COST BEHAVIOR ANALYSIS (Exercises) – 1.

The closeness of the linear relationship between the cost

and the activity is the
Exercise # 1: VARIABLE vs. FIXED a. Correlation
b. Variation
A company manufactures and sells a single product. A c. Deviation
partially completed schedule of the company’s total and per unit d. Standard error
costs over a relevant range of 60 to 100 units produced and sold 2. Which of the following correlation coefficients represents
each year is given below: strongest relationship between two variables?
a. +0.50 b. -0.80 c. +0.05 d. +1.02
Units produced & sold 3. What is the appropriate range for the coefficient of
60 80 100 determination (r 2 )?
Total Costs a. -1 to +1 c. 0 to +1
b. -1 to 0 d. 0 to infinity
(A) VC P120
(B) FxC 600 Exercise # 4: LEAST-SQUARES REGRESSION METHOD
(C) Total
Costs per unit A company’s total overhead costs at various levels of
activity are presented below:
(D) VC
(E) FxC Month Machine Hours Total OH Costs
March 500 P 970
Based on the above data, April 400 851
1. Complete the schedule by writing the correct amount in the May 600 1,089
blanks. June 700 1,208
2. Identify 2 specific costs that remain constant over the
relevant range. The breakdown of the overhead costs in April at 400 machine-
3. Identify 2 specific costs that are directly related with hour level of activity is as follows:
production.
4. Identify the specific cost that is inversely related with Supplies (variable P 260
production. Salaries (fixed) 300
5. Express the cost formula based on the line equation form Utilities (mixed) 291
“Y = a + bX”. total P851
6. Determine the expected total costs if the company produces
90 units.
Required:
Exercise # 2: HIGH-LOW METHOD
1. Determine how much June’s overhead cost of P1,208
consisted of utilities costs.
The controller of a hospital would like to come up
2. Using high-low method, determine the cost function
with a cost formula that links admitting department cost to the
for utilities cost.
number of patients admitted during a month. The admitting
3. Using high-low method, determine the cost function
department’s costs and the number of patients admitted during
for total overhead cost.
the past nine months are as follows:
4. Using least-squares method, determine the cost
function for total overhead costs.
# of Patients Admitting Dept.’s 5. Determine the total overhead costs if operating level is
Months Admitted Cost at 450 machine hours.
April 18 P 15,600
May 19 15,200
June 17 13,700 (source: ReSA review material adapted from Managerial
July 15 14,600 Accounting by Garrison and Noreen)
August 15 14,300
September 11 13,200
October 11 12,800
November 48 72,500
December 16 14,000

Required: Using the high-low method, determine: TRUE OR FALSE; MULTIPLE CHOICE.
1. The variable cost per unit.
2. The annual fixed costs. 1. Unit variable costs are costs that change in direct
3. The admitting department’s monthly cost function. proportion to changes in the activity level.
4. Total estimated costs, if number of patients admitted
for the month is 20. 2. Unit variable cost is constant while unit fixed cost is
variable.
Exercise # 3: CORRELATION ANALYSIS
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 3. In cost analysis using the line equation Y = a + bX, total a. The higher is the production within the relevant range,
cost (Y) is regarded as the the higher is the fixed cost per unit.
a. Dependent variable b. The higher is the production within the relevant range,
b. Independent variable the higher is the variable cost per unit.
c. Slope of the line c. The lower is the production within the relevant range, the
d. Y-axis intercept lower is the total fixed cost.
d. The lower is the production within the relevant range, the
4. A company has developed a production cost equation for lower is the total variable cost.
its lone product: Y -20 + 5X, where X is based on the
number of labor hours. Assuming a relevant range of 10 to 12. Assuming costs are represented on the vertical axis
20 labor hours, what is the estimated production costs at and volume of activity on the horizontal axis, which of the
zero (0) labor hour? following costs would be represented by a line that is parallel
a. P 5 to the horizontal axis?
b. P 20 a. Total direct material costs
c. P 25 b. A consultant paid P500 per hour with a maximum fee of
d. An amount that cannot be determined from the given P10,000
information. c. Employees who are paid P120 per hour and guaranteed a
minimum weekly wage of P2,500
5. The term “high-low” in cost segregation appropriately d. Rent on exhibit space at a convention
refers to the highest cost and the lowest cost among the
sample data points. 13. The range is a
a. Relatively wide range of sales where total variable costs
6. If one variable drastically increases and another variable remain the same.
does not at all react, then correlation coefficient between b. Relatively wide range of sales where all costs remain the
these two variables is said to be close to -1.0. same.
c. Relatively narrow span of production where total
7. A company is interested in the relationship between sales variable costs remain the same.
and occurrence of rain. Using the proper formula, the d. Relatively wide span of production where total fixed
coefficient of correlation ® is computed as -0.99. What costs are expected to remain the same.
conclusion about the sales and rain occurrence could one
make? 14. The average amount of change in a dependent variable
a. An increase in sales causes an increase in rain that is associated with a change in an independent variable is
occurrence. determined through
b. An increase in sales causes a decrease in rain a. Factor analysis.
occurrence. b. Variance linearity analysis.
c. An increase in rain occurrence causes a decrease in c. Correlation analysis.
sales. d. Regression analysis.
d. An increase in rain occurrence causes an increase in
sales. 15. A fixed cost that would be considered a direct cost is
a. A cost accountant’s salary when the cost objective is a
8. Using statistical normal relationships, the least squares unit pf product.
method devises which of the following equation(s)? b. The rental cost of a warehouse to store inventory when
a. ∑ ∑ ∑
xy = a x + b x 2
c.
the cost objective is the Purchasing Department.
A production supervisor’s salary when the cost objective
b. ∑ y = na + b∑ x is the Production Department.
d. Board of Directors’ fees when the cost objective is the
x Marketing Department.
c. y=a+b
∑ y = na + b∑ x Items 16 through 18 are based on the following information:
A company had the following materials handling cost
d. ∑ y = na + b∑ x at three months of activity levels –
∑ xy = a∑ x + b∑ x 2 Months
1
Kilos Handled
80,000
Costs
P160,000
9. The cost estimation that gives the most mathematically 2 60,000 P132,000
precise cost segregation techniques is the 3 70,000 P130,000
a. High-low method
b. Least squares method 16. What is the value of the slope of the line at 80,000-
c. Scatter diagram method kilo level?
d. Calendar method a. 1.4 b. 1.5 c. 1.4X number of kilos d. 112,000

10. Knowledge on cost behavior is critical to profit planning, 17. What is the value of the y-intercept at 60,000-kilo
particularly in the cost-volume-profit analysis. level?
a. 0.80 c. P48,000 per month
11. Which of the following statements is true? b. P48,000 per kilo d. P 48,000 per year

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 18. What is the estimated cost for handling 500,000 kilos d. Fixed manufacturing overhead
for the next operating year?
a. P 700,000 c. P 1,276,000 25. Within the relevant range, the amount of variable cost per unit
b. P 748,000 d. P 8,976,000 a. Differs at each production level.
b. Increases as production increases.
19. A company had the following flexible budget for 2014 c. Decreases as production increases.
at 100% capacity of 30,000 direct labor hours: d. Remains constant at each production level.

Direct materials P800,000 26. In March, a company had electrical costs of P225 when the
Direct labor 600,000 total volume was 4,500 cups of coffee served. IN April,
Variable MOH 360,000 electrical costs were P227.50 for 4,750 cups of coffee. Using
Fixed MOH 288,000 the high-low method, what is the estimated fixed cost of
electricity per year?
What is the total manufacturing overhead application rate if a. P200 b. P180 c. P225 d. P2,160
the company has to operate at 80% of stated capacity?
a. P24.00 c. P24.60 27. A company has an average unit cost of P45 at 10,000 units
b. P 27.00 d. P21.60 and P25 at 30,000 units. What is the variable cost per unit?
a. P10 b. P15 c. P20
20. When 10,000 units are produced, fixed costs are P14 per unit. d.cannot be determined without more information
Therefore, when 20,000 units are produced, fixed costs will
a. Increase to P28 per unit. 28. In March, direct labor was 60% of conversion cost. If the
b. Remain at P14 per unit. manufacturing overhead cost for the month was P38,000 and
c. Decrease to P7 per unit. the direct materials cost was P32,000, the direct labor cost
d. Total P280,000. was
a. P21,333 c. P25,333
21. Assuming costs are represented on the vertical axis and b. P48,000 d. P57,000
volume of activity on the horizontal axis, which of the
following costs would be represented by an upward sloping 29. The following data have been collected for 4 different cost
line that starts at the origin and reaches a maximum value items:
beyond which the line is parallel to the horizontal axis?
a. Rental on a delivery truck that contains a daily rental Cost Item Cost @ 100 units Cost at 140 units
charge of P500 and a charge of P15 per mile. W P8,000 P10,560
b. A consultant who is paid P400 per hour, with a X P5,000 P5,000
guaranteed maximum fee of P5,000. Y P6,500 P9,100
c. Salaries of quality inspectors where each inspector can Z P6,700 P8,580
inspect 1,000 units per month.
d. A telephone bill that contains an access fee of P850 per Which of the following classifications of these cost items by
month and an additional fee of P2 per minute of use. cost behavior is correct?
Cost WCost XCost YCost Z
22. Which of the following statements is true? a. Variable fixed mixed variable
a. The slope of the total costs line is dependent on the b. Mixed fixed variable mixed
variable cost per unit. c. Variable fixed variable variable
b. The total cost line normally begins at zero. d. Mixed fixed mixed mixed
c. The total revenue line typically begins above zero.
d. The slope of the total revenue line is the contribution 30. A cost function is an expression that mathematically links
margin per unit. costs, their behavior, and their cost driver. If the cost function
for a relevant range of 100,000 units to 200,000 units is:
23. Simple regression analysis may be used to approximate the Total costs = P500,000 + 8x, where x is the number of units
relationship between two variables, such as, direct labor hours produced,
and total product cost. This technique is Which of the following statements is incorrect?
a. Most appropriate when the relationship between the two a. P500,000 is the total fixed cost.
variables is expressed by an exponential (non-linear b. P8 is the variable cost per unit.
graph). c. Total cost is P2,100,000 if production is 200,000 units.
b. Based on a two-dimensional model and the formula, y = d. Total cost is P500,000 if production is zero.
a + bx.
c. Similar to the quantitative technique simulation and is 31. Which of the following best describes a fixed cost?
often used in conjunction with it. a. It may change in total when such change is unrelated to
d. Useful in determining variable costs per unit produced, changes in production.
but is not related to fixed costs. b. It may change in total when such change is related to
changes in production.
24. Which cost is not subtracted from selling price to calculate the c. It is constant per unit of changes in production.
contribution margin per unit? d. It may change in total when such change depends upon
a. Variable manufacturing overhead production or within the relevant range.
b. Variable selling expenses
c. Direct labor 32. An example of a discretionary fixed cost would be
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 a. Depreciation on equipment. Variable cost per thousand applications =
b. Rent on a factory building. ?-?
c. Salaries of top management. 30 - ?
d. Research and development.

33. Which of the following best describes a step cost?

a. It varies less than proportionately with volume.
b. It varies more than proportionately with volume.
c. It is partly variable and partly fixed.
d. It increases abruptly outside the relevant range.

34. In describing the cost formula equation, Y = a + bx, which of

the following statements is correct?
a. ‘Y’ is the independent variable
b. ‘a’ is the variable rate
c. ‘a’ and ‘b’ are valid for all levels of activity
d. In the high-low method, ‘b’ equals the change in cost
divided by the change in activity

35. Which of the following is not a method of splitting a semi-

variable cost?
a. High and low point
b. Slope of the line
c. Scatter chart
d. Linear programming

Problem:

You have been hired recently as a part-time cost analyst for

DWCL’s admission office. Your firs task is to estimate the
relationship between the cost of operating the admissions office
and the number of applications received. After painstakingly
collecting six months’ worth of data, you analyzed the cost
behavior using two different methods. You wrote up a brief
report and headed for the VP – Finance office. However, a gust
of wind caught the papers in your hand and blew them out the
window, where they were torn to bits by the basketball coach’s
dog. You and your roommate managed to piece together the
following bits and pieces of information from your shredded
report:

Cost of
Operating
the
Applications Admissions
Received (in Office (in
thousands) thousands)

Month
? ? x
2 ?
Oct. 8.9 178
Nov. 10
Dec. 25 240
Jan. 9.1 200.2
Feb. 8.7 225
Mar. 10
sum 2,734

a. Least squares regression:

? = (?)(1,128,7) – (?)(54.3)
(?)(?) – (?)(?)
b. High-low method:

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