TRUE-FALSE STATEMENTS
1. An activity index identifies the activity that has a causal relationship with a particular cost.
2. A variable cost remains constant per unit at various levels of activity.
3. A fixed cost remains constant in total and on a per unit basis at various levels of activity.
4. If volume increases, all costs will increase.
5. If the activity index decreases, total variable costs will decrease proportionately.
6. Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.
7. For CVP analysis both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.
8. The relevant range of activity is the activity level where the firm will earn income.
9. Costs will not change in total within the relevant range of activity.
10. The high-low method is used in classifying a mixed cost into its variable and fixed elements.
11. A mixed cost has both selling and administrative cost elements.
12. The fixed cost element of a mixed cost is the cost of having a service available.
13. For planning purposes, mixed costs are generally grouped with fixed costs.
14. The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost.
15. When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element.
16. An assumption of CVP analysis is that all costs can be classified as either variable or fixed.
17. In CVP analysis, the term “cost” includes manufacturing costs, and selling and administrative expenses.
18. Contribution margin is the amount of revenues remaining after deducting cost of goods sold.
19. Unit contribution margin is the amount that each unit sold contributes towards the recovery of fixed costs and to income.
20. The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit sales price.
21. Both variable and fixed costs are included in calculating the contribution margin.
22. A CVP income statement shows contribution margin instead of gross profit.
23. The break-even point is where total sales equal total variable costs.
24. The break-even point is where total sales equal total variable costs.
25. The break-even point is equal to the fixed costs plus net income.
26. If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even volume, then net income will be $10,000.
27. A target net income is calculated by taking actual sales minus the margin of safety.
28. Target net income is the income objective for an individual product line.
29. The margin of safety is the difference between sales at breakeven and sales at a determined activity level.
30. The margin of safety is the difference between contribution margin and fixed costs.
31. The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.
32. The trends in most companies is to have more variable costs and fewer fixed costs.
33. For purposes of CVP analysis mixed costs must be classified into their fixed and variable elements.
34. The contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.
35. A cost-volume-profit graph shows the amount of net income or loss at each level of sales.
36. If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.
37. The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or (expected) sales.
MULTIPLE CHOICE QUESTIONS
38. For an activity base to be useful in cost behavior analysis.
a. the activity should always be stated in dollars.
b. there should be a correlation between changes in the level of activity and changes in costs.
c. the activity should always be stated in terms of units.
d. the activity level should be constant over a period of time.
39. A variable cost is a cost that
a. varies per unit at every level of activity.
b. occurs at various times during the year.
c. varies in total in proportion to changes in the level of activity.
d. may or may not be incurred, depending on management’s discretion.
40. A cost which remains constant per unit at various levels of activity is a
a. variable cost.
b. fixed cost.
c. mixed cost.
d. manufacturing cost.
41. Two costs at Bradshaw Company appear below for specific months of operation.
Month Amount Units Produced
Delivery costs September $ 40,000 40,000
October 55,000 60,000
Utilities September $ 84,000 40,000
October 126,000 60,000
Which type of costs are these?
a. Delivery costs and utilities are both variable.
b. Delivery costs and utilities are both mixed.
c. Utilities are mixed and delivery costs are variable.
d. Delivery costs are mixed and utilities are variable.
42. An increase in the level of activity will have the following effects on unit costs for variable and fixed costs:
Unit Variable Cost Unit Fixed Cost
a. Increases Decreases
b. Remains constant Remains constant
c. Decreases Remains constant
d. Remains constant Decreases
43. A fixed cost is a cost which
a. varies in total with changes in the level of activity.
b. remains constant per unit with changes in the level of activity.
c. varies inversely in total with changes in the level of activity.
d. remains constant in total with changes in the level of activity.
44. Fixed costs normally will not include
a. property taxes.
b. direct labor.
c. supervisory salaries.
d. depreciation on buildings and equipment.
45. The increased use of automation and less use of the work force in companies has caused a trend towards an increase in
a. both variable and fixed costs.
b. fixed costs and a decrease in variable costs.
c. variable costs and a decrease in fixed costs.
d. variable costs and no change in fixed costs.
46. Cost behavior analysis is a study of how a firm’s costs
a. relate to competitors’ costs.
b. relate to general price level changes.
c. respond to changes in the level of business activity.
d. respond to changes in the gross national product.
47. Cost behavior analysis applies to
a. retailers.
b. wholesalers.
c. manufacturers.
d. all entities.
48. If a firm increases its activity level,
a. costs should remain the same.
b. most costs will rise.
c. no costs will remain the same.
d. some costs will change, others will remain the same.
49. An activity index might be referred to as a cost
a. driver.
b. multiplier.
c. element.
d. correlation.
50. Cost activity indexes might help classify costs as
a. temporary.
b. permanent.
c. variable.
d. transient.
51. Which of the following is not a cost classification?
a. Mixed
b. Multiple
c. Variable
d. Fixed
52. If the activity level increases 10%, total variable costs will
a. remain the same.
b. increase by more than 10%.
c. decrease by less than 10%.
d. increase 10%.
53. Which of the following costs are variable?
Cost 10,000 Units 30,000 Units
1. $100,000 $300,000
2. 40,000 240,000
3. 90,000 90,000
4. 50,000 150,000
a. 1 and 2
b. 1 and 4
c. only 1
d. only 2
54. Changes in activity have a(n) _________ effect on fixed costs per unit.
a. positive
b. negative
c. inverse
d. neutral
55. Which of the following is not a fixed cost?
a. Direct materials
b. Depreciation
c. Lease charge
d. Property taxes
56. Why is identification of a relevant range important?
a. It is required under GAAP.
b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.
c. It directly impacts the number of units of product a customer buys.
d. It is a cost that is incurred by a company that must be accounted for.
57. The relevant range of activity refers to the
a. geographical areas where the company plans to operate.
b. activity level where all costs are curvilinear.
c. levels of activity over which the company expects to operate.
d. level of activity where all costs are constant.
58. Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion?
a. Labor specialization
b. Overtime wages
c. Total variable costs are constant within the relevant range
d. Availability of quantity discounts
59. Firms operating at 100% capacity
a. are common.
b. are the exception rather than the rule.
c. have no fixed costs.
d. have no variable costs.
60. Which of the following would be the least controllable fixed costs?
a. Property taxes
b. Rent
c. Research and development
d. Management training programs
More Questions are Included
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