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## Easy to Medium Practice Test

1. As volume decreases, total fixed costs

a. are constant and cost per unit decreases
b. are constant and cost per unit increases
c. increase
d. decrease

B. Fixed costs do not change as volume changes. (c. & d.). The cost per unit changes the opposite as volume changes. As volume decreases, cost per unit increases. This is because cost per unit is calculated: Total fixed costs divided by volume = fixed cost per unit.

2. Fixed costs that management can decide not to incur at any time are

a. always variable costs
b. unavoidable costs
d. discretionary costs

D. Discretionary costs by definition are costs that management does not have to incur. They are therefore not unavoidable and can be either fixed or variable. Value-added costs normally enhance the product and this would not be something that management would normally not incur.

3. Which of the following is the least likely to be a fixed cost?

a. Utilities
b. Executive management salaries
d. Copier maintenance

A. The cost of utilities is usually determine by the amount used and is normally mixed or variable. All salaries are fixed annually. Advertising is generally spent based on a predetermined amount which does not change because volume changes, making it a fixed cost. Copier maintenance is normally paid for in equal amounts monthly based on an agreement, which is fixed.

4. When a cost changes in total in direct proportion to changes in volume it is

a. a semi-variable cost
b. a mixed cost
c. a variable cost
d. a fixed cost

C. A variable cost must be incurred every time you make or sell a product. Therefore, as you make one more you have to incur costs for one more, which is in direct proportion. Fixed costs do not change with changes in volume, so a fixed cost and any cost that has fixed cost in it (a. b.) are not correct.

5. Cost behavior analysis is related to

a. how costs change as new products are introduced
b. how costs change as output changes
c. how costs change over time, trending up or down
d. all of the above

B. Costs are classified based on how the cost changes as volume changes, volume means the same as output. The term has nothing to do with a. or c., therefore d. can not be correct.

6. A mixed cost consists of

a. both fixed and variable
b. either fixed or variable
c. product and period
d. direct and indirect

A. A mixed cost by definition consists of both fixed and variable characteristics. It must be both, if it is either it is just called a fixed cost or a variable cost. Product and period is not correct as these are two very different types of costs related to if the cost is inventory or expensed in the period incurred. Direct and indirect is not correct as these are two very different types of costs which are related to whether or not a cost has to be allocated to a product.

7. A committed fixed cost

a. must always be paid and can never be eliminated
b. can be eliminated in the short term but not in the long term
c. can be eliminated in the long term but not in the short term
d. can be easily eliminated

C. A committed fixed costs can be eliminated with a change in management strategy or goals, which happens over the long term.

8. Which of the following states how a variable cost behaves as volume changes?

a. remains constant in total and remains constant per unit
b. remains constant in total and changes per unit
c. changes in total and remains constant per unit
d. changes in total and changes per unit

C. By definition, a variable cost remains constant per unit and changes in total as volume changes. The formula for determining total variable cost is cost per unit x volume = total variable cost As volume changes, total variable cost changes and the cost per unit does not change. (b.) is how a fixed cost behaves.

9. Within the relevant range

a. total variable costs decrease as production increases
b. fixed costs per unit decreases as production decreases
c. total fixed costs remain the same when production increases or decreases
d. total variable costs remain the same when production increases or decreases

C. Total fixed costs remain the same within a relevant range of production. Production can increase or decrease within this range and the fixed costs will not change. Total variable costs increase as production increases and always move the same together in the same direction (a.) Fixed costs per unit will always move the opposite direction as production changes (b.), not the same direction. Total variable costs change in the same direction as production changes and does not remain the same; “the more you make the more it costs”.

10. As volume changes, which of these costs could be considered a mixed cost?

a. sales commission expense
b. assembly line labor
c. salaries of the accountant
d. utilities at the manufacturing plant

D. Utilities are paid for based on usage. If there is a base part paid first and then you pay for what you use, it is a mixed cost. A mixed cost has a fixed and variable part to it. Assembly line labor is a variable cost only, as it is incurred as based on how many products are made and changes with volume changes. Salaries of anyone is a fixed cost, which does not change as production/sales volumes change. Sales commission expense is a variable cost, since more is paid to the salesperson for selling more.

11. The following are costs that were incurred by Nike, Inc. Determine which
costs are fixed (F) and which are variable (V).

1. rubber for the sole of the shoe, \$6 per shoe
2. rent on the manufacturing facility building, \$188,000 annually
3. sales manager salary, \$127,000 annually
4. worker who operates the machine that puts the shoe together, \$2 per shoe
5. shoe laces, \$1.80 per shoe
6. worker who puts the shoes in the shoe box, \$0.20 per shoe
7. insurance on the manufacturing facility, \$23,000 annually
8. water and utilities, \$22,000 per month consistently
9. depreciation on manufacturing equipment, \$18,000 each month
11. sales commission paid to salespeople based on 5% of sales
12. office supplies, usually approximately \$3,000 per month
13. paper for the copier in the executive offices, usually about \$1,200 per month
14. glue used in the shoe, approximately \$0.18 per shoe
15. company jet lease, \$14,000 per month

V 1. rubber for the sole of the shoe, \$6 per shoe
F 2. rent on the manufacturing facility building, \$188,000 annually
F 3. sales manager salary, \$127,000 annually
V 4. worker who operates the machine that puts the shoe together, \$2 per shoe
V 5. shoe laces, \$1.80 per shoe
V 6. worker who puts the shoes in the shoe box, \$0.20 per shoe
F 7. insurance on the manufacturing facility, \$23,000 annually
F 8. water and utilities, \$22,000 per month consistently
F 9. depreciation on manufacturing equipment, \$18,000 each month
V 11. sales commission paid to salespeople based on 5% of sales
F 12. office supplies, usually approximately \$3,000 per month
F 13. paper for the copier in the executive offices, usually about \$1,200 per month
V 14. glue used in the shoe, approximately \$0.18 per shoe
F 15. company jet lease, \$14,000 per month

Important to notice:

All costs that are annually or monthly are fixed. They do not change because production or sales is more or less.

All costs that are “per shoe” are variable. Each time another shoe is produced, this much additional cost must be incurred.

The sales commission varies with sales dollars. As sales increase the total cost will increase. For variable costs, total costs change with changes in sales or production.

12. Using the same information that is given in problem 11, calculate the cost of producing one shoe when production is 100,000 shoes and 200,000 shoes. (Assume this list is all the costs incurred to produce and sell the shoes, even though it is not all the costs a company like Nike would incur.)

1. rubber for the sole of the shoe, \$6 per shoe
2. rent on the manufacturing facility building, \$188,000 annually
3. sales manager salary, \$127,000 annually
4. worker who operate the machine that puts the shoe together, \$2 per shoe
5. shoe laces, \$1.80 per shoe
6. worker who puts the shoes in the shoe box, \$0.20 per shoe
7. insurance on the manufacturing facility, \$23,000 annually
8. water and utilities, \$22,000 per month consistently
9. depreciation on manufacturing equipment, \$18,000 each month
11. sales commission paid to salespeople, 5% of sales, currently \$2.50 per pair
12. office supplies, usually run approximately \$3,000 per month
13. paper for the copier in the executive offices, usually about \$1,200 per month
14. glue used in the shoe, approximately \$0.18 per shoe
15. company jet lease, \$14,000 per month

V 1. rubber for the sole of the shoe, \$6 per shoe
F 2. rent on the manufacturing facility building, \$188,000 annually
F 3. sales manager salary, \$127,000 annually
V 4. worker who operate the machine that puts the shoe together, \$2 per shoe
V 5. shoe laces, \$1.80 per shoe
V 6. worker who puts the shoes in the shoe box, \$0.20 per shoe
F 7. insurance on the manufacturing facility, \$23,000 annually
F 8. water and utilities, \$22,000 per month consistently
F 9. depreciation on manufacturing equipment, \$18,000 each month
V 11. sales commission paid to salespeople, 5% of sales, currently \$2.50 per pair
F 12. office supplies, usually run approximately \$3,000 per month
F 13. paper for the copier in the executive offices, usually about \$1,200 per month
V 14. glue used in the shoe, approximately \$0.18 per shoe
F 15. company jet lease, \$14,000 per month

 Per Shoe Annual Cost \$6.00 \$2.00 \$1.80 \$0.20 \$2.50 \$0.18 \$12.68 per unit \$188,000 \$127,000 \$23,000 \$264,000 (\$22,000 x 12 mo.) \$216,000 \$1,800,000 \$36,000 (\$3,000 x 12 mo.) \$14,400 (\$1,200 x 12 mo.) \$168,000 (\$14,000 x 12 mo.) \$2,836,400 Fixed

Total cost for 100,000 shoes = \$2,836,400 + (100,000 x \$12.68) = \$4,104,400
fixed variable

Total cost for 200,000 shoes = \$2,836,400 + (200,000 x \$12.68) = \$5,372,400
fixed variable

The cost per shoe at 100,000 shoes is \$41.044
The cost per shoe at 200,000 shoes is \$26.862

Important to Notice:

The total fixed cost remains the same for both volume levels because fixed cost do not change as volume changes.

The cost per unit changes as the volume changes. As volume goes up the cost per unit in total goes down. The fixed cost is less per unit when
you get more units for the same amount of fixed cost.

The variable cost per shoe does not change when the volume changes, however, the total variable costs do change in direct proportion.

13. Green Thumb, Inc. incurred the following cost in the business of maintaining
lawns. In May, 2,000 lawns were cut. In June, 3,000 lawns were cut.
All lawns cut are similar in size.

 2,000 3,000 Gasoline for the lawnmowers \$8,200 \$12,300 Salary to the owner \$5,000 \$5,000 Wages paid to lawn cutters \$24,000 \$36,000 Costs paid for fertilizer \$3,000 \$4,500 Depreciation on lawn equipment \$800 \$800 General business insurance \$70 \$70 Advertising in the daily paper \$160 \$160 Gasoline for 7 trucks used \$30,800 \$41,300 Maintenance on lawn equipment \$780 \$900 Cell phone bill \$99 \$99 Twine for the weed-eaters \$120 \$180

Using the cost information above, determine if each type of cost is a fixed cost,
a variable cost, or a mixed cost.