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.