Cost Behavior - Fixed and Variable
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. A variable cost per unit
a. is different or different levels of activity
b. remains constant
c. increases as activity increases
d. decreases as the activity increases
B. By definition, a variable cost per unit remains constant. The total variable costs will change with changes in activity, but the cost per unit will not change (a. , c. & d.)
2. A discretionary fixed cost
a. is always budgeted over a 5 year time period
b. must be spent no matter what happens in the company
c. can be delayed with management’s decision
d. is always related to facilities
C. By definition, a discretionary fixed cost is one that is spent if management decides to incur the cost. Therefore, they can also not incur the cost if they want. Discretionary costs can be any type of period cost. (d.) The budget period is not relevant to whether it is discretionary or not (a.).
3. A fixed cost
a. is different in total for different levels of activity
b. remains constant in total
c. increases as activity increases
d. decreases as the activity decreases
B. By definition, a fixed cost does not change in total (a.). The fixed cost per unit will increase as activity decreases and decrease as activity increases. The cost per unit moves the opposite way as the change in activity. (c. & d.)
4. A mixed cost
a. is the same for all levels of activity
b. increases in total as activity decreases after a certain point
c. has characteristics of a fixed and variable cost
d. both b. and c.
C. By definition, a mixed cost has both fixed and variable characteristics. It would increase in total after activity increases to a certain point and not decrease. (b.) It will increase as activity increases and is not the same for all levels of activity because of the variable part (a.).
5. A relevant range is
a. the length of time the company plans its costs to remain the same
b. the level of activity that current fixed costs can support without increasing
c. the high and low range of variable costs
d. the difference in a fixed and variable cost
B. A relevant range is “the range of activity where the assumption about cost behavior is valid”. This also means that fixed costs won’t change within this range of activity. It is not related to a certain time frame, it is related to a stated range of activity, normally units produced. (a.) The relevant range is not associated with variable costs because variable costs are a certain cost per unit no matter what the range of production is. (c. & d.)
6. An opportunity cost
a. means the company had only one alternative
b. is the total amount of a net loss from operations
c. is what is given up by a choice to pursue other alternatives
d. is what your future job will pay you
C. By definition, an opportunity cost is what you do not get because you pursue another alternative. It is related to a current situation, not future (d.) There is more than one alternative or you would not be able to make a choice. (a)
7. A sunk cost
a. can be refunded upon request in the future
b. can not be recovered no matter what happens in the future
c. is what will be spent in the future for salaries for personnel added
d. is always a variable cost
B. By definition, a sunk cost is already paid for and can not be changed by a decision made or action taken in the future. It is normally a fixed cost (d.) Both a. and c. are related to future cash flows and are not sunk costs for this reason.
8. A committed cost is
a. a cost that does not have to be spent this year to meet company goals
b. a cost that can be changed if the number of units sold changes by 5%
c. a cost that is not in the budget
d. a cost that can’t be reduced without changing the goals of the company
D. By definition a committed cost can’t be reduced without a significant change in the company’s goals and strategy. A committed cost would be in the budget because it is a cost that must occur. (c.) A change in the number of units sold by 5% is not considered a change in the company’s goals
9. A semi-variable cost behaves the same way as
a. a mixed cost
b. a monthly fixed cost
c. an annual fixed cost
d. a variable cost
A. Another name for a semi-variable cost is a mixed cost. They behave in the same way. A mixed cost is both a variable and a fixed, so either one by itself is not correct. The timeframe associated with the cost is not relevant to how the cost behaves. (b. & c.)
Do you understand how to apply the terms and definitions?
1. When the level of activity increases within a relevant range
a. fixed cost per unit will decrease
b. fixed cost in total will increase
c. variable costs in total will decrease
d. variable cost per unit and in total will decrease
A. Fixed cost per unit moves the opposite direction that the level of activity moves. When activity increases, the cost per unit decreases. Fixed costs in total do not change. (b.) Variable costs do not change per unit with changes in activity (d.) and move the same direction as the activity (c.).
2. An example of a committed fixed cost would be
a. property taxes on the manufacturing building
b. dollars spent for advertising based on sales volumes
c. management training programs
d. the company Christmas party
A. Property taxes are a cost that must be paid and are set by the government for the year making them fixed since the total will not change with changes in activity. Management training programs and the Christmas party are discretionary costs, since management does not have to spend for this if they don’t want to. (c. & d.) Advertising based on sales volumes is a variable cost since it changes with changes in sales, the activity. (b.)
3. The company has a mixed cost that has a total cost formula of
$8,000 + $2.00 X. When activity is 2,000, the total cost is expected to be:
b. $ 6,950
d. $ 9,900
C. Using the total cost formula you would take the fixed cost of $8,000 and add to it the variable cost of $2 x 2,000, giving you $12,000.
4. Costs that the company would classify as fixed would be
a. utilities at the manufacturing plant
b. insurance and rent
c. a & b.
d. none of the above
B. Insurance and rent are normally paid for a set period of time at a set cost. The cost is for the facility and it will not increase or decrease with changes in production or sales. Utilities is a variable or mixed cost, as the cost will vary with the number of units produced which drives usage. (a. & c.)
5. Which of these costs is least likely to be a discretionary cost?
a. management bonus
b. additional building maintenance
d. salaries of extra maintenance workers
C. A discretionary cost is one that management can decide not to pay. Insurance is not an option. The company’s assets must be properly protected. The company can decide not to pay a management bonus and extra maintenance costs, so these costs are discretionary.
6. A cost will be variable if it changes in total
a. as the cost per unit changes with the number of units sold
b. as cost per unit changes with the number of units manufactured
c. at differing levels of activity
d. both a. and b.
C. By definition, variable costs change in total as volume changes and the cost per unit does not change as volume changes. Since the cost per unit does not change a., b., and d. are not correct
7. Fixed costs that can’t be reduced over a short period of time are
b. not necessary
d. non committed
C. By definition, a committed cost can not be changed over a short period of time. Management can decide not to incur all of the other choices listed.
8. As volume increases
a. total fixed costs change and variable costs stay the same
b. total fixed costs stay the same and variable cost per unit changes
c. total fixed costs change and variable cost per unit does not change
d. total fixed costs stay the same and variable cost per unit does not change
D. As volume increases, total fixed costs stay the same and variable costs per unit does not change, while total variable costs do change. This is the most important thing you must understand. All other answers are not how costs behave.
Know this: As volume changes:
1) total fixed cost do not change
2) total variable costs do change
3) variable cost per unit does not change