Mastery of Management Services

Costs Concepts and Behavior

Multiple Choices:
1. Knowing how costs change as output changes is essential to
a. planning and controlling.
b. controlling and decision making.
c. planning, controlling and decision making.
d. none of these are correct

2. A fixed cost within the relevant range

a. increases in total as output decreases.
b. does not change in total as output changes.
c. decreases in total as output increases.
d. all of these are correct

3. Which of the following would be an example of a fixed cost?

a. wages for an assembly line worker
b. electric bill
c. depreciation on equipment
d. materials used

4. A factor that causes or leads to a change in a cost or activity is a(n)

a. cost formula.
b. step cost.
c. mixed cost.
d. driver.

5. Which of the following would probably be a fixed cost in a fast-food restaurant?

a. cost of hamburger
b. cost of french fries
c. shift manager's salary
d. utility cost

6. Per-unit fixed costs

a. can be misleading and lead to poor decisions.
b. stay the same as output changes.
c. decrease as output decreases.
d. increase as output increases.

7. Which of the following would probably be a discretionary fixed cost for a law firm?
a. salary of receptionist
b. Advertising
c. depreciation on furniture and equipment
d. cost of legal forms

Figure 1:
Jazz Company incurred the following costs for the months of January and February.

Type of Cost January February

Insurance P 5,000 P 5,000
Utilities 4,000 5,000
Depreciation 3,500 3,500
Materials 10,000 20,000

8. Refer to Figure 1. From the information above we can assume that

a. insurance and depreciation are fixed costs.
b. output decreased from January to February.
c. output stayed the same from January to February.
d. insurance is a mixed cost.

9. Refer to Figure 1. Assume that output was 5,000 units in January and 10,000 units in February,
utility cost is a mixed cost, and the fixed cost of utilities was P3,000. What was the variable rate per
unit of output for utilities cost?
a. P.60
b. P.40
c. P.20
d. P.30

Variable cost = P4,000 - P3,000

Variable rate: P1,000/5,000 = P.20

10. Refer to Figure 1. If output was 5,000 units in January and 10,000 units in February we can
assume that
a. utilities and materials are variable costs.

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Mastery of Management Services
Costs Concepts and Behavior

b. utilities, insurance, and depreciation are fixed costs.

c. insurance and depreciation are mixed costs.
d. materials is the only variable cost.

11. The range of output over which the assumed cost relationship is valid for normal operations of a
firm is called the
a. mixed range.
b. relevant range.
c. linear range.
d. dependent range.

12. Cost behavior analysis focuses on

a. how costs react to increases in activity levels only.
b. how costs will change in the future.
c. how costs react to changes in activity level.
d. none of these are correct

13. Fixed cost per unit is P9 when 20,000 units are produced and P6 when 30,000 units are produced.
What is the total fixed cost when nothing is produced?
a. P180,000
b. P360,000
c. P150,000
d. P240,000

14. If production volume increases from 8,000 to 10,000 units,

a. total costs will increase by 20%.
b. total costs will increase by 25%.
c. total variable costs will increase by 25%.
d. mixed and variable costs will increase by 25%.

15. When the volume of activity increases within the relevant range, the fixed cost per unit
a. decreases.
b. increases at first, then decreases.
c. remains the same.
d. increase.

16. When a mixed cost is graphed the slope of the line equals
a. the variable cost per unit of the activity driver.
b. the total variable cost.
c. the sales price per unit.
d. the total fixed cost.

17. The high-low method

a. is the most accurate methods.
b. is not affected by the presence of outliers.
c. has the advantage of objectivity.
d. has the advantage of subjectivity.

18. The method of least squares

a. uses the results of regression analysis to construct a cost formula.
b. is the least accurate method.
c. analyzes a cost relationship by plotting the data points on a graph.
d. can easily be calculated by hand.

19. The scatter-graph method

a. allows a cost analyst to inspect data visually.
b. is objective.
c. only uses two data points.
d. none of these are correct

20. Ruskin Company had utilities cost of P95,000 at an output level of 30,000 units. The utilities cost
was a mixed cost and the fixed portion was P50,000. What would the estimate of total utilities cost be
at an output level of 40,000 units?
a. P65,000
b. P95,000
c. P110,000
d. P125,000

Variable rate: P45,000/30,000 = P1.50

Total cost: (40,000 x P1.50) + P50,000 = P110,000

Figure 2.

Jasmin May P. Baniaga, CPA, CMA, MBA Page 6

Mastery of Management Services
Costs Concepts and Behavior

Jazz Company manufactures skis. The management accountant wants to calculate the fixed and
variable costs associated with the leasing of machinery. Data for the past four months were collected.

Machine
Month Lease cost hours
April P21,000 550
May 16,500 420
June 19,000 510
July 22,230 570

21. Refer to Figure 2. Using the high-low method calculate the variable rate for the lease cost
a. P38.18
b. P38.20
c. P61.50
d. P37.25

(P22,230 - P16,500)/(570 - 420) = P38.20

22. Refer to Figure 2. Using the high-low method calculate the fixed cost of leasing
a. P482
b. P516
c. P420
d. P456

P22,230 - (P38.20 x 570)

23. Refer to Figure 2. What would Jazz Company's cost formula be to estimate the cost of leasing
within the relevant range?
a. total lease cost = P456 + (P38.20 X machine hours)
b. total lease cost = P516 + (P38.18 X machine hours)
c. total lease cost = P420 + (P37.25 X machine hours)
d. none of these are correct

24. Refer to Figure 2. What would the estimate of Jazz Company's total lease cost be at a level of 500
machine hours?
a. P19,606
b. P19,556
c. P16,464
d. P18,546

P19,556 = P456 + (P38.20 x 500)

Figure 3:
Jazz Company makes cell phones. The company controller wanted to calculate the fixed and variable
costs associated with electricity use in the factory. Data for the past four months were collected.

Electricity Machine
Month cost hours
January P7,560 570
February 8,220 625
March 7,480 546
April 7,186 518

Coefficients shown by a regression program are:

Intercept 2,255
X Variable 1 9.48

25. Refer to Figure 3. Using the results of regression, calculate the variable rate of the electricity cost.
a. P9.67 per machine hour
b. P9.48 per machine hour
c. P2,255 per machine hour
d. none of these are correct

26. Refer to Figure 3. Using the results of regression, calculate the fixed cost of electricity.
a. P2,255
b. P9.48
c. P2,200
d. none of these are correct

27. Refer to Figure 3. Using the results of regression, the cost formula for electricity cost was
a. P9.48 X machine hours

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Mastery of Management Services
Costs Concepts and Behavior

b. P2,255 X machine hours

c. P2,255 + (P9.48 X machine hours)
d. none of these are correct

28. Refer to Figure 3. Using the results of regression, what would be the total budgeted cost for
electricity next month assuming that 615 machine hours are budgeted?
a. P2,225
b. P8,240
c. P8,085
d. P4,015

P2,255 + (P9.48 x 615)

29. Jazz Company makes cross-country skis. The company controller wants to calculate the fixed and
variable costs associated with janitorial services incurred by the factory. Data for the past six months
were collected.

Janitorial Labor
Month cost hours
January P9,200 10,120
February 8,800 9,500
March 9,350 10,500
April 9,620 11,100
May 8,400 8,660
June 9,800 10,650

Select the correct set of high and low months.

High Low
a. June April
b. June May
c. January February
d. April May

30. Advantages of the method of least squares over the high-low method include all of the following
except
a. a statistical method is used to mathematically derive the cost function.
b. only two points are used to develop the cost function.
c. the squared differences between actual observations and the line (cost function) are
minimized.
d. All the observations have an effect on the cost function.

31. If an automobile manufacturer changes from skilled labor to computer-controlled assembly

procedures, the past data
a. are useful in predicting future costs.
b. are of little or no value in predicting future costs.
c. should be used without adjustments to predict future costs.
d. are representative of future costs.

32. Which of the following is an advantage of using the scatter-graph method over the high-low
method to estimate costs?
a. It is a statistical method to determine "best fit".
b. A cost analyst can review the data visually and eliminate outliers.
c. The quality of the cost formula relies on the objective judgment of the analysts.
d. The cost formula can be determined simply by looking at two points of data.

33. If at a given volume total costs and fixed costs are known, the variable costs per unit may be
computed as follows:
a. (total costs - fixed costs)/unit volume
b. (total costs/unit volume) x fixed costs
c. (total costs x unit volume) x (fixed costs/unit volume)
d. total costs x (fixed costs/unit volume)

Figure 4.
Jazz Company manufactures motorcycles. The company's management accountant wants to calculate
the fixed and variable costs associated with utility cost incurred by the factory. Data for the past five
months were collected.
Utility Machine
Month cost hours
March P30,255 2,200
April 32,750 2,525
May 34,712 2,710

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Mastery of Management Services
Costs Concepts and Behavior

June 31,850 2,410

July 30,720 2,290

34. Refer to Figure 4. Using a regression program, the value of the intercept (rounded to the nearest
centavo) is
a. P.99.
b. P195.35.
c. P11,028.73.
d. P190,267.00.

35. Refer to Figure 4. Using a regression program, the value of the X Variable 1 (rounded to the
nearest centavo) is
a. P.99.
b. P8.74.
c. P195.35.
d. P11,594.00.

36. Refer to Figure 4. Using a regression program, the forecasted utility cost at 2,300 machine hours
(rounded to the nearest peso) is
a. P31,131.
b. P37,116.
c. P25,945.
d. P10,631.

37. Refer to Figure 4. Using a regression program, the forecasted utility cost at 2,600 machine hours
(rounded to the nearest peso) is
a. P28,288.
b. P33,753.
c. P45,945.
d. P10,631.

38. Refer to Figure 4. Using a regression program, the forecasted utility cost at 2,550 machine hours
(rounded to the nearest peso) is
a. P28,288.
b. P37,116.
c. P33,316.
d. P10,631.

39. Refer to Figure 4. Using a regression program, the yearly utility cost equation (with all variables to
the nearest centavo) is
a. Total utility cost = P127,569.60 + (P8.74 x machine hours)
b. Total utility cost = P11,028.73 + (P8.74 x machine hours)
c. Total utility cost = P8.74 + (P10,630.80 x machine hours)
d. Total utility cost = P10,630.80  (P8.74 x machine hours)

Figure 5.
Jazz Company produces hand-held calculators. The company controller wanted to calculate the fixed
and variable costs associated with the maintenance cost incurred by the factory. Data for the past four
months were collected.
Maintenance Machine
Month cost hours
June P4,180 328
July 3,956 310
August 4,686 386
September 4,240 352

Coefficients shown by a regression program are:

Intercept 1,150
X Variable 1 9.06

40. Refer to Figure 5. Using the results of regression, calculate the fixed cost of maintenance.
a. P1,150.00
b. P978.37
c. P9.06
d. None of these are correct

41. Refer to Figure 5. Using the results of regression, calculate the variable rate of maintenance cost.
a. P1,150 per machine hour
b. P12.74 per machine hour
c. P9.06 per machine hour
d. P12.14 per machine hour

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Mastery of Management Services
Costs Concepts and Behavior

42. Refer to Figure 5. Using the results of regression, the cost formula for maintenance cost was
a. P1,150 x machine hours
b. (P4,686 x P3,956)/(386 x 310)
c. P9.06 x machine hours
d. P1,150 + (P9.06 x machine hours)

43. Refer to Figure 5. Using the results of regression, what would be the budgeted cost for
maintenance next month assuming that 340 machine hours are budgeted?
a. P4,230
b. P3,928
c. P1,150
d. P2,943

P1,150 + (P9.06 x 340)

44. Managerial judgment

a. is the most accurate way to determine cost behavior.
b. is the least used method in practice.
c. is critically important in determining cost behavior.
d. none of these are correct

45. The method of least squares

a. is a way to find the "best fitting" line through a set of data points.
b. is a statistical way of separating a mixed cost.
c. always produces the same cost formula when used on the same data set.
d. all of these are correct

Jasmin May P. Baniaga, CPA, CMA, MBA Page 10