ending
inventories.
Garrison - Chapter 06

70. At the level of sales for the third quarter, how much in additional fixed selling expenses could
Sorter Company have afforded to spend and still would have reported \$41,500 operating
income?

A. \$50,000.
B. \$87,750.
C. \$91,500.
D. \$96,250.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #70
Learning Objective: 1
Learning Objective: 3

71. Suppose the sales for the third quarter was the equivalent of 1,000 units and that the fixed
manufacturing and non-manufacturing costs were valid between the relevant range of 800 and
1,200 units. If Sorter Company had sold 100 additional units, it would have reported what
amount of additional operating income?

A. \$9,150.
B. \$23,725.
C. \$50,000.
D. \$100,650.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #71
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
72. Which of the following items of Sorter Company's expenses and/or costs can be misleading if
reported on a per unit of production and/or sales basis?

A. Direct labour
B. Direct materials.
C. Variable administrative expenses.
D. Fixed manufacturing overhead.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #72
Learning Objective: 1

73. Which of the following should be the first step in the analysis of cost behaviour?

A. Estimating the slope coefficient.

B. Estimating the intercept term.
C. Estimating the R-squared in the case of least-squares regression.
D. Scattergram plot.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #73
Learning Objective: 1
Learning Objective: 2
Learning Objective: 4

74. Which of the following assumptions is implicit in the simplified contribution approach income
statement?

A. There are two cost drivers, both units of production and units of sales.
B. The fixed expenses do vary with either units of production or units of sales.
C. Units of production and units of sales are equal.
D. Inventory levels in units do change.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #74
Learning Objective: 3

75. Which of the following is generally true for the cost of goods sold amount that a merchandising
company would report on its income statement?

A. It is a mixed cost.
B. It is a variable cost.
C. It is a fixed cost.
D. It has no effect on the contribution margin.
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #75
Learning Objective: 1
Learning Objective: 3
76. Modern technology is causing shifts away from variable costs toward more fixed costs in many
industries.

TRUE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #76
Learning Objective: 1

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

FALSE
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #77
Learning Objective: 1

78. 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.

TRUE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #78
Learning Objective: 1

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

FALSE
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #79
Learning Objective: 1

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

FALSE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #80
Learning Objective: 5
Learning Objective: 6

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

TRUE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #81
Learning Objective: 1
Learning Objective: 2

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

TRUE
Blooms Level: Remember
Difficulty: Easy
Garrison - Chapter 06 #82
Learning Objective: 1

83. Significant reductions in committed fixed costs can usually be made on a temporary basis
without seriously impairing the long-term goals of a firm.

FALSE
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #83
Learning Objective: 1

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

FALSE
Blooms Level: Remember
Difficulty: Easy
Garrison - Chapter 06 #84
Learning Objective: 1

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

TRUE
Blooms Level: Understand
Difficulty: Medium
Garrison - Chapter 06 #85
Learning Objective: 2
Learning Objective: 4

86. The contribution approach to constructing and income statement emphasizes the functions of
production, administration and sales.

FALSE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #86
Learning Objective: 3

87. The "goodness of fit" statistic (that is, R-squared) associated with the least-squares regression
method indicates the proportion of a mixed cost that is variable.

FALSE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #87
Learning Objective: 4

88. Because the least-squares regression method is more accurate, a scattergram plot is
unnecessary.

FALSE
Blooms Level: Remember
Difficulty: Easy
Garrison - Chapter 06 #88
Learning Objective: 2
Learning Objective: 4

89. The contribution approach to the income statement classifies costs by behaviour rather than
by function.

TRUE
Blooms Level: Understand
Difficulty: Easy
Garrison - Chapter 06 #89
Learning Objective: 3

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

TRUE
Blooms Level: Remember
Difficulty: Easy
Garrison - Chapter 06 #90
Learning Objective: 1

91. The following information summarizes the company's cost structure:

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

Prepare a schedule showing predictions for the following items at the 40,000 unit level of
activity:

a) Total variable cost.

b) Total fixed cost.
c) Variable cost per unit.
d) Fixed cost per unit.

Blooms Level: Apply

Difficulty: Easy
Garrison - Chapter 06 #91
Learning Objective: 1
Learning Objective: 2
92. Mateo Company's average cost per unit is \$1.425 at the 16,000-unit level of activity and \$1.38
at the 20,000-unit level of activity.

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

(a) Variable cost per unit.

(b) Total fixed cost per period.
(c) Total expected costs at the 18,000-unit level of activity.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #92
Learning Objective: 1
Learning Objective: 2
93. ABC Company's total overhead costs at various levels of activity are presented below:

Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. At the 50,000-machine-hour level of activity, these costs are presented below:

The company wants to break down the maintenance cost into its basic variable and fixed cost
elements.

Required:

a) Estimate the maintenance cost for June.

b) Use the high-low method to estimate the cost formula for maintenance cost.
c) Estimate the total overhead cost at an activity level of 55,000 machine hours, using the
separate estimates you obtained for its components.
d) Estimate the total overhead cost at an activity level of 55,000 machine hours, independent
of the separate estimates you obtained for its components.

b) High-low analysis of maintenance cost:

c) Total overhead at 55,000 machine hours:

Note: The overhead cost function is: Y = (\$62,000 + \$18,000) + (\$1.08 + \$1.20) X
Y = \$80,000 + \$2.28X

d.) Independent estimate of the overhead cost function involves using the high-low method on
the original data as follows:

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #93
Learning Objective: 1
Learning Objective: 2
94. Stuart Manufacturing produces metal picture frames. The company's income statements for
the last two years are presented below:

The company has no beginning or ending inventories.

Required:

a. Estimate the company's total variable cost per unit, and its total fixed costs per year.
(Remember that this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.

Fixed cost:

Fixed cost:

Total fixed cost:

b.
Blooms Level: Apply
Difficulty: Hard
Garrison - Chapter 06 #94
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
95. The Central Valley Company is a merchandising firm that sells a single product. The
company's revenues and expenses for the last three months are presented below:

Required:

a. Determine which expenses are mixed and, by use of the high-low method, separate each
mixed expense into its variable and fixed components. State the cost formula for each mixed
expense.
b. Compute the company's total contribution margin for May.

a. The cost of goods sold for this company is a variable cost and is \$56 per unit. The Shipping
Expense and the Salaries and Commissions Expense are mixed. All other expenses are
constant for each of the months shown and are therefore fixed.
Blooms Level: Apply
Difficulty: Hard
Garrison - Chapter 06 #95
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3

96. Selected data about Pitkin Company's manufacturing operations at two levels of activity are
presented below:

Required: Using the high-low method, estimate the cost formula for manufacturing overhead.
Assume that both direct material and direct labour are variable costs.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #96
Learning Objective: 1
Learning Objective: 2
97. Unified Parcel, Inc. operates a local parcel delivery service. The company keeps detailed
records relating to operating costs of trucks, and has found that if a truck is driven 110,000
kilometres per year, the operating cost is 7.5 cents per kilometre. This cost increases to 8.75
cents per kilometre if a truck is driven 60,000 kilometres per year.

Required:

Estimate the cost formula for truck operating costs using the high-low method.

The cost formula is \$1,650 per year plus \$0.06 per kilometre.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #97
Learning Objective: 1
Learning Objective: 2
98. (Appendix 6A) The Stephens Leadership Centre provides training seminars in personal
development and time management. The company is relatively new and management is
seeking information regarding the Centre's cost structure. The following information has been
gathered since the inception of the business in January of the current year:

Required:

a. Using the high-low method, estimate the variable cost per seminar and the total fixed cost
per month.
b. Using the least-squares regression method and the equations for a and b, estimate the
variable cost per seminar and the total fixed cost per month.

a. High-low method:

Cost formula for seminar costs: \$8,547.50 per month plus \$845.25 per seminar held

b. Least-squares regression method:

n=6
X = 84
Y = 121,662
XY = 1,737,816
X^2 = 1,218

b
= [n(XY) - (X)(Y)]/[n(X^2) - (X)^2]
= [6(1,737,816) - (84)(121,662)]/[6(1,218) - (84)^2]
= \$822.57 (rounded to the nearest whole cent)

a
= [(Y) - b(X)]/n
= [(121,662) - 822.57(84)]/6
= \$8,761 (rounded to the nearest whole dollar)

The cost formula is \$8,761 per month plus \$822.57 per seminar.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #98
Learning Objective: 1
Learning Objective: 2
Learning Objective: 4
99. The 4 x 4 Shop is a large retailer of equipment for pickup trucks. An income statement for the
company's Bed Liner Department for the most recent quarter is presented below:

The liners sell, on average, for \$350 each. The department's variable selling expenses are \$35
per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25%
variable and 75% fixed. The company purchases its liners from a supplier at a cost of \$125 per
liner.

Required:

Prepare an income statement for the quarter, using the contribution approach.

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #99
Learning Objective: 3
100. (Appendix 6A) The Accounting Department of Archer Company, a merchandising company,
has prepared the following analysis:

The Accounting Department feels that billing expense is a mixed cost, containing both fixed
and variable cost elements. A tabulation has been made of billing expense and sales in units
over the last several months, as follows:

The Accounting Department now plans to develop a cost formula for billing expense so that a
contribution-type income statement can be prepared for management's use.

Required:

a. Using the least-squares regression method and the equations for a and b, estimate the cost
formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling price of \$100
per unit. Prepare a budgeted income statement for the month, using the contribution format.

a.

n=6
X = 78
Y = 215,000
XY = 2,856,000
X^2 = 1,056
b = [n(XY) - (X)(Y)]/[n(X^2) - (X)^2]
= [6(2,856,000) - (78)(215,000)]/[6(1,056) - (78)^2]
= \$1,452 (rounded to the nearest dollar)

a = [(Y) - b(X)]/n
= [(215,000) - 1,452(78)]/6
= \$16,957 (rounded to nearest dollar)

The cost formula is \$16,957 per month plus \$1,452 per thousand units.

b.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #100
Learning Objective: 3
Learning Objective: 4
101. (Appendix 6A) 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.

Required:

Using the least-squares regression method and the equations for a and b, estimate the cost
formula for this cost.

n=4
X = 183
Y = 1,110
XY = 50,866
X^2 = 8,405

b
= [n(XY) - (X)(Y)]/[n(X^2) - (X)^2]
= [4(50,866) - (183)(1,110)]/[4(8,405) - (183)^2
= \$2.55 (rounded to nearest cent)

= [(Y) - b(X)]/n
= [(1,110) - 2.55(183)]/4
= \$161 (rounded to nearest whole dollar)

Blooms Level: Apply

Difficulty: Medium
Garrison - Chapter 06 #101
Learning Objective: 4
102. Suppose a firm reports the following results using the least-squares regression method:

Y = \$750 - \$2.56X

Y is the daily repair and maintenance cost and X is the daily units of production in hundreds.
The daily observations were over a one-month period. The results do not make sense to the
manager of the repair and maintenance department.

Required:

What is the most plausible explanation for the apparently meaningless results?

According to the results, total daily repair and maintenance costs decrease as the daily units
of production increase. This is consistent with a situation where very little or no repair and
maintenance is conducted when the production facilities are in use. In other words, repair and
maintenance is most likely scheduled when the production facilities are idle. Also repair and
maintenance is generally not conducted daily but production is. A least-squares regression
using, for example, monthly or bi-weekly repairs and maintenance and production data is likely
to produce meaningful results.

Blooms Level: Evaluate

Difficulty: Hard
Garrison - Chapter 06 #102
Learning Objective: 4
103. The cost structure of Sackville Manufacturing Company (SMC) at two levels of production is
as follows:

Required:

a. Classify and explain each production cost as either strictly variable or strictly fixed or mixed
b. Determine the total production cost equation for SMC, using the units of production as the
cost driver. (Be sure to identify clearly all the separate components of the equation.)
c. Explain what causes the drop in average cost per unit from \$7.10 to \$6.60 when production
is increased from 60,000 to 80,000 units. Show all supporting calculations.

a. The cost of both direct materials and direct labour is strictly variable because, in each case,
the average cost per unit remains the same at both levels of production. It is \$2.00 for direct
materials and \$1.50 for direct labour. On the other hand, factory overhead cost is a mixed
cost, that is, it is a combination of some fixed costs and some variable costs. The average cost
per unit does not remain the same at the two levels of production. In this case, it decreases
with increased production. (See part c below for further explanation.)

b. The two-point method can be used to estimate the total cost function either by combining
the cost function of the three separate costs or using their totals.

Alternatively using the total cost:

c. The drop in the average cost from \$7.10 to \$6.60 was the result of spreading the total fixed
cost of \$120,000 over 80,000 units (an average of \$1.50) instead of 60,000 (an average of
\$2.00. The difference is exactly \$0.50.

Blooms Level: Analyze

Difficulty: Medium
Garrison - Chapter 06 #103
Learning Objective: 1
Learning Objective: 2
104. The Great Toy Company (GTC) produces a radio-controlled toy that it wholesales to retailers.
For the month of September 2008, GTC reported a before-tax profit of \$4,400 when it
produced and sold 7,500 units of the toy.

GTC's controller has provided the following information about the company's cost structure:

Note 1: These are additional total variable costs to produce (sell) the additional 4,000 units.
Note 2: Each is calculated as additional fixed cost divided by the 4,000 additional units.

The marketing manager states that the average selling price per unit for the 7,500 units that
were sold in September 2008 is valid for the first 8,000 units. She, however, estimates that the
average unit selling price for the additional 4,000 units will be 7.5% lower.

Required:

a. Calculate the following for the two levels of production and sales:

(i) Average variable manufacturing cost per unit

(ii) Average selling and administrative cost per unit
(iii) Total fixed manufacturing cost
(iv) Total fixed selling and administrative cost

b. Using the contribution margin format, prepare the following:

(i). An income statement for month ended September 30, 2008 when GTC produced and sold
7,500 units.
(ii). Prepare a contribution for the month when GTC expects to produce and sell 12,000 units.

a.

(i) Average variable manufacturing cost per unit:

8,000 units: \$10 (\$80,000/8,000)
12,000 units: \$12 ((\$80,000 + \$64,000)/(8,000 + 4,000))
(ii) Average selling and administrative cost per unit
8,000 units: \$2 (\$16,000/8,000)
12,000 units: \$2 ((\$16,000 + \$8,000)/(8,000 + 4,000))
(iii) Total fixed manufacturing cost
8,000 units: \$48,000 (\$6.00 x 8,000)
12,000 units: \$60,000 ((\$6.00 x 8,000) + (\$3.00 x 4,000))
(iv) Total fixed selling and administrative cost
8,000 units: \$8,000 (\$1.00 x 8,000)
12,000 units: \$8,000 ((\$1.00 x 8,000) + (\$0.00 x 4,000))
b.

(i) The contribution margin and sales are the only remaining unknown items for preparing the
statement. Both can be derived by working backwards from the before-tax profits, total fixed
and variable expenses.

(ii) The only additional information for this part is the average selling price of the additional
4,000 units projected to be 7.5% less than the first 8,000 units.

Blooms Level: Apply

Difficulty: Hard
Garrison - Chapter 06 #104
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
105. The following is Allison Corporation's contribution format income statement for December
2008:

The company had no beginning or ending inventories. The company produced and sold
10,000 units in December 2008.

Required:

Assuming no change in either the cost structure or the average selling price, complete the
following contribution format income statement for a month Allison Corporation reports no
before-tax profit or loss:

Crucial step: Determining the required units to generate \$400,000 total contribution margin.
The average contribution per unit when company sold 10,000 was \$5, that is,
\$500,000/10,000. This is also the difference between the average selling price of \$8 (that is,
\$800,000/10,000) and average variable expenses of \$3 (that is, \$300,000/10,000). By
assumption, the average contribution margin of \$5 does not change, further implying 8,000
units to be produced and sold to obtain the \$400,000 total contribution margin (that is,
\$400,000/\$5)
Note 1: \$8 x 8,000
Note 2: \$3 x 8,000

Blooms Level: Analyze

Difficulty: Medium
Garrison - Chapter 06 #105
Learning Objective: 1
Learning Objective: 3
106. Suppose X Company uses ABC for internal decision-making.

Required:

Explain some of the implications of the ABC system for this firm in using traditional
classification of costs as either variable or fixed.

Traditional classification of cost as either fixed or variable is strictly on the basis of how the
cost changes with respect to changes in units of production or sales, that is, unit-level
activities. However, in an ABC environment a cost can change with respect to higher order
activities such as batch-level, product-level, customer-level and, in the extreme, even
organization-sustaining activities. For example, a batch-level cost such as cost of preparing a
purchase order cost is fixed in the traditional sense with respect to the units ordered but will
vary with respect to the number of purchase orders. Such a cost is realistically step-fixed or
step-variable, depending on the width of the relevant range. Conceptually, all costs are
"variable" (that is, no cost is "fixed") in an ABC context since they are caused by activities. A
cost likely to come close to traditional fixed cost is that arising from organization-sustaining
activities.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #106
Learning Objective: 1

107. Suppose Y Company uses ABC for internal decision-making and employs least-squares
regression to analyze mixed costs.

Required:

Realistically, would you expect the company to use simple regression or multiple regression
analysis? Explain.

Y Company would be expected to use multiple regression analysis. Simple regression uses
only one independent variable (that is, one cost driver) while multiple regression uses more
than one independent variable. Y Company is mostly likely using ABC because it has
determined that most of the costs incurred in its operations are caused by multiple cost drivers
of different orders such as batch-level, customer-level, and product-level. It would only be
logical to use these as the set of independent variables in a multiple regression to obtain more
reliable and accurate estimates of its different cost functions.

Blooms Level: Analyze

Difficulty: Hard
Garrison - Chapter 06 #107
Learning Objective: 4
Chapter 06 Cost Behaviour: Analysis and Use Summary

Category # of Questions
Blooms Level: Analyze 13
Blooms Level: Apply 53
Blooms Level: Evaluate 1
Blooms Level: Remember 4
Blooms Level: Understand 36
Difficulty: Easy 24
Difficulty: Hard 27
Difficulty: Medium 56
Garrison - Chapter 06 121
Learning Objective: 1 87
Learning Objective: 2 56
Learning Objective: 3 30
Learning Objective: 4 10
Learning Objective: 5 1
Learning Objective: 6 1