Do You Understand?
Self Test

Cost Behavior - Fixed and Variable

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Do you know the terms and definitions?

1. A variable cost per unit
     a. is different or different levels of activity Incorrect
     b. remains constantBy 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.)
     c. increases as activity increases Incorrect
     d. decreases as the activity increasesIncorrect

2. A discretionary fixed cost
     a. is always budgeted over a 5 year time periodIncorrect
      b. must be spent no matter what happens in the companyIncorrect
     c. can be delayed with management’s decisionBy 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 time period is not relevant to whether it is discretionary or not (a.).
     d. is always related to facilitiesIncorrect

3. A fixed cost
     a. is different in total for different levels of activityIncorrect
     b. remains constant in totalBy 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.)
     c. increases as activity increasesIncorrect
     d. decreases as the activity decreasesIncorrect

4. A mixed cost
     a. is the same for all levels of activityIncorrect
     b. increases in total as activity decreases after a certain pointIncorrect
     c. has characteristics of a fixed and variable costBy 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.).
     d. both b. and c.Incorrect

5. A relevant range is
     a. the length of time the company plans its costs to remain the sameIncorrect
     b. the level of activity that current fixed costs can support without increasingA 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.)
     c. the high and low range of variable costsIncorrect
     d. the difference in a fixed and variable costIncorrect

6. An opportunity cost
     a. means the company had only one alternativeIncorrect
     b. is the total amount of a net loss from operationsIncorrect
      c. is what is given up by a choice to pursue other alternativesBy 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)
     d. is what your future job will pay youIncorrect

7. A sunk cost
     a. can be refunded upon request in the futureIncorrect
      b. can not be recovered no matter what happens in the futureBy 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.
     c. is what will be spent in the future for salaries for personnel addedIncorrect
     d. is always a variable costIncorrect

8. A committed cost is
     a. a cost that does not have to be spent this year to meet company goalsIncorrect
     b. a cost that can be changed if the number of units sold changes by 5%Incorrect
     c. a cost that is not in the budgetIncorrect
     d. a cost that can’t be reduced without changing the goals of the companyBy 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 costAnother 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.)
     b. a monthly fixed costIncorrect
     c. an annual fixed costIncorrect
     d. a variable costIncorrect

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 decreaseFixed 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.).
     b. fixed cost in total will increaseIncorrect
     c. variable costs in total will decreaseIncorrect
     d. variable cost per unit and in total will decreaseIncorrect

2. An example of a committed fixed cost would be
     a. property taxes on the manufacturing buildingProperty 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.)
     b. dollars spent for advertising based on sales volumesIncorrect
     c. management training programsIncorrect
     d. the company Christmas partyIncorrect

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:
     a. $10,000Incorrect
     b. $ 6,950Incorrect
     c. $12,000Using 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.
     d. $ 9,900Incorrect

4. Costs that the company would classify as fixed would be
     a. utilities at the manufacturing plantIncorrect
     b. insurance and rentInsurance 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.)
     c. a & b.Incorrect
     d. none of the aboveIncorrect

5. Which of these costs is least likely to be a discretionary cost?
     a. management bonusIncorrect
     b. additional building maintenanceIncorrect
     c. insuranceA 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.
     d. salaries of extra maintenance workersIncorrect

6. A cost will be variable if it changes in total
     a. as the cost per unit changes with the number of units soldIncorrect
     b. as cost per unit changes with the number of units manufacturedIncorrect
     c. at differing levels of activityBy 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
     d. both a. and b.Incorrect

7. Fixed costs that can’t be reduced over a short period of time are
     a. avoidableIncorrect
     b. not necessaryIncorrect
     c. committedBy 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.
     d. non committedIncorrect

8. As volume increases
     a. total fixed costs change and variable costs stay the sameIncorrect
     b. total fixed costs stay the same and variable cost per unit changesIncorrect
     c. total fixed costs change and variable cost per unit does not changeIncorrect
     d. total fixed costs stay the same and variable cost per unit does not changeAs 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.

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