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Chapter 5
Recommended assignments for 1/31/08
Cost Behavior: Analysis and Use
Solutions to Questions
[I will generally include these for your interest.]
5-1
a.Variable cost: A variable cost remainsconstant on a per unit basis, butchanges in
total
in direct relation tochanges in volume.b.Fixed cost: A fixed cost remainsconstant in total amount. The
average
fixed cost per unit varies inversely withchanges in volume.c.Mixed cost: A mixed cost contains bothvariable and fixed cost elements.
5-2
a.Unit fixed costs decrease as volumeincreases.b.Unit variable costs remain constant asvolume increases.c.Total fixed costs remain constant asvolume increases.d.Total variable costs increase as volumeincreases.
5-3
a.Cost behavior: Cost behavior refers tothe way in which costs change inresponse to changes in a measure of activity such as sales volume,production volume, or ordersprocessed.b.Relevant range: The relevant range isthe range of activity within whichassumptions about variable and fixedcost behavior are valid.
5-4
An activity base is a measure of whatever causes the incurrence of avariable cost. Examples of activity basesinclude units produced, units sold, letterstyped, beds in a hospital, meals served ina cafe, service calls made, etc.
5-5
a.Variable cost: A variable cost remainsconstant on a per unit basis, butincreases or decreases
in total
in directrelation to changes in activity.b.Mixed cost: A mixed cost is a cost thatcontains both variable and fixed costelements.c.Step-variable cost: A step-variable costis a cost that is incurred in largechunks, and which increases ordecreases only in response to fairlywide changes in activity.
5-6
 The linear assumption isreasonably valid providing that the costformula is used only within the relevantrange.
5-7
A discretionary fixed cost has afairly short planning horizon—usually ayear. Such costs arise from annualdecisions by management to spend oncertain fixed cost items, such asadvertising, research, and managementdevelopment. A committed fixed cost has© The McGraw-Hill Companies, Inc., 2008. All rights reserved.Solutions Manual, Chapter 5195
CostActivity
Mixed CostVariable CostStep-Variable Cost
 
a long planning horizon—generally manyyears. Such costs relate to a company’sinvestment in facilities, equipment, andbasic organization. Once such costs havebeen incurred, they are “locked in” formany years.© The McGraw-Hill Companies, Inc., 2008. All rights reserved.196Managerial Accounting, 12th Edition
 
5-8
a.Committedd.Committedb.Discretionarye.Committedc.Discretionaryf.Discretionary
5-9
 Yes. As the anticipated level of activity changes, the level of fixed costsneeded to support operations may alsochange. Most fixed costs are adjustedupward and downward in large steps,rather than being absolutely fixed at onelevel for all ranges of activity.
5-10
 The high-low method uses only twopoints to determine a cost formula. Thesetwo points are likely to be less than typicalsince they represent extremes of activity.
5-11
 The formula for a mixed cost is Y =a + bX. In cost analysis, the “a” termrepresents the fixed cost, and the “b” termrepresents the variable cost per unit of activity.
5-12
 The term “least-squaresregression” means that the sum of thesquares of the deviations from the plottedpoints on a graph to the regression line issmaller than could be obtained from anyother line that could be fitted to the data.
5-13
Ordinary single least-squaresregression analysis is used when avariable cost is a function of only a singlefactor. If a cost is a function of more thanone factor, multiple regression analysisshould be used to analyze the behavior of the cost.
5-14
 The contribution approach incomestatement organizes costs by behavior,first deducting variable expenses to obtaincontribution margin, and then deductingfixed expenses to obtain net operatingincome. The traditional approachorganizes costs by function, such asproduction, selling, and administration.Within a functional area, fixed and variablecosts are intermingled.
5-15
 The contribution margin is totalsales revenue less total variable expenses.© The McGraw-Hill Companies, Inc., 2008. All rights reserved.Solutions Manual, Chapter 5197
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