Cost Behavior - Fixed and Variable
Hard Practice Test
Introduction to Accounting
Hard Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. As volume increases, the total cost of a mixed cost
a. increases by the same percentage as volume increases
b. increases
c. decreases
d. decreases by the same percentage as the volume increases
Answer
B. A mixed cost has a fixed part that does not change as the volume changes and a variable part that changes at the same rate as the volume changes. Since both do not change proportionately, a., is incorrect. Any cost that is all or part variable will change the same direction as volume changes, therefore, a decrease in cost is not correct when volume increases.
2. Discretionary costs are
a. almost always committed
b. never fixed
c. are usually the first costs reduced in a cost reduction program
d. are unavoidable
Answer
C. Discretionary costs are costs that management does not have to spend and can decide to not incur the costs. Committed is the opposite of discretionary. Discretionary costs can be variable or fixed and this is not what determines if the cost is discretionary. Discretionary costs are avoidable if management decides not to spend the money.
3. The most significant variable cost in a manufacturing company is most often
a. straight-line depreciation on equipment
b. direct materials that go into the product
c. utilities
d. cost of operating the warehouse to store materials
Answer
B. Direct materials is a variable cost that is required for all products manufactured. Depreciation and warehouse costs are fixed costs. Utilities is a variable cost, however, it is not as costly as direct materials that go into the product.
4. Management can do very little to reduce these types of costs over the period of the next six months
period of the next six months
a. flexible costs
b. discretionary costs
c. committed costs
d. product costs
Answer
C. Committed costs by definition can not be changed in the short term without a major change in goals or strategy. Flexible costs is not a type of cost. Discretionary costs can be avoided and not incurred at any time. Product costs go into making the product and are not something you can decide not to spend and still make the product.
5. Which of the following is classified as a committed, sunk, fixed expense?
a. investment in manufacturing equipment
b. advertising
c. additional maintenance on equipment
d. employee benefit programs
Answer
A. The investment in equipment is a cost that is sunk because it has already been made and you can’t get your money back, it is committed and fixed because you will incur the depreciation expense at a set amount as you use the equipment. Management can decide not to spend all of the other choices listed above.
6. The term relevant range means the range that
a. will cause costs to fluctuate
b. cost relationships identified are valid
c. relevant costs are incurred
d. production volumes may not vary and will remain constant
Answer
B. The relevant range is the range where fixed cost will not change due to changes in volume within the relevant range. The term cost relationship means it is either a fixed, mixed, or variable cost. Relevant range is used to determine the range of volume where a cost will be fixed within these volumes, therefore, the costs won’t fluctuate (a.) Production volumes will almost always vary (d.) and all costs used to make a decision are relevant which is not directly related to the term relevant range.
7. Which of the following is least likely to be classified as a variable cost?
a. depreciation on a machine based on how much is produced
b. supervisors on the production line
c. utilities at the manufacturing plant
d. costs to delivery the product to the customer
Answer
B. Supervisors on the production line are fixed costs, or could be considered a semi-variable cost. It is not a variable cost, because you do not add supervisor costs each time you produce one more unit. The other choices above will change in direct proportion to the volume produced or sold and are therefore by definition a variable cost.
8. Which of the following is considered a variable cost?
a. insurance for employee automobiles
b. feed for cattle at a feed lot
c. cleaning supplies
d. costs that are incurred once a year
Answer
B. The definition of a variable cost is a cost that changes with changes in volume or activity. The key is that it must change as volume changes. At a cattle feed lot, the product is the cattle, therefore, the more product you have the more feed you must purchase. This cost changes with changes in production volume. Insurance for employee automobiles may change with the number of autos, but not directly with changes in volume of production or sales. Cleaning supplies costs are normally incurred based on the size of the area being cleaned, not based on volume changes. Costs that are incurred once a year are normally fixed costs.
9. A fixed cost
a. is set at the beginning of the year and will not change
b. is fixed for one level of production volumes
c. will not change directly in proportion to production volume
d. behaves very similar to costs incurred for material
Answer
C. By definition, a fixed cost will not change as volume changes within a set relevant range. The term “fixed” does not mean that it will not ever change. (a.) Fixed costs are fixed within a range and not for one level of production. (b.) Material is a variable cost (d.)
10. Which of these costs would be the most difficult to estimate when
you know exactly how many units will be produced?
a. rent
b. materials used in the product
c. utilities
d. insurance
Answer
C. Fixed costs are easy to estimate when you know the volume of units to be produced because it is easy to determine what is needed to support this volume of production. Fixed costs are a. and d. Variable costs are easy to estimate because you simply take the cost per unit x the known volume to get total cost. Utilities is the most difficult to estimate because it is most likely mixed and will not stay the same or be incurred directly with the volume.
11. Hansen Natural manufactures and sells energy drinks. The drinks are sold for $1.50 a bottle to the distributor. The company estimates costs will be as follows when producing at a volume level of 100,000 units per month and sales of 90,000 per month:
| Ingredients used to make the drink | $36,000 | |
| Bottles | $8,000 | |
| Labor working to manufacture the drink | $22,000 | |
| Rent for the manufacturing plant | $7,500 | |
| Utilities at the manufacturing plant – (variable) | $2,000 | |
| Management salaries | $18,000 | |
| Other administrative expenses, each month | $29,000 | |
| Costs to ship the product to customers | $3,600 | |
| Supervisors at the manufacturing plant | $6,000 | |
| Sales commission expense | $900 | |
| General business insurance | $600 | |
| Advertising expense, paid monthly | $900 |
Determine the total cost to produce and sell 120,000 bottles of drink.
Answer
| Variable Costs | Per Unit Cost |
| Ingredients | $0.36 |
| Bottles | $0.08 |
| Labor Working | $0.22 |
| Costs to ship | $0.04 |
| Utilities | $0.02 |
| Sales Commission | $0.01 |
| Total variable cost per unit | $0.73 each |
Selling cost per unit is calculated as total costs / units sold
Production cost per unit is calculated as total costs / units produced
| Fixed Costs Per Month | |
| Rent for the manufacturing plant | $7,500 |
| Management salaries | $18,000 |
| Other administrative expenses, each month | $29,000 |
| Supervisors – manufacturing | $6,000 |
| General business insurance | $600 |
| Advertising expense, paid monthly | $900 |
| Total monthly fixed costs | $62,000 |
Total cost to produce
and sell 120,000 bottles of drink is:
$62,000 + ($0.73 x 120,000) is $87,600 = $149,600
fixed variable
Total fixed cost remains the same at a different volume level
Total variable cost increases as volume increases and the variable
cost per unit does notchange.
12. Morning Co. manufactures toasters. During the first year, the company sold 500,000 toasters and reported the following operating results:
| Sales | $7,000,000 | |
| Cost of Goods Sold |
$4,000,000 | |
| Gross Profit | $3,000,000 | |
| Operating Expenses | $2,000,000 | |
| Income | $1,000,000 |
Cost of goods sold are 40% variable and 60% fixed.
Operating expenses are 90% fixed and 10% variable.
For next year, the company expects to sell 600,000 toasters. What is the
expected income for next year given the price per unit and costs do not change?
Answer
To answer this question, you must first determine the variable and fixed amount for cost of goods sold and operating expenses. Then you
must calculate the cost per unit for variable costs only, which will stay the same. Fixed costs will be the same for next year.
| Cost of Goods Sold | Operating Expenses | |
| Fixed | $2,400,000 | $1,800,000 Fixed |
| Variable | $1,600,000 | $200,000 Variable |
| Variable cost | $3.20 Per Unit | $0.40 Variable per unit |
Divide the total variable cost by 500,000 units to get cost per unit
Expected for sales of 600,000 toasters
| Sales ($14 per unit) | $8,400,000 |
| -Cost of Goods Sold ($3.20 per unit) | $1,920,000 |
| -Cost of Goods Sold Fixed | $2,400,000 |
| Gross Profit | $4,080,000 |
| Operating Expenses ($0.40 per unit) | $240,000 |
| Operating Expenses – Fixed | $1,800,000 |
| Income Before Tax | $2,040,000 |
13. A company that manufactures flashlights incurs the following costs to produce 60,000 and sell 50,000 flashlights.
| Direct Labor to make the flashlights | $4 per unit |
| Direct Materials that go into the flashlights | $6 per unit |
| Manufacturing costs that are the same per unit | $1 per unit |
| Manufacturing costs that will not change as production volume changes | $234,000 |
| Selling costs that vary by units sold | $0.50 per unit |
| Selling costs that will not change as sales change | $127,000 |
| Administrative costs | $275,000 |
What price must the company sell the product at to earn 20% profit above
total costs on sales volumes of 40,000 and 50,000 flashlights?
Answer
| 40,000 | 50,000 | |
| Variable costs = units x cost per unit | ||
| Direct Labor | $160,000 | $200,000 |
| Direct Materials | $240,000 | $300,000 |
| Variable Manufacturing | $40,000 | $50,000 |
| Variable Selling | $20,000 | $25,000 |
| Fixed Costs Remain same | ||
| Manufacturing | $234,000 | $234,000 |
| Selling | $127,000 | $127,000 |
| Administrative | $275,000 | $275,000 |
| Total Cost | $1,096,000 | $1,211,000 |
| / units | 40,000 | 50,000 |
| Total Cost per unit | $27.40 | $24.22 |
| multiply cost by 1.20 | ||
| price to earn 20% | $32.88 | $29.06 |
Important to Notice:
When working with variable costs you must always get a cost per unit
To get the total variable costs, multiply the variable cost per unit
by the volume. Total variable costs will change with volume changes.
Fixed costs do not change as volume changes.