Chapter 05

Cost Behavior
 

True / False Questions

 

1. The relevant range is the range in which costs remain variable. 

 
True    False
 
2. A variable cost increases in total as the volume increases. 
 
True    False
 
3. A fixed cost will stay constant on a per unit basis as the volume increases. 
 
True    False
 
4. Step costs are fixed over some range of activity and then increase like a variable cost. 
 
True    False
 
5. A mixed cost has either fixed and variable components, but not both. 
 
True    False
 
6. The equation for a mixed cost is total fixed costs + (variable cost per unit × units of activity). 
 
True    False
 
7. A scattergraph is useful in recognizing unusual patterns in the cost data. 
 
True    False
 
8. A scattergraph cannot be created by hand because it is too complex. 
 
True    False
 
9. The visual fit method is the most objective way to fit a line to cost data. 
 
True    False
 
10. The high-low method needs three observations of costs to calculate the cost formula. 
 
True    False
 
11. The least-squares regression method uses all of the available data to find the best fitting line. 
 
True    False
 
12. R-square tells managers how much of the variability in activity is caused by variability in cost. 
 
True    False
 
13. Contribution margin is defined as sales revenue less variable costs. 
 
True    False
 
14. Contribution margin is equal to sales revenue less gross margin. 
 
True    False
 
15. Contribution margin plus variable cost per unit equals total sales revenue. 
 
True    False
 
16. The unit contribution margin tells how much each additional unit sold will contribute to covering variable
costs. 
 
True    False
 
17. The contribution margin ratio is calculated as total contribution margin divided by total sales revenue. 
 
True    False
 
18. Variable costing uses a contribution margin income statement. 
 
True    False
 
19. Firms may choose to use absorption costing or variable costing for external financial reporting purposes. 
 
True    False
 
20. Full absorption costing divides fixed overhead between Cost of Goods Sold and period expenses. 
 
True    False
 
 

Multiple Choice Questions

 
21. Cost behavior is 
 

A. the way in which costs change when the activity level changes.
B. the difference between sales revenue and fixed costs.
C. the same as absorption costing.
D. the amount of sales necessary to achieve a specific profit.
 
22. A cost driver 
 

A. is the same as a fixed cost.

B. is an activity that causes total costs to change.
C. is the same as margin of safety.
D. is a method of calculating mixed costs.
 
23. Relevant range 
 

A. is the range of activity over which our assumptions about cost behavior are true.
B. only applies to fixed costs.
C. is defined as total sales minus break-even sales.
D. increases in total as the activity level increases.
 
24. A cost that changes, in total, in direct proportion to changes in activity levels is a(n) 
 

A. absorption cost.
B. contribution margin.
C. fixed cost.
D. variable cost.
 
25. If sales revenue doubles, variable costs will 
 

A. decrease in total.
B. increase in total.
C. decrease on a per unit basis.
D. increase on a per unit basis.
 
26. When Carter, Inc. sells 48,000 units, its total variable cost is $115,200. What is its total variable cost when
it sells 54,000 units? 
 

A. $100,800
B. $115,200
C. $129,600
D. It cannot be determined from the information given.
 
27. Which of the following is a variable cost? 
 

A. A cost that is $26,000 when production is 65,000, and $26,000 when production is 91,000.
B. A cost that is $26,000 when production is 65,000, and $36,400 when production is 91,000.
C. A cost that is $26,000 when production is 65,000, and $52,000 when production is 91,000.
D. A cost that is $52,000 when production is 65,000, and $52,000 when production is 91,000.
 
28. Which of the following statements is true? 
 

A. Fixed costs are constant on a per unit basis.

B. Variable costs per unit decrease as activity volume increases.
C. Variable costs are constant in total dollars.
D. Fixed costs are constant in total dollars.
 
29. A cost that remains the same, in total, regardless of changes in activity level is a 
 

A. variable cost.
B. fixed cost.
C. mixed cost.
D. step cost.
 
30. If sales revenue doubles, fixed costs will 
 

A. decrease in total.
B. increase in total.
C. decrease on a per unit basis.
D. increase on a per unit basis.
 
31. When Greenway, Inc. sells 48,000 units, its total fixed cost is $115,200. What is its total fixed cost when it
sells 54,000 units? 
 

A. $100,800
B. $115,200
C. $129,600
D. It cannot be determined from the information given.
 
32. Which of the following is a fixed cost? 
 

A. A cost that is $28.00 per unit when production is 70,000, and $28.00 per unit when production is
112,000.
B. A cost that is $28.00 per unit when production is 70,000, and $17.50 per unit when production is
112,000.
C. A cost that is $28.00 per unit when production is 70,000, and $56.00 per unit when production is
112,000.
D. A cost that is $56.00 per unit when production is 70,000, and $56.00 per unit when production is
112,000.
 
33. A step cost 
 

A. is a fixed cost over the relevant range and a variable cost everywhere else.
B. contains both fixed and variable components.
C. increases in direct proportion to changes in activity.
D. is fixed over some range of activity.
 
34. Stella, Inc. must perform maintenance on its production machinery after every 10,000 units produced.
Production varies between 12,000 and 30,000 units a year. The cost of this maintenance would be classified
as a 
 

A. variable cost.
B. fixed cost.
C. step cost.
D. mixed cost.
 
35. A mixed cost 
 

A. is fixed over a wider range of activity than a step cost.

B. is a fixed cost over the relevant range and a variable cost everywhere else.
C. contains both fixed and variable components.
D. always increases on a per unit basis.
 
36. Mohave, Inc. places a quality assurance logo on each of its units. To use this logo, it must pay the quality
assurance firm $5,000 per month plus $1 per unit. The cost to Mohave of using the quality assurance logo
would be a 
 

A. fixed cost.
B. mixed cost.
C. variable cost.
D. step cost.
 
37. Which of the following is a mixed cost? 
 

A. A cost that is $32.00 per unit when production is 80,000, and $32.00 per unit when production is
128,000.
B. A cost that is $32.00 per unit when production is 80,000, and $40.00 per unit when production is
128,000.
C. A cost that is $32.00 per unit when production is 80,000, and $26.00 per unit when production is
128,000.
D. A cost that is $64.00 per unit when production is 80,000, and $64.00 per unit when production is
128,000.
 
38. The per-unit amount of three different production costs for Onini, Inc., are as follows:

   

What type of cost are each of these three costs? 

 

A. Cost A is fixed, Cost B is mixed, Cost C is variable.

B. Cost A is fixed, Cost B is variable, Cost C is mixed.
C. Cost A is variable, Cost B is mixed, Cost C is fixed.
D. Cost A is variable, Cost B is fixed, Cost C is mixed.
 
39. The per-unit amount of three different production costs for Thunderbird, Inc., are as follows:

   

What type of cost are each of these three costs? 

 

A. Cost A is fixed, Cost B is mixed, Cost C is variable.

B. Cost A is fixed, Cost B is variable, Cost C is mixed.
C. Cost A is variable, Cost B is mixed, Cost C is fixed.
D. Cost A is variable, Cost B is fixed, Cost C is mixed.
 
40. The linearity assumption is 
 

A. the assumption that the relationship between fixed costs and variable costs can be approximated by a
straight line.
B. necessary to the high-low method of analyzing mixed costs.
C. realistic in all costing situations.
D. the assumption that total cost depends on activity level.
 
41. A graph of the relationship between the total cost and the activity level is called a 
 

A. relevant range.
B. scattergraph.
C. contribution margin graph.
D. dependent variable.
 
42. A scattergraph is a graph with 
 

A. total cost plotted on the vertical axis and activity on the horizontal axis.
B. activity plotted on the vertical axis and contribution margin on the horizontal axis.
C. contribution margin plotted on the vertical axis and sales revenues on the horizontal axis.
D. the vertical axis measured in units and the horizontal axis measured in dollars.
 
43. The slope of the cost line on a scattergraph represents 
 

A. fixed cost per unit.

B. total fixed cost.
C. variable cost per unit.
D. sales price per unit.
 
44. The intercept of the cost line on a scattergraph represents 
 

A. fixed cost per unit.

B. total fixed cost.
C. variable cost per unit.
D. sales price per unit.
 
45. If a scattergraph contains points that do not fall in a perfect line, 
 

A. the relationship between the variables is not good enough to warrant fitting a line to the data.
B. this is an indication that there is no relationship whatsoever between the variables.
C. the visual fit method and high-low methods should not be used, but least-squares regression can be used.
D. a straight line can still be used to approximate the relationship if a general linear trend can be discerned.
 
46. The cost estimating approach that involves "eye-balling" the closest fitting line to the data is the 
 

A. scattergraph method.
B. high-low method.
C. visual fit method.
D. regression analysis.
 
47. The cost estimating approach that uses the two most extreme activity observations is the 
 

A. scattergraph method.
B. high-low method.
C. visual fit method.
D. regression analysis.
 
48. Georgia uses the high-low method of estimating costs. Georgia had total costs of $50,000 at its lowest level
of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 10,000 units,
total costs were $78,000. Georgia would estimate variable cost per unit as 
 

A. $14.00.
B. $9.10.
C. $5.60.
D. $10.54.
 
49. Elm uses the high-low method of estimating costs. Elm had total costs of $250,000 at its lowest level of
activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 10,000 units, total
costs were $390,000. Elm would estimate variable cost per unit as 
 

A. $70.00.
B. $45.50.
C. $28.00.
D. $52.71.
 
50. Cardinal uses the high-low method of estimating costs. Cardinal had total costs of $25,000 at its lowest
level of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 10,000
units, total costs were $39,000. Cardinal would estimate variable cost per unit as 
 

A. $7.00.
B. $4.55.
C. $2.80.
D. $5.26.
 
51. Sparrow, Inc. used the high-low method to estimate that its fixed costs are $105,000. At its low level of
activity, 50,000 units, average cost was $2.60 per unit. What would Sparrow predict as its variable cost per
unit? 
 

A. $0.50
B. $1.55
C. $2.10
D. $2.60
 
52. The high-low method is a cost estimating approach that uses _______________ to find the cost line. 
 

A. only two data points

B. all available data points
C. only four data points
D. personal intuition
 
53. Ajax uses the high-low method of estimating costs. Ajax had total costs of $50,000 at its lowest level of
activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 12,000 units, total
costs were $78,000. Ajax would estimate fixed costs as 
 

A. $28,000.
B. $30,000.
C. $64,000.
D. $128,000.
 
54. Meadow, which uses the high-low method, had total costs of $500,000 at its lowest level of activity when
5,000 units were sold. When, at its highest level of activity, sales equaled 12,000 units, total costs were
$780,000. Meadow would estimate fixed costs as 
 

A. $280,000.
B. $300,000.
C. $640,000.
D. $1,200,000.
 
55. Lark, which uses the high-low method, had total costs of $25,000 at its lowest level of activity when 5,000
units were sold. When, at its highest level of activity, sales equaled 12,000 units, total costs were $39,000.
Lark would estimate fixed costs as 
 

A. $14,000.
B. $15,000.
C. $32,000.
D. $60,000.
 
56. Holly, which uses the high-low method, had an average cost per unit of $10 at its lowest level of activity
when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when
sales equaled 20,000 units. Holly would estimate fixed costs as 
 

A. $70,000.
B. $16.50.
C. $8.25.
D. $100,000.
 
57. Palm, which uses the high-low method, had an average cost per unit of $50 at its lowest level of activity
when sales equaled 1,000 units and an average cost per unit of $32.50 at its highest level of activity when
sales equaled 2,000 units. Palm would estimate fixed costs as 
 

A. $30.00.
B. $82.50.
C. $17,500.
D. $35,000.
 
58. Cypress, which uses the high-low method, had an average cost per unit of $5 at its lowest level of activity
when sales equaled 10,000 units and an average cost per unit of $3.25 at its highest level of activity when
sales equaled 24,000 units. Cypress would estimate fixed costs as 
 

A. $30,000.
B. $6.25.
C. $1.75.
D. $50,000.
 
59. Carson, which uses the high-low method, reported total costs of $24 per unit at its lowest activity level,
when production equaled 10,000 units. When production doubled, at its highest activity level, the total cost
per unit dropped to $15. Carson would estimate variable cost per unit as 
 

A. $9.
B. $6.
C. negative $9.
D. negative $0.0009.
 
60. Carson, which uses the high-low method of estimating costs, reported total costs of $24 per unit when
production was at its lowest level, at 10,000 units. When production doubled to its highest level, the total
cost per unit dropped to $15. Carson would estimate its total fixed cost as 
 

A. $9.
B. $33.
C. $180,000.
D. $585,000.
 
61. Fremont, which uses the high-low method, reported total costs of $10 per unit at its lowest production
level, 5,000 units. When production tripled to its highest level, the total cost per unit dropped to $5.
Fremont would estimate its variable cost per unit as 
 

A. $2.50.
B. $5.00.
C. $15.00.
D. negative $0.0005.
 
62. Fremont, which uses the high-low method, reported total costs of $10 per unit at its lowest production
level, 5,000 units. When production tripled to its highest level, the total cost per unit dropped to $5.
Fremont would estimate its total fixed cost as 
 

A. $5.
B. $15.
C. $50,000.
D. $37,500.
 
63. McNeil uses the high-low method of estimating costs. McNeil had total costs of $50,000 at its lowest level
of activity, when 5,000 units were sold. When, at its highest level of activity, sales equaled 12,000 units,
total costs were $78,000. What would McNeil estimate its total cost to be if sales equaled 8,000 units? 
 

A. $32,000
B. $52,000
C. $62,000
D. $80,000
 
64. Winston, which uses the high-low method, had an average cost per unit of $10 at its lowest level of activity
when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when
sales equaled 20,000 units. What would Winston estimate its total cost to be if sales equaled 8,000 units? 
 

A. $24,000
B. $52,000
C. $70,000
D. $94,000
 
65. Citrus, Inc. used the high-low method to estimate that its fixed costs are $210,000. At its low level of
activity, 100,000 units, average cost was $2.60 per unit. What would Citrus predict its average cost per unit
to be when production is 200,000 units? 
 

A. $1.05
B. $1.55
C. $2.60
D. $5.20
 
66. A statistical method for finding the best-fitting cost equation to a set of data is the 
 

A. scattergraph method.
B. high-low method.
C. visual fit method.
D. least-squares regression method.
 
67. Regression analysis is a cost-estimating approach that uses _______________ to find the cost line. 
 

A. only two data points

B. all available data points
C. only four data points
D. personal intuition