C Cost Behavior

TRUE/FALSE

1. A cost that changes in total as output changes is a variable cost.

2. The cost of raw materials used is usually a fixed cost.
3. Fixed costs are costs that in total remain constant within the relevant range as the level of output increases or
decreases.
4. As output decreases fixed costs per unit will increase.
5. As output increases variable cost per unit will also increase.
6. The cost of advertising is usually a discretionary fixed cost.
7. A discretionary fixed cost can be changed relatively easily at management discretion.
8. The relevant range is the range of output which the assumed cost relationship is valid for the normal operations of
the firm.
9. Determining cost behavior is not essential to planning, controlling, and decision making.
10. A variable cost increases in total when output increases but the per-unit costs remains the same.
11. Cost relationships may change at output levels outside of the relevant range.
12. Computing unit fixed costs may result in misleading information.
13. Discretionary fixed costs often involve a long-term contract.
14. Total variable costs = Variable rate  amount of output.
15. A driver is a factor that causes or leads to a change in a cost.
16. Mixed costs have both a fixed and a variable component.
17. Managerial judgment is critically important in determining cost behavior.
18. The high-low method is an objective method to separate the cost behavior of a mixed cost.
19. "Outliers" are points that seem to fit the general pattern of behavior.
20. The slope of a mixed cost line is equal to the fixed element of the cost.
21. Using the high-low method, the calculation of the cost line uses the highest and lowest cost period.
22. Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an outlier.
23. Using a linear regression program, the term 'Intercept' refers to the variable cost.
24. Using a regression program, the term 'X Variable 1' refers to the dependent variable.
25. Using regression, the value of 'X Variable 1' equals the slope of the line.

MATCHING
Select the appropriate cost behavior for each of the costs listed below.
a. variable
b. fixed
1. factory supervisor's salary

2. factory supplies
3. direct labor
4. factory insurance
5. controller's salary
6. depreciation
7. direct materials

8. indirect materials

Select the appropriate type of fixed cost for each cost listed below.
a. discretionary
b. committed
9. property taxes
10. advertising
11. cost of leasing
12. travel costs
13. cost of executive training seminars
14. depreciation
15. rent of building
16. salary of receptionist

Select the appropriate item for each of the definitions listed below.
 a. relevant range
b. cost behavior
c. driver
d. variable cost
e. fixed cost
17. a factor that causes a change in cost or activity
18. may be discretionary or committed
19. total cost depends on the level of output
20. a description of how a cost changes when the level of output changes
21. the range of output over which the assumed cost relationship is valid

Select the appropriate cost behavior for the following costs incurred by an automobile manufacturer.
a. variable
b. fixed
22. cost of windshields
23. cost of assembly line workers
24. depreciation on robotic equipment
25. cost of car stereos
26. cost of transporting cars to dealerships
27. cost of inspections
28. factory supervisor's salary
29. cost of rework
30. cost of lubricating machinery
31. sales commissions
32. salary of chief executive officer
33. real estate taxes
34. license fees on automobiles
35. factory supplies

PROBLEMS

1. Laconic Company manufactures ultra sound equipment. Based on past experience, Laconic has found that total
annual repair and maintenance cost can be represented by the following formula: total annual repair and
maintenance cost = $205,000 + $7.50x, where x = machine hours. Last year, Laconic incurred 145,000 machine
hours.
Required:
A. What was the total repair and maintenance cost incurred by Laconic last year?
B. What was the total fixed repair and maintenance cost incurred by Laconic last year?
C. What was the total variable repair and maintenance cost incurred by Laconic last year?
D. What was the repair and maintenance cost per machine hour last year?
E. What was the fixed repair and maintenance cost per machine hour last year?
F. What was the variable repair and maintenance cost per machine hour last year?

2. Harnow Company manufactures drill presses. Based on past experience, Harnow has found that its total overhead
cost can be represented by the following formula: Total overhead cost = $35,500 + $1.25x, where x = number of
machine hours. Last year Harnow incurred 120,000 machine hours.
Required:
A. What was the total overhead cost incurred by Harnow last year?
B. What was the total variable overhead cost incurred by Harnow last year?
C. What was the total overhead cost per machine hour last year?
D. What was the fixed overhead cost per machine hour last year?
E. If Harnow incurs 140,000 machine hours next year, what will be the total overhead cost per
machine hour?

3.Arcadia Company incurred the following costs and machine hours during the first three months of the current year.
Assume that the driver for all costs is machine hours.

Type of cost January February March

Electricity $20,000 $15,000 $18,000
 Depreciation 15,000 15,000 15,000
Factory supplies 9,600 5,600 7,600
Property taxes 12,000 12,000 12,000

Machine hours 1,200 700 950

Required:
A. Using the high-low method, construct a cost formula for electricity cost.
B. If Arcadia had total costs in April of $53,000, how many machine hours did they incur during
April?
C. If Arcadia expects to incur 1,500 machine hours in May what would be the estimate of their
total costs?

4. Graber and Johnson, Attorney's at Law, recently opened a law practice in the Northwest. Their goal is to generate a
monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their billable hours in the
first month of operations (January) were 150 and in the second month of operations (February), 175 billable hours.
The costs incurred at these levels for January and February are given below.

150 billable hours 175 billable hours

Salaries:
Mr. Graber $10,000.00 $10,000.00
Ms. Johnson 10,000.00 10,000.00
Legal Secretary 4,000.00 4,000.00

Depreciation (Furniture) 500.00 500.00

Supplies 450.00 525.00
Rent 1,000.00 1,000.00
Utilities 412.00 449.50
Total cost $26,362.00 $26,474.50
Required:
A. Classify each cost as fixed, variable, or mixed using billable hours as the driver.
B. Use the high-low method to separate mixed costs into their fixed and variable components.
C. Compute the net income/loss for January and February.
D. If they expect to average 200 billable hours each month what do they need to set as a billing rate
per hour to achieve their goal of generating $10,000 of monthly net income? Show your
calculations.

5. Below are the overhead costs and labor hours for Smith & Co.
Month Overhead Cost # of labor hours
January $ 9,640 490
February $ 12,680 680
March $ 11,080 580
April $ 11,720 620
May $ 13,000 700
June $ 10,120 520
July $ 8,840 440
August $ 6,600 300

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in September the labor hours will be 600. How much should they estimate to
have in total overhead cost for September?

6. The controller at Speedy Delivery wants to break-out the cost of deliveries into fixed and variable components so
that they will be better able to predict costs for next year. Below are the delivery cost incurred each month and the
number of deliveries.

Month Delivery Cost # of deliveries

January $2,176.00 105
February $2,272.00 110
March $1,926.40 92
April $1,696.00 80
 May $1,600.00 75
June $2,752.00 135
July $3,616.00 180
August $1,849.60 88
September $1,676.80 79
October $ 3,808.00 190
November $ 3,961.60 198
December $ 4,000.00 200

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.
2.) Calculate the variable rate per labor hour.
3.) Construct the cost formula for total overhead cost.
4.) The company is estimating that in January the number of deliveries will be 125. How much should they estimate
to have in total delivery costs for January?

7. The following six months of data were collected on electricity cost and the number of machine hours in a factory.

Electricity Machine
Month cost hours
June $25,160 4,500
July 26,170 4,810
August 27,250 5,120
September 26,680 5,010
October 27,950 5,430
November 27,500 5,190

Required:
A. Using the high-low method compute the variable rate for the electricity cost.
B. Using the high-low method compute the fixed cost of electricity.
C. Estimate the total electricity cost to be incurred in December if 5,300 machine hours are
incurred.