Chapter 5Cost Behavior: Analysis and UseTrue/False

1.TEasyModern technology is causing shifts away from variable costs toward more fixed costsin many
industries.2.FMediumIn order for a cost to be variable it must vary with either units produced or units
sold. .TEasy! cost that is obtainable in large chun"s and that increases or decreases only in response to
fairly wide changes in the activity level is "nown as a step#variable cost.$.FEasyThe concept of the
relevant range does not apply to fixed costs.%.FMediumIndirect costs& such as manufacturing
overhead& are always fixed costs.'.TEasy! cost formula may not be valid outside the relevant range of
activity.(.TEasy)iscretionary fixed costs arise from annual decisions by management to spend in certain
fixed cost areas.*.FEasy+ignificant reductions in committed fixed costs can usually be made on a
temporary basis without seriously impairing the long#run goals of a firm.,.FEasyThe planning hori-ons
for committed fixed costs and discretionary fixed costs are generally the same.1 .TEasyThe high#low
method is generally less accurate than the least#s/uares regression method for analy-ing the behavior of
mixed costs.

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11.TEasyIn a scattergraph& the line fitted to the plotted points is "nown as a regression line.12.FEasyThe
ad0usted 2 i.e.& #s/uared3 indicates the proportion of a mixed cost that is variable.1 .FEasyIn
least#s/uares regression& independent variables are not included in the computations of the slope and
intercept.1$.TEasyThe contribution approach to the income statement classifies costs by behavior
rather than by function.1%.TEasy! mixed cost is partially variable and partially fixed.

Multiple Choice

1'.4MediumExpense ! is a fixed cost5 expense 6 is a variable cost. )uring the current year the activity
level has increased& but is still within the relevant range. In terms of cost per unit of activity& we would
expect that7a. expense ! has remained unchanged. b. expense 6 has decreased.c. expense ! has
decreased.d. expense 6 has increased.1(.6Easy8hich costs will change with a decrease in activity within
the relevant range9a. Total fixed costs and total variable cost. b. :nit fixed costs and total variable cost.c.
:nit variable cost and unit fixed cost.d. :nit fixed cost and total fixed cost.1*.6Medium8ithin the relevant
range of activity& variable cost per unit will7a. increase in proportion with the level of activity. b. remain
constant.c. vary inversely with the level of activity.d. none of these.

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1,.)Medium!n increase in the activity level within the relevant range results in7a. an increase in fixed
cost per unit. b. a proportionate increase in total fixed costs.c. an unchanged fixed cost per unit.d. a
decrease in fixed cost per unit.2 .6Easy4;! adaptedThe term <relevant range< means the range over
which7a. costs may fluctuate. b. a particular cost formula is valid.c. production may vary.d. relevant
costs are incurred.21.!MediumThe linear e/uation = > a ? b@ is often used to express cost formulas. In
this e/uation7a. the b term represents variable cost per unit of activity. b. the a term represents variable
cost in total.c. the @ term represents total cost.d. the = term represents total fixed cost.22.4Easy!n
example of a discretionary fixed cost is7a. insurance. b. taxes on real estate.c. management training.d.
depreciation of buildings and e/uipment.2 .4Easy!n example of a committed fixed cost is7a. a training
program for salespersons. b. executive travel expenses.c. property taxes on the factory building.d. new
product research and development.2$.)Easy)iscretionary fixed costs7a. vary directly and proportionately
with the level of activity. b. have a long#term planning hori-on& generally encompassing many years.c.
are made up of plant& e/uipment& and basic organi-ational costs.d. none of the above.2%.6MediumIn
describing the cost formula e/uation = > a ? b@& which of the following statementsis correct9a. <@< is
the dependent variable. b. <a< is the fixed component.c. In the high#low method& <b< e/uals change in
activity divided by change in costs.d. !s <@< increases <=< decreases