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ACCT1022 Chapter Notes - Chapter 6: Cost Estimate, Fixed Cost, Marginal Cost

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School
Boston College
Department
Accounting
Course
ACCT1022
Professor
Ewa Sletten

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Document Summary

Chapter six: activity analysis, cost behavior, and cost estimation. Cost behavior: relationship between cost and activity. Cost prediction: a forecast of cost at a particular level of activity. Changes in total in direct proportion to a change in the activity level: variable cost per unit remains the same as activity changes. Usually include inputs that are purchased and used in relatively small increments. Remains unchanged in total as the activity level (or cost drivers) varies: fixed cost per unit does change with changing levels of production. Unit fixed cost declines as production increases. Some costs remain fixed over a wide range of activity but jump to a different amount for activity levels outside that range. Has both a fixed and variable component. Has a curved graph of all the cost behavior patterns: for low levels of activity this cost is decreasing marginal cost, for high levels of activity this cost is increasing marginal cost.

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Related Questions

1. Which one of the following refers to a cost that remains the same as the volume of activity decreases within the relevant range?

A. Average cost per unit.

B. Variable cost per unit.

C. Unit fixed cost.

D. Total variable cost.

2. The relevant range refers to the activity levels over which

A. Cost relationships hold constant.

B. Costs fluctuate.

C. Production varies.

D. Relevant costs are incurred.

3. When identifying fixed and variable costs, which one of the following is a typical assumption concerning cost behavior?

A. General and administrative costs are assumed to be variable costs.

B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.

C. Total costs are assumed to be linear when plotted on a graph.

D. The relevant time period is assumed to be 5 years.

4. A management accountant is about to prepare graphs of total variable cost and per-unit variable cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on the horizontal axis. How will these graphs appear under completion?

Total Variable Cost; Per-Unit Variable Cost

A. Straight line, sloping upward to the right; Straight line, parallel to the horizontal axis

B. Curvilinear, sloping upward to the right; A line that basically parallels the horizontal axis, first decreasing and then increasing

C. Straight line, sloping upward to the right; Straight line, sloping upward to the right

D. Straight line, parallel to the horizontal axis; Straight line, sloping upward to the right

5. A company has found that its total electricity cost has both a fixed component and a variable component within the relevant range. The variable component seems to vary directly with the number of units produced. Which one of the following statements concerning electricity cost is incorrect?

A. The total electricity cost will increase as production volume increases.

B. The total electricity cost per unit of production will increase as production volume increases.

C. The variable electricity cost per unit of production will remain constant as production volume increases.

D. The fixed electricity cost per unit of production will decline as production volume increases.

Munchak Company’s relevant range of production is 9,000-11,000 units. Last month the company produced 10,000 units. Its total manufacturing cost per unit produced was $70. At this level of activity the company’s variable manufacturing costs are 40% of its total manufacturing costs.

Required:

Assume that next month Munchak produces 10,050 units and that its cost behavior patterns remain unchanged. Label each of the following statements as true or false with respect to next month.

Statement True or False
1. The variable manufacturing cost per unit will remain the same as last month.
2. The total fixed manufacturing cost will be greater than last month.
3. The total manufacturing cost will be greater than last month.
4. The average fixed manufacturing cost per unit will be less than last month.
5. The total variable manufacturing cost will be less than last month.
6. The total manufacturing cost per unit will be greater than last month.
7. The variable manufacturing cost per unit will equal $28.
8. The total fixed manufacturing cost will equal $422,100.
9. The total manufacturing cost will equal $701,400.
10. The average fixed manufacturing cost per unit (rounded to the nearest cent) will equal $41.79.
11. The total variable manufacturing cost will equal $280,000.
12. The total manufacturing cost per unit (rounded to the nearest cent) will equal $69.79.

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.