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## Practice Test

1. Which method should be used to detect nonlinearity and outliers?

a. method of least squares
b. regression analysis
c. high low method
d. scatterplot method

D. The scatterplot method puts all costs with the related activity on the chart and it is very easy to tell which points are not along the line. Those that are out and away from the line are outliers and non-linear. The other methods are calculations and do not show the relationships between points.

2. In the scatterplot method, the vertical axis represents

a. total activity
b. total costs
c. total variable costs
d. total mixed costs

B. The cost is shown on the vertical axis on the left.

3. In the scatterplot method, the horizontal axis represents

a. total activity
b. total costs
c. total variable costs
d. total mixed costs

A. The activity for the period is shown on the horizontal axis along the bottom

4. The company determined the fixed cost or the variable cost by looking at the scatterplot. Which type of cost was determined just by looking.

a. Total variable costs
b. Total fixed costs
c. Total variable cost per unit
d. None of the above

B. The total fixed cost is the point on the vertical line of costs where the line crosses. Total variable costs and variable costs per unit are calculated once the fixed cost is determined by looking at the scatterplot.

5. The slope in the line of a scatter graph is an indication of

a. fixed cost per unit
b. total fixed cost
c. variable cost per unit
d. total variable cost

C. A variable cost per unit increases as activity changes. This is what is occurring on the scatter graph, the activity is increasing and the cost is increasing also. This increase in cost is due to the variable cost per unit.

6. The scatter graph method is used to analyze

a. fixed costs
b. variable costs
c. mixed costs
d. discretionary costs

C. The scatter graph method is used to determine the fixed and variable portions of a mixed cost.

Technical Scatter graph Questions:  Ignore if your professor did not discuss this.  It is common that this level of detail is not discussed.

7. What does fixed costs refer to in the formula: Total Cost = Fixed Cost +
Variable Cost per activity x # activity?

a. dependent variable
b. independent variable
c. slope parameter
d. intercept parameter

D. The cost line intercepts on the vertical axis and is called the intercept parameter.

8. What does activity refer to in the formula: Total Cost = Fixed Cost + Variable Cost per activity x # activity?

a. dependent variable
b. independent variable
c. slope parameter
d. intercept parameter

B. The independent variable is the activity that is changing that is also changing total cost

9. What does total cost refer to in the formula: Total Cost = Fixed Cost + Variable Cost per activity x # activity?

a. dependent variable
b. independent variable
c. slope parameter
d. intercept parameter

A. Total cost is a result of the other factors, therefore it is a dependent variable

10. What does variable cost per unit refer to in the formula: Total Cost = Fixed
Cost + Variable Cost per activity x # activity?

a. dependent variable
b. independent variable
c. slope parameter
d. intercept parameter

C. The variable cost per unit is referred to as the slope parameter since it determines the slope of the line.

11. When the coefficient correlation is .40, what percentage of the change in costs is explained by changes in the activity?

a. 16%
b. 40%
c. 60%
d. 84%

A. Take the square of the correlation coefficient and you will get the percentage of the change that is caused by a change in activity.

12. A positive coefficient indicates that

a. cost and activity are not correlated at all
b. cost and activity move predictably in opposite directions
c. cost and activity move predictably in the same direction
d. the slope is downward

C. A positive coefficient means that as activity increases, total cost also increases.

High Low Method:

1. The high low method has all except which one of the following weaknesses?

a. the high and low activity may not be a representative sample
b. this method does not show if an activity is non-linear
c. only two levels of activity are required
d. it is difficult to apply

D. The method is very simple to apply. All other answers are related to the fact that the cost behavior that is calculated may hold for the two points used and not for many other points.

2. The high low method has all except which one of the following advantages?

a. only two levels of activity are required
b. it is very easy to apply
c. anyone using the method will arrive at the same conclusion quickly
d. all data points will give the same cost behavior

D. Only the high activity and the low activity will give the same cost behavior. It is very easy to apply and using the formula will give the same answer to all who apply the method.

3. When using the high low method, the total high low dollars is

a. the highest dollar cost and the lowest dollar cost
b. the highest variable cost and the lowest variable cost
c. the highest fixed cost and the lowest fixed cost
d. the cost that is in the same period as the high and low activity

D. You must match the high low activity with the cost that is in the same period. Do not just pick the highest dollar and the lowest dollar.

4. The high low formula directly calculates

a. total fixed costs
b. total variable costs
c. variable cost per activity
d. fixed cost per unit

C. The high low formula directly calculates the variable cost per activity. This variable cost per activity is then used to compute the total fixed costs. The fixed cost per unit and total variable costs is different for different levels of activity.

5. The high low method is used to

a. determine total costs
b. determine fixed costs per unit at one level of activity
c. determine the total mixed cost
d. determine the separate fixed and variable parts of the mixed cost

D. The method is used to determine the fixed and variable portions of a mixed cost. Total costs and total mixed costs are the same and are known amounts. Fixed costs per unit is not relevant because this is constantly changing for different levels of activity.

6. Why would a company need to use the high low method?

a. to determine total costs at a given level of activity
b. to determine fixed cost per unit at many levels of activity
c. to determine which costs are mixed and which are fixed
d. to determine variable costs in total to use at different levels of activity

A. The high low method separates the fixed part and variable part of a particular costs. As volume changes the fixed cost will remain the same and the total variable cost will change proportionately with the change in activity. The high low method tells you how much the variable portion will change for each change in activity which will allow you to estimate total costs for different levels of activity. The other answers do not make any sense due to the way fixed, mixed and variable costs react to changes in activity.

General Questions related to mixed costs:

1. Cost behavior can be described in terms of how the cost changes with

respect to
a. a period of time
b. a related sales price
c. income of the company
d. a level of activity

D. Costs behavior is related to how a cost changes with changes in the level of activity.

2. Total fixed costs are the same as total costs when

a. the company has a high level of fixed costs
b. the company has a high level of activity
c. the activity is 0
d. fixed costs are not in the relevant range

C. Use the formula Total cost = Total fixed cost + (VC\$ per unit x activity). When the activity is 0, then the total variable cost portion will be 0 also and fixed costs will equal total costs. The amount of fixed costs is not relevant to answering this question. (a. & d.) A higher level of activity will make total costs = to total fixed costs unless the variable cost is 0.

3. Mixed costs consist of

a. relevant costs and variable costs
b. relevant costs and fixed costs
c. variable costs and fixed costs
d. variable costs and semi-variable costs

C. By definition, a mixed cost is a mixture of variable costs and fixed costs. When analyzing cost behavior all fixed and variable costs are relevant. Variable costs and semi-variable costs are two names for the same cost.

4. In the total cost formula: y = a + bX, the “a” represents

a. total variable
b. total fixed costs
c. variable cost per unit
d. fixed cost per unit

B. Total costs = total fixed costs + (variable cost per activity x activity). The “a” is in the total fixed cost position

5. In the total cost formula: y = a + bX, the “X” represents

a. total variable
b. total fixed costs
c. variable cost per unit
d. total activity

D. Total costs = total fixed costs + (variable cost per activity x activity). The “X” is in the total activity

6. Which of the following is an example of a mixed cost:

a. straight line depreciation expense
b. total payment to salespersons which includes salary plus commission
c. utilities at a fixed monthly rate per kilowatt
d. the accountant’s salary

B. The salary is a fixed cost and the commission is a variable cost, together they are a mixed cost. Depreciation and salary are fixed costs, and anything at a rate per will be a variable cost.

Problems

1. A manufacturing company has determined their cost behavior for the following as:

Manufacturing Cost 1 \$40,000 annually
Manufacturing Cost 2 \$1.55 per labor hour plus \$15,000 annually
Manufacturing Cost 3 \$ 4.75 per machine hour

During the year the company incurred 22,000 labor hours and 12,000 machine hours. Calculate the total manufacturing costs the company expects to incur.

State the cost formula for the company.

1st Identify the fixed cost portion as \$40,000 + \$15,000 = \$55,000

2nd Take the cost per activity x the activity to get total variable cost:

\$1.55 per labor hour x 22,000 labor hours =                   \$34,100
\$4.75 per machine hour x 12,000 machine hours =       \$57,000
Total Variable Costs                                                             \$91,100

Total expected costs = \$55,000 + \$91,100 = \$146,100

The cost formula for the company is:

\$55,000 + (\$1.55 x labor hours) + (\$4.75 x machine hours)

2. The company operates a restaurant and incurred the following costs for the first half of the year:

 Total Costs Customers Served January \$32,000 1,289 February \$28,674 1,106 March \$36,065 1,467 April \$35,092 1,397 May \$35,022 1,422 June \$35,175 1,332

Using the high low method, determine the fixed and variable parts of the mixed costs. Write the cost formula for the company. Determine what it would cost the
company to serve 1,500 customers.

1st – Put the highest and the lowest activity amount on the bottom.

2nd – Put the dollar amount from the same period as the high and low activity on the top as the high and low dollar. Do not just take the highest and lowest
dollar amount.

\$36,065 – \$28,674 = \$7,391 = \$20.47 per customer
1,467 – 1,106      361

Per customer is the variable cost

Total cost = Fixed cost + (\$20.47 x # customers served)

Pick the high or low dollar and activity, do not mix a high and a low.

\$36,065 =    ?    + \$20.47 x 1,467= \$30,029

Fixed cost = \$6,036 per month

Cost Formula is \$6,036 + (\$20.47 x number of customers)

Using the cost formula, 1,500 customers should cost:

\$6,036 + (\$20.47 x 1,500 = \$30,705) = \$36,741

Notice that this is less than what it actually cost to serve 1,422 customers in May. The high low formula is just an estimate and the cost formula will not give the exact outcome due to various factors such as what the customer orders.

If you are learning how to use a scatter graph, plot the months on a scatter graph use the formulas and see if you come close to the above fixed cost and variable cost per customer.  You should be close but not exactly the same.

3. The company has an average unit cost of \$15 when it produces 15,000 and an average unit cost of \$15.75 when it produces 14,000 units. Calculate the fixed and variable components of the company’s cost. Write the company’s cost formula and determine the expected cost to produce 18,000 units.

1st – Compute the total cost for each volume level by multiplying the cost per unit times the number of units during that period.

Units              Total Cost
15,000           \$225,000
14,000           \$220,500

2nd – You only have two points of reference so take the high less the low and work the high low formula

\$225,000 – \$220,500 = \$4,500   =   \$4.50 per unit
15,000 – 14,000          1,000

3rd – Use the formula to determine total fixed costs

\$225,000 = \$ ? + (\$4.50 x 15,000 = \$67,500)
Total Fixed Costs = \$157,500

Company’s cost formula is: \$157,500 + (\$4.50 x # units produced)

For 18,000 units: \$157,500 + (\$4.50 x 18,000 = 81,000) = 238,500

4. The retail company incurred the following utility costs for the amount of
hours they were open during the period.

 January 300 \$695 February 600 \$920 March 400 \$680

The company varied their hours of operation during the month to determine what would be the most profitable.  Determine the fixed and variable part of the total costs and determine the cost formula.