Chapter 5
Cost Behavior: Analysis and Use
True/False
1. A variable cost is a cost that remains constant in total throughout wide ranges of activity.
Level: Easy LO: 1 Ans: F
2. If the activity level increases, then one would expect the variable cost per unit to increase as well.
Level: Medium LO: 1 Ans: F
3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.
Level: Medium LO: 1 Ans: T
4. Calculation of fixed costs on a per unit basis is critical for internal reporting to managers.
Level: Medium LO: 1 Ans: F
5. Management’s strategy will determine to a large degree the classification of a fixed cost as
discretionary or committed.
Level: Easy LO: 1 Ans: T
6. Committed fixed costs cannot be reduced to zero without seriously impairing the company’s long term
goals.
Level: Easy LO: 1 Ans: T
7. Unless the behavior pattern of each cost of a company is understood, the impact of a company’s
activities on its costs will not be known until after the activity has occurred.
Level: Medium LO: 1 Ans: T
8. When using the high-low method, if the high and low activity levels do not coincide with the high and
low levels of cost, then the analyst should use the points with the high and low levels of cost.
Level: Medium LO: 3 Ans: F
9. A traditional functional income statement organizes costs on the basis of behavior.
Level: Easy LO: 4 Ans: F
10. The contribution income statement organizes costs according to behavior.
Level: Easy LO: 4 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e 174
,11. The contribution margin represents the amount available to contribute toward covering fixed expenses
and toward profits for the period.
Level: Easy LO: 4 Ans: T
12. Most companies use the contribution approach in preparing financial statements for external reporting
purposes.
Level: Medium LO: 4 Ans: F
13. The least-squares regression method computes the regression line that minimizes the sum of the
squared deviations from the plotted points to the line.
Level: Medium LO: 5 Ans: T
14. Account analysis is a special form of least-squares regression in which more than one account is
analysed at the same time.
Level: Easy LO: 6 Ans: F
15. The inventory value shown on the balance sheet is generally higher under absorption costing than
under variable costing.
Level: Medium LO: 5 Ans: T
16. Under variable costing, inventoriable product costs consist of direct materials, direct labor, variable
manufacturing overhead and variable selling and administration expenses.
Level: Medium LO: 5 Ans: F
17. Under variable costing, an increase in the fixed factory overhead will have no effect on the unit
product cost.
Level: Medium LO: 5 Ans: T
18. Under the absorption costing method, a portion of fixed manufacturing overhead cost is allocated to
each unit of product.
Level: Easy LO: 5 Ans: T
19. Under variable costing, it is possible to defer a portion of the fixed manufacturing overhead costs of
the current period to future periods through the inventory account.
Level: Medium LO: 5 Ans: F
20. Under absorption costing, a portion of fixed manufacturing overhead cost is released from inventory
when sales volume exceeds production volume.
Level: Medium LO: 5 Ans: T
175 Brewer, Introduction to Managerial Accounting, 3/e
,21. Contribution margin and gross margin mean the same thing.
Level: Easy LO: 5 Ans: F
22. When reconciling variable costing and absorption costing net operating income, fixed manufacturing
overhead costs deferred in inventory under absorption costing should be deducted from variable costing
net operating income to arrive at the absorption costing net operating income.
Level: Medium LO: 5 Ans: F
23. If production equals sales for the period, absorption costing and variable costing will produce the
same net operating income under LIFO.
Level: Medium LO: 5 Ans: T
24. When the number of units in inventories decrease between the beginning and end of the period,
absorption costing net operating income will typically be greater than variable costing net operating
income.
Level: Medium LO: 5 Ans: F
25. When viewed over the long term, accumulated net operating income will be the same for variable and
absorption costing if there are no ending inventories at the end of the term.
Level: Hard LO: 5 Ans: T
26. Under absorption costing, the profit for a period is not affected by changes in inventory.
Level: Medium LO: 5 Ans: F
Multiple Choice
27. As the level of activity increases, how will a mixed cost in total and per unit behave?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Hard LO: 1 Ans: A
Brewer, Introduction to Managerial Accounting, 3/e 176
, 28. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore, always
using natural gas. However, when there is no pizza in the oven, the oven automatically lowers its flame
and reduces its natural gas usage by 70%. The cost of natural gas would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.
Level: Easy LO: 1 Ans: B
29. When the activity level is expected to decline within the relevant range, what effects would be
anticipated with respect to each of the following?
A) A above
B) B above
C) C above
D) D above
E) E above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
30. Within the relevant range, variable costs can be expected to:
A) vary in total in direct proportion to changes in the activity level.
B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases.
D) increase on a per unit basis as the activity level decreases.
E) none of these.
Level: Easy LO: 1 Ans: A
31. Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on management’s strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without seriously
impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.
Level: Easy LO: 1 Ans: D
177 Brewer, Introduction to Managerial Accounting, 3/e
Cost Behavior: Analysis and Use
True/False
1. A variable cost is a cost that remains constant in total throughout wide ranges of activity.
Level: Easy LO: 1 Ans: F
2. If the activity level increases, then one would expect the variable cost per unit to increase as well.
Level: Medium LO: 1 Ans: F
3. Fixed costs expressed on a per unit basis vary inversely with changes in activity.
Level: Medium LO: 1 Ans: T
4. Calculation of fixed costs on a per unit basis is critical for internal reporting to managers.
Level: Medium LO: 1 Ans: F
5. Management’s strategy will determine to a large degree the classification of a fixed cost as
discretionary or committed.
Level: Easy LO: 1 Ans: T
6. Committed fixed costs cannot be reduced to zero without seriously impairing the company’s long term
goals.
Level: Easy LO: 1 Ans: T
7. Unless the behavior pattern of each cost of a company is understood, the impact of a company’s
activities on its costs will not be known until after the activity has occurred.
Level: Medium LO: 1 Ans: T
8. When using the high-low method, if the high and low activity levels do not coincide with the high and
low levels of cost, then the analyst should use the points with the high and low levels of cost.
Level: Medium LO: 3 Ans: F
9. A traditional functional income statement organizes costs on the basis of behavior.
Level: Easy LO: 4 Ans: F
10. The contribution income statement organizes costs according to behavior.
Level: Easy LO: 4 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e 174
,11. The contribution margin represents the amount available to contribute toward covering fixed expenses
and toward profits for the period.
Level: Easy LO: 4 Ans: T
12. Most companies use the contribution approach in preparing financial statements for external reporting
purposes.
Level: Medium LO: 4 Ans: F
13. The least-squares regression method computes the regression line that minimizes the sum of the
squared deviations from the plotted points to the line.
Level: Medium LO: 5 Ans: T
14. Account analysis is a special form of least-squares regression in which more than one account is
analysed at the same time.
Level: Easy LO: 6 Ans: F
15. The inventory value shown on the balance sheet is generally higher under absorption costing than
under variable costing.
Level: Medium LO: 5 Ans: T
16. Under variable costing, inventoriable product costs consist of direct materials, direct labor, variable
manufacturing overhead and variable selling and administration expenses.
Level: Medium LO: 5 Ans: F
17. Under variable costing, an increase in the fixed factory overhead will have no effect on the unit
product cost.
Level: Medium LO: 5 Ans: T
18. Under the absorption costing method, a portion of fixed manufacturing overhead cost is allocated to
each unit of product.
Level: Easy LO: 5 Ans: T
19. Under variable costing, it is possible to defer a portion of the fixed manufacturing overhead costs of
the current period to future periods through the inventory account.
Level: Medium LO: 5 Ans: F
20. Under absorption costing, a portion of fixed manufacturing overhead cost is released from inventory
when sales volume exceeds production volume.
Level: Medium LO: 5 Ans: T
175 Brewer, Introduction to Managerial Accounting, 3/e
,21. Contribution margin and gross margin mean the same thing.
Level: Easy LO: 5 Ans: F
22. When reconciling variable costing and absorption costing net operating income, fixed manufacturing
overhead costs deferred in inventory under absorption costing should be deducted from variable costing
net operating income to arrive at the absorption costing net operating income.
Level: Medium LO: 5 Ans: F
23. If production equals sales for the period, absorption costing and variable costing will produce the
same net operating income under LIFO.
Level: Medium LO: 5 Ans: T
24. When the number of units in inventories decrease between the beginning and end of the period,
absorption costing net operating income will typically be greater than variable costing net operating
income.
Level: Medium LO: 5 Ans: F
25. When viewed over the long term, accumulated net operating income will be the same for variable and
absorption costing if there are no ending inventories at the end of the term.
Level: Hard LO: 5 Ans: T
26. Under absorption costing, the profit for a period is not affected by changes in inventory.
Level: Medium LO: 5 Ans: F
Multiple Choice
27. As the level of activity increases, how will a mixed cost in total and per unit behave?
A) A above
B) B above
C) C above
D) D above
E) E above
Level: Hard LO: 1 Ans: A
Brewer, Introduction to Managerial Accounting, 3/e 176
, 28. Since Anytime Pizza is open 24 hours a day, its pizza oven is constantly on and is, therefore, always
using natural gas. However, when there is no pizza in the oven, the oven automatically lowers its flame
and reduces its natural gas usage by 70%. The cost of natural gas would best be described as a:
A) fixed cost.
B) mixed cost.
C) step-variable cost.
D) true variable cost.
Level: Easy LO: 1 Ans: B
29. When the activity level is expected to decline within the relevant range, what effects would be
anticipated with respect to each of the following?
A) A above
B) B above
C) C above
D) D above
E) E above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
30. Within the relevant range, variable costs can be expected to:
A) vary in total in direct proportion to changes in the activity level.
B) remain constant in total as the activity level changes.
C) increase on a per unit basis as the activity level increases.
D) increase on a per unit basis as the activity level decreases.
E) none of these.
Level: Easy LO: 1 Ans: A
31. Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on management’s strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without seriously
impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.
Level: Easy LO: 1 Ans: D
177 Brewer, Introduction to Managerial Accounting, 3/e
