Do you know the terms and definitions?

1. A variable cost per unit
       a. is different for different levels of activity
       b. remains constant
       c. increases as activity increases
       d. decreases as the activity increases

B.   By definition, a variable cost per unit remains constant. The total variable
       costs will change with changes in activity, but the cost per unit will not        
       change (a. , c. & d.)

2. A discretionary fixed cost
       a. is always budgeted over a 5 year time period
       b. must be spent no matter what happens in the company
       c. can be delayed with management’s decision 
       d. is always related to facilities

C.   By definition, a discretionary fixed cost is one that is spent if management        
       decides to incur the cost. Therefore, they can also not incur the cost if they
       want. Discretionary costs can be any type of period cost. (d.) The budget        
       time period is not relevant to whether it is discretionary or not (a.).

3. A fixed cost
       a. is different in total for different levels of activity
       b. remains constant in total
       c. increases as activity increases
       d. decreases as the activity decreases

B.   By definition, a fixed cost does not change in total (a.). The fixed cost per 
       unit will increase as activity decreases and decrease as activity increases.        
       The cost per unit moves the opposite way as the change in activity. (c. & d.)

4. A mixed cost
       a. is the same for all levels of activity
       b. increases in total as activity decreases after a certain point
       c. has characteristics of a fixed and variable cost
       d. both b. and c.

C.   By definition, a mixed cost has both fixed and variable characteristics. It would 
       increase in total after activity increases to a certain point and not decrease.        
       (b.) It will increase as activity increases and is not the same for all levels of
       activity because of the variable part (a.).

5. A relevant range is
       a. the length of time the company plans its costs to remain the same
       b. the level of activity that current fixed costs can support without increasing
       c. the high and low range of variable costs
       d. the difference in a fixed and variable cost

B.   A relevant range is “the range of activity where the assumption about cost 
       behavior is valid”. This also means that fixed costs won’t change within
       this range of activity. It is not related to a certain time frame, it is related
       to a stated range of activity, normally units produced. (a.) The relevant range
       is not associated with variable costs because variable costs are a certain cost
       per unit no matter what the range of production is. (c. & d.)

6. An opportunity cost
       a. means the company had only one alternative
       b. is the total amount of a net loss from operations
       c. is what is given up by a choice to pursue other alternatives
       d. is what your future job will pay you

C.   By definition, an opportunity cost is what you do not get because you pursue
       another alternative. It is related to a current situation, not future (d.)        
       There is more than one alternative or you would not be able to make a 
       choice. (a)

7. A sunk cost
       a. can be refunded upon request in the future
       b. can not be recovered no matter what happens in the future
       c. is what will be spent in the future for salaries for personnel added
       d. is always a variable cost 

B.   By definition, a sunk cost is already paid for and can not be changed by a 
       decision made or action taken in the future. It is normally a fixed cost (d.)
       Both a. and c. are related to future cash flows and are not sunk costs for        
       this reason.

8. A committed cost is
       a. a cost that does not have to be spent this year to meet company goals
       b. a cost that can be changed if the number of units sold changes by 5%
       c. a cost that is not in the budget
       d. a cost that can’t be reduced without changing the goals of the company

D.   By definition a committed cost can’t be reduced without a significant change
       in the company’s goals and strategy. A committed cost would be in the budget
       because it is a cost that must occur. (c.) A change in the number of units sold
       by 5% is not considered a change in the company’s goals

9. A semi-variable cost behaves the same way as
       a. a mixed cost
       b. a monthly fixed cost 
       c. an annual fixed cost
       d. a variable cost

A. Another name for a semi-variable cost is a mixed cost. They behave in the
       same way. A mixed cost is both a variable and a fixed, so either one by itself 
       is not correct. The timeframe associated with the cost is not relevant to how 
       the cost behaves. (b. & c.)

Do you understand how to apply the terms and definitions?

1. When the level of activity increases within a relevant range
       a. fixed cost per unit will decrease 
       b. fixed cost in total will increase
       c. variable costs in total will decrease
       d. variable cost per unit and in total will decrease

A.   Fixed cost per unit moves the opposite direction that the level of activity moves.
       When activity increases, the cost per unit decreases. Fixed costs in total do 
       not change. (b.) Variable costs do not change per unit with changes in 
       activity (d.) and move the same direction as the activity (c.).

2. An example of a committed fixed cost would be
       a. property taxes on the manufacturing building
       b. dollars spent for advertising based on sales volumes
       c. management training programs
       d. the company Christmas party

A.   Property taxes are a cost that must be paid and are set by the government        
       for the year making them fixed since the total will not change with changes        
       in activity. Management training programs and the Christmas party are
       discretionary costs, since management does not have to spend for this if        
       they don’t want to. (c. & d.) Advertising based on sales volumes is a 
       variable cost since it changes with changes in sales, the activity. (b.)

3. The company has a mixed cost that has a total cost formula of
       $8,000 + $2.00 X. When activity is 2,000, the total cost is expected to be:
       a. $10,000
       b. $ 6,950
       c. $12,000
       d. $ 9,900

C.   Using the total cost formula you would take the fixed cost of $8,000 and add 
       to it the variable cost of $2 x 2,000, giving you $12,000.

4. Costs that the company would classify as fixed would be
       a. utilities at the manufacturing plant
       b. insurance and rent
       c. a & b.
       d. none of the above

B.   Insurance and rent are normally paid for a set period of time at a set cost. 
       The cost is for the facility and it will not increase or decrease with changes        
       in production or sales. Utilities is a variable or mixed cost, as the cost will 
       vary with the number of units produced which drives usage. (a. & c.)      

5. Which of these costs is least likely to be a discretionary cost?
       a. management bonus
       b. additional building maintenance
       c. insurance
       d. salaries of extra maintenance workers

C.   A discretionary cost is one that management can decide not to pay. 
       Insurance is not an option. The company’s assets must be properly protected.
       The company can decide not to pay a management bonus and extra
       maintenance costs, so these costs are discretionary.

6. A cost will be variable if it changes in total 
       a. as the cost per unit changes with the number of units sold
       b. as cost per unit changes with the number of units manufactured
       c. at differing levels of activity
       d. both a. and b.

C.   By definition, variable costs change in total as volume changes and the cost per
       unit does not change as volume changes. Since the cost per unit does not        
       change a., b., and d. are not correct 

7. Fixed costs that can’t be reduced over a short period of time are
       a. avoidable
       b. not necessary
       c. committed
       d. non committed

C.   By definition, a committed cost can not be changed over a short period of time.
       Management can decide not to incur all of the other choices listed. 

8. As volume increases
       a. total fixed costs change and variable costs stay the same
       b. total fixed costs stay the same and variable cost per unit changes
       c. total fixed costs change and variable cost per unit does not change
       d. total fixed costs stay the same and variable cost per unit does not change

D.   As volume increases, total fixed costs stay the same and variable costs
       per unit does not change, while total variable costs do change. This is
       the most important thing you must understand. All other answers are
       not how costs behave.

Know this: As volume changes: