Hard Practice Test
Cost Behavior - Fixed and Variable

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1. As volume increases, the total cost of a mixed cost
     a. increases by the same percentage as volume increasesIncorrect
     b. increases 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.
     c. decreasesIncorrect
     d. decreases by the same percentage as the volume increasesIncorrect

2. Discretionary costs are
     a. almost always committedIncorrect
     b. never fixedIncorrect
     c. are usually the first costs reduced in a cost reduction programDiscretionary 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.
     d. are unavoidableIncorrect

3. The most significant variable cost in a manufacturing company is most often
     a. straight-line depreciation on equipmentIncorrect
     b. direct materials that go into the productDirect 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.
     c. utilitiesIncorrect
     d. cost of operating the warehouse to store materialsIncorrect

4. Management can do very little to reduce these types of costs over the
     period of the next six months
     a. flexible costsIncorrect
     b. discretionary costsIncorrect
     c. committed costsCommitted 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.
     d. product costsIncorrect

5. Which of the following is classified as a committed, sunk, fixed expense?
     a. investment in manufacturing equipmentThe 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.
     b. advertisingIncorrect
     c. additional maintenance on equipmentIncorrect
     d. employee benefit programsIncorrect

6. The term relevant range means the range that
     a. will cause costs to fluctuateIncorrect
     b. cost relationships identified are valid 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.
     c. relevant costs are incurredIncorrect
     d. production volumes may not vary and will remain constantIncorrect

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 producedIncorrect
     b. supervisors on the production lineSupervisors 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.
     c. utilities at the manufacturing plantIncorrect
     d. costs to delivery the product to the customerIncorrect

8. Which of the following is considered a variable cost?
     a. insurance for employee automobilesIncorrect
     b. feed for cattle at a feed lotThe 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.
     c. cleaning suppliesIncorrect
     d. costs that are incurred once a yearIncorrect

9. A fixed cost
     a. is set at the beginning of the year and will not changeIncorrect
     b. is fixed for one level of production volumesIncorrect
     c. will not change directly in proportion to production volumeBy 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.)
     d. behaves very similar to costs incurred for materialIncorrect

10. Which of these costs would be the most difficult to estimate when
you know a exactly how many units will be produced?
     a. rentIncorrect
     b. materials used in the productIncorrect
     c. utilitiesFixed 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.
     d. insuranceIncorrect

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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

  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.

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?


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.

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