1. As volume increases, the total cost of a mixed cost
       a. increases by the same percentage as volume increases
       b. increases 
       c. decreases
       d. decreases by the same percentage as the volume increases

B.   A mixed cost has a fixed part that does not change as the volume changes
       and a variable part that changes at the same rate as the volume changes.
       Since both do not change proportionately, a., is incorrect. Any cost 
       that is all or part variable will change the same direction as volume changes,
       therefore, a decrease in cost is not correct when volume increases.

2. Discretionary costs are
       a. almost always committed
       b. never fixed
       c. are usually the first costs reduced in a cost reduction program
       d. are unavoidable

C.   Discretionary costs are costs that management does not have to spend and
       can decide to not incur the costs. Committed is the opposite of discretionary.        
       Discretionary costs can be variable or fixed and this is not what determines if
       the cost is discretionary. Discretionary costs are avoidable if management
       decides not to spend the money.

3. The most significant variable cost in a manufacturing company is most often
       a. straight-line depreciation on equipment
       b. direct materials that go into the product
       c. utilities
       d. cost of operating the warehouse to store materials

B.   Direct materials is a variable cost that is required for all products manufactured.
       Depreciation and warehouse costs are fixed costs. Utilities is a variable cost,
       however, it is not as costly as direct materials that go into the product.	     

4. Management can do very little to reduce these types of costs over the
       period of the next six months
       a. flexible costs
       b. discretionary costs
       c. committed costs
       d. product costs

C.   Committed costs by definition can not be changed in the short term
       without a major change in goals or strategy. Flexible costs is not a
       type of cost. Discretionary costs can be avoided and not incurred
       at any time. Product costs go into making the product and are not
       something you can decide not to spend and still make the product.

5. Which of the following is classified as a committed, sunk, fixed expense?
       a. investment in manufacturing equipment
       b. advertising
       c. additional maintenance on equipment
       d. employee benefit programs

A.   The investment in equipment is a cost that is sunk because it has already
       been made and you can’t get your money back, it is committed and fixed
       because you will incur the depreciation expense at a set amount as you
       use the equipment. Management can decide not to spend all of the 
       other choices listed above.
     

6. The term relevant range means the range that
       a. will cause costs to fluctuate
       b. cost relationships identified are valid
       c. relevant costs are incurred
       d. production volumes may not vary and will remain constant

B.   The relevant range is the range where fixed cost will not change due
       to changes in volume within the relevant range. The term cost
       relationship means it is either a fixed, mixed, or variable cost. Relevant        
       range is used to determine the range of volume where a cost will be
       fixed within these volumes, therefore, the costs won’t fluctuate (a.)
       Production volumes will almost always vary (d.) and all costs used
       to make a decision are relevant which is not directly related to the
       term relevant range.

7. Which of the following is least likely to be classified as a variable cost?
       a. depreciation on a machine based on how much is produced
       b. supervisors on the production line
       c. utilities at the manufacturing plant
       d. costs to delivery the product to the customer

B.   Supervisors on the production line are fixed costs, or could be considered
       a semi-variable cost. It is not a variable cost, because you do not
       add supervisor costs each time you produce one more unit.
       The other choices above will change in direct proportion to the volume
       produced or sold and are therefore by definition a variable cost.

8. Which of the following is considered a variable cost?
       a. insurance for employee automobiles
       b. feed for cattle at a feed lot
       c. cleaning supplies
       d. costs that are incurred once a year

B.   The definition of a variable cost is a cost that changes with changes
       in volume or activity. The key is that it must change as volume changes.
       At a cattle feed lot, the product is the cattle, therefore, the more product you
       have the more feed you must purchase. This cost changes with changes
       in production volume. Insurance for employee automobiles may change
       with the number of autos, but not directly with changes in volume of
       production or sales. Cleaning supplies costs are normally incurred based on 
       the size of the area being cleaned, not based on volume changes. Costs that
       are incurred once a year are normally fixed costs. 

9. A fixed cost
       a. is set at the beginning of the year and will not change
       b. is fixed for one level of production volumes
       c. will not change directly in proportion to production volume
       d. behaves very similar to costs incurred for material 

C.   By definition, a fixed cost will not change as volume changes within
       a set relevant range. The term “fixed” does not mean that it        will not
       ever change. (a.) Fixed costs are fixed within a range and not for
       one level of production. (b.) Material is a variable cost (d.)

10. Which of these costs would be the most difficult to estimate when 
       you know exactly how many units will be produced?
       a. rent
       b. materials used in the product
       c. utilities
       d. insurance

C.   Fixed costs are easy to estimate when you know the volume of units
       to be produced because it is easy to determine what is needed to
       support this volume of production. Fixed costs are a. and d. Variable
       costs are easy to estimate because you simply take the cost per unit
       x the known volume to get total cost. Utilities is the most difficult
       to estimate because it is most likely mixed and will not stay the same
       or be incurred directly with the volume.
       
     

11. Hansen Natural manufactures and sells energy drinks. The drinks are sold
for $1.50 a bottle to the distributor. The company estimates costs will be
as follows when producing at a volume level of 100,000 units per month
and sales of 90,000 per month:

Ingredients used to make the drink	$36,000
Bottles	$8,000
Labor working to manufacture the drink	$22,000
Rent for the manufacturing plant	$7,500
Utilities at the manufacturing plant - (variable)	$2,000
Management salaries	$18,000
Other administrative expenses, each month	$29,000
Costs to ship the product to customers	$3,600
Supervisors at the manufacturing plant	$6,000
Sales commission expense	$900
General business insurance	$600
Advertising expense, paid monthly	$900
Determine the total cost to produce and sell 120,000 bottles of drink.

 

 

 

 

 

 

 

 

 

Variable Costs	Per Unit Cost
Ingredients	$0.36
Bottles	$0.08
Labor Working	$0.22
Costs to ship	$0.04
Utilities	$0.02
Sales Commission	$0.01
Total variable cost per unit	$0.73 each

 

Selling cost per unit is calculated as total costs / units sold
Production cost per unit is calculated as total costs / units produced

Fixed Costs Per Month
Rent for the manufacturing plant	$7,500
Management salaries	$18,000
Other administrative expenses, each month	$29,000
Supervisors - manufacturing	$6,000
General business insurance	$600
Advertising expense, paid monthly	$900
Total monthly fixed costs	$62,000

Total cost to produce and sell 120,000 bottles of drink is:

 $62,000 + ($0.73 x 120,000) is $87,600 = $149,600
     fixed               variable

Total fixed cost remains the same at a different volume level
Total variable cost increases as volume increases and the variable 
    cost per unit does not change.





12. Morning Co. manufactures toasters. During the first year, the company
sold 500,000 toasters and reported the following operating results:

Sales	$7,000,000
Cost of Goods Sold	$4,000,000
Gross Profit	$3,000,000
Operating Expenses	$2,000,000
Income	$1,000,000

Cost of goods sold are 40% variable and 60% fixed.
Operating expenses are 90% fixed and 10% variable.

For next year, the company expects to sell 600,000 toasters. What is the
expected income for next year given the price per unit and the costs do not change?

To answer this question, you must first determine the variable and fixed
amount for cost of goods sold and operating expenses. Then you
must calculate the cost per unit for variable costs only, which will
stay the same. Fixed costs will be the same for next year.

	Cost of Goods Sold	Operating Expenses
Fixed	$2,400,000	$1,800,000 Fixed
Variable	$1,600,000	$200,000 Variable
Variable cost	$3.20 Per Unit	$0.40 Variable per unit

Divide the total variable cost by 500,000 units to get cost per unit

Expected for sales of 600,000 toasters

Sales ($14 per unit)	$8,400,000
-Cost of Goods Sold ($3.20 per unit)	$1,920,000
-Cost of Goods Sold Fixed	$2,400,000
Gross Profit	$4,080,000
Operating Expenses ($0.40 per unit)	$240,000
Operating Expenses - Fixed	$1,800,000
Income Before Tax	$2,040,000

 

13. A company that manufactures flashlights incurs the following costs
to produce 60,000 and sell 50,000 flashlights.

Direct Labor to make the flashlights	$4 per unit
Direct Materials that go into the flashlights	$6 per unit
Manufacturing costs that are the same per unit	$1 per unit
Manufacturing costs that will not change as production volume changes	$234,000
Selling costs that vary by units sold	$0.50 per unit
Selling costs that will not change as sales change	$127,000
Administrative costs	$275,000

What price must the company sell the product to earn 20% profit above total costs
on sales volumes of 40,000 and 50,000 flashlights.

	40,000	50,000
Variable costs = units x cost per unit
Direct Labor	$160,000	$200,000
Direct Materials	$240,000	$300,000
Variable Manufacturing	$40,000	$50,000
Variable Selling	$20,000	$25,000
Fixed Costs Remain same
Manufacturing	$234,000	$234,000
Selling	$127,000	$127,000
Administrative	$275,000	$275,000
Total Cost	$1,096,000	$1,211,000
/ units	40,000	50,000
Total Cost per unit	$27.40	$24.22
multiply cost by 1.20
price to earn 20%	$32.88	$29.06

Important to Notice: