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Exam 5: How Do Organizations Identify Cost Behavior Patterns

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Per unit fixed costs change with changes in activity.

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To accurately predict costs,managers must understand how costs behave with changes in activity.

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Exhibit 5-7 Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month. -Refer to Exhibit 5-7.Which of the following amounts represents total selling and administrative costs?

Which of the following costs is typically not a fixed overhead cost for a factory?

Exhibit 5-2 Manchester Company is a small company that has hired you to help them estimate costs.They present you with the following information from the company's most recent fiscal year. Sales (2,000 units) $1,000,000 Cost of goods sold (24% of sales) 240,000 Store supervisor's annual salary 65,000 Annual operating costs 70,000 Annual advertising and promotion 10,000 Sales commissions (5% of sales) 50,000 -Refer to Exhibit 5-2.What were the total fixed costs for the company's most recent fiscal year?

Factory maintenance costs are estimated for Bing Company based on the level of machine hours used.If total monthly fixed costs are $150,000,variable costs per machine hour are $8,and 15,000 machine hours are expected to be used in June,which of the following would be the best estimate of total maintenance costs?

Exhibit 5-7 Last month,Ellison Industries sold its product for $100 per unit.Fixed production costs were $50,000,and variable production costs amounted to $21 per unit.Fixed selling and administrative costs totaled $20,000,and variable selling and administrative costs amount to $3.00 per unit.Dawson produced and sold 6,000 units last month. -Refer to Exhibit 5-7.Which of the following amounts represents total operating profit?

An example of a mixed cost would include salespersons who are paid salaries plus commissions based on sales dollars.

All of the following are steps of the high-low method except:

Which of the following costs does not change in total when the activity level increases or decreases within the relevant range?

The following regression analysis output is for Watson Company's cost of paying sales people salary plus commission as a percent of sales on a monthly basis: $\begin{array} { l r } &\text { Coefficients } \\ \text { Y Intercept } & 258,323 \\\text { \( X \) Variable } & 0.04\end{array}$ a.Use the regression output above to develop the cost equation Y = f + vX. b.What would be Watson's estimated costs if it had sales of $2,000,000 next month? c.What concerns would you have if Watson's CEO wanted you to compute estimated costs based on $8,000,000 sales for next month,when sales amounts have never exceeded $3,000,000?

Variable costs such as direct labor and direct materials typically stay constant on a per unit basis.

Unusual data points are often called outliers.

When 85,000 units are produced,the fixed cost is $10 per unit.Assuming our company is within the relevant range and we produce 120,000 units,our fixed costs will not remain at $10 per unit.

Exhibit 5-1 Presented below are the production data for the mixed costs incurred by Clarion Company. $\begin{array} { l r r } \text { Muoth } & \text { Cast } & \text { Units } \\\text { March } & \$ 4,700 & 3,700 \\\text { April } & 7,200 & 5,050 \\\text { May } & 5,565 & 4,725 \\\text { June } & 9,500 & 8,500 \\\text { July } & 7,915 & 6,745 \\\text { August } & 8,300 & 7,500\end{array}$ Clarion Company uses the high-low method to estimate mixed costs. -Refer to Exhibit 5-1.How would the cost function be stated using the high-low method?

Regression analysis is one of the most accurate methods for estimating costs,because its estimates are based on the data set as a whole.

Randle Company ran a regression analysis comparing total units of production and maintenance costs for the past four months.The regression analysis shows an R-squared of 0.76.Which of the following statements best describes this measure?

The equation that best describes a mixed cost is:

Last month,Pioneer Company sold its product for $50 per unit.Fixed production costs were $20,000,and variable production costs amounted to $8.00 per unit.Fixed selling and administrative costs totaled $13,000,and variable selling and administrative costs amount to $3.00 per unit.Pioneer produced and sold 4,000 units last month. (1)Prepare a traditional income statement for Pioneer Industries. (2)Prepare a contribution margin income statement for Pioneer Industries. (3)Why do companies use the contribution margin income statement format?

Regression analysis and the high-low method often result in the same fixed and variable cost estimates because both approaches use the same data.