MAS-01: Cost Behavior Analysis

Exercise: A company manufactures and sells a single product. A partially completed schedule of the company’s
total and per unit costs over a relevant range of 500 to 2,500 units produced and sold each year is given below.

Units Produced and Sold

500 1,500 2,500
TOTAL COSTS:
(a ) Variable costs P1,500 P4,500 P7,500
(b ) Fixed costs 1,500 1,500 1,500
(c ) Total costs P3,000 P6,000 P9,000
COSTS PER UNIT
(d ) Variable costs 3.00 3.00 3.00
(e ) Fixed costs 3.00 1.00 .60
(f ) Total costs 6.00 4.00 3.60
Required:
1. Using high-low points method, complete the above schedule.
2. Give at least five (5) observations on the costs behavior.
3. Express the cost formula based on the line equation form ‘ Y = a + bX’.
4. If the company produces 2,000 units, then how much is the expected total costs?

Multiple Choices:

1. Which of the following statements is true?

a. The higher is the production within the relevant range, the higher is the fixed cost per unit
b. The higher is the production within the relevant range, the higher is the variable cost per unit
c. The lower is the production within the relevant range, the lower is the total fixed cost
d. The lower is the production within the relevant range, the lower is the total variable cost

2. As volume increases,
a. Total fixed costs remain constant and per-unit fixed costs increase
b. Total fixed costs remain constant and per-unit fixed costs decrease
c. Total fixed costs remain constant and per-unit fixed costs remain constant
d. Total fixed costs increase and per-unit fixed costs increase

3. Within the relevant range, the amount of variable cost per unit
a. Differs at each production level c. Decreases as production increases
b. Increases as production increases d. Remains constant at each production level
4. Which of the following best describes a fixed cost?
a. It may change total when such change is unrelated to changes in production.
b. It may change in total when such change is related to changes in production.
c. It is constant per unit of changes in production.
d. It may change in total when such change depends upon production or within the relevant range.

5. Which of the following best describes a step cost?

a. It varies less than proportionately with volume
b. It varies more than proportionately with volume
c. It is partly variable and partly fixed
d. It increases abruptly outside the relevant range

6. In describing the cost formula equation, Y = a + bX, which of the following statements is correct?
a. ‘Y’ is the independent variable
b. ‘a’ is the variable rate
c. ‘a’ and ‘b’ are valid for all levels of activity
d. In the high-low method, ‘b’ equals the change in cost divided by the change in activity

7. The fixed cost of semi-variable cost is comparable to the mathematical concept of

a. Y-intercept c. Dependent variable
b. Slope of the line d. Independent variable
8. Which of the following is not a method of splitting a semi-variable cost?
a. High and low point c. Scatter chart
b. Method of least squares d. Linear programming

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 9. The company applied the high-low method of cost estimation to customer order data for the first 4
months of the year.
Month Orders Costs(P)
January 1,200 3,120
February 1,300 3,185
March 1,800 4,320
April 1,700 3,895
What is the estimated variable filing cost component per order?
a. P2.00 c. P2.48
b. P2.42 d. P2.50
10. The company estimated its material handling cost at two activity levels as follows:
Kilos handled Cost
80,000 160,000
60,000 132,000
What is the company’s estimated cost for handling 75,000 kilos?
a. P150,000 c. P157,500
b. P153,000 d. P165,000
11. In May, the company had electrical costs of P225.00 when the total volume was 4,500 cups of coffee
served. In June, electrical costs were P227.50 for 4,750 cups of coffee. Using the high-low method, what
is the estimated fixed cost of electricity per year?
a. P200 c. P225
b. P180 d. P2,160
12. The company uses high-low method to derive the cost formula for electrical power cost. According to the
cost formula, the variable cost per unit of activity is P3 per machine hour. Total electrical power cost at
the high level of activity was P7,600 and the low level of activity was P7,300. If the high level of activity
was 1,200 machine-hours, then the low level of the activity was
a. 800 machine-hours c. 1,000 machine-hours
b. 900 machine-hours d. 1,100 machine-hours
13. The company has an average unit cost of P45 at 10,000 units and P25 at 30,000 units. What is the
variable cost per unit?
a. P10.00
b. P15.00
c. P20.00
d. An amount that cannot be determined without more information

14. Total production costs of prior periods for a company are listed below. Assume that the same cost
behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost
driver for each product is the number of units produced.
Production per month (units) 3,000 9,000 16,000 35,000
Product X P23,700 P52,680 P86,490 P178,260
Product Y 47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of 8,000 units for product X?
a. P5.98 c. P7.90
b. P5.85 d. P4.83
15. When unit production decreases, the average product cost per unit increases. This increase in the
average cost per unit is due to the
a. Increase in the total variable costs c. Increase in the unit variable cost
b. Increase in the total fixed costs d. Increase in the unit fixed cost
16. The company provided you with the following flexible budget of factory overhead at three different
capacity levels:
Capacity Factory Overhead
60% P98,000
70% 106,000
85% 118,000
What will be the flexible budget of factory overhead at 90% capacity?
a. P112,000 c. P130,000
b. P122,000 d. P132,000

Brain exercise: xxxvi - How can you throw a ball as hard as you can and have it come back to you, even if it doesn’t
bounce off anything? There is nothing attached to it, and no one else catches or throws it back to you. - ivxxx

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17. The major objective of preparing a scatter diagram is to
a. Derive an equation to predict future costs
b. Perform regression analysis on the results
c. Determine the relevant range
d. Find the high and low points to use for the high-low method of estimating costs

18. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is
that scatter-diagram method
a. Includes cost outside the relevant range
b. Considers more than two points
c. Can be used with more types of costs than the high-low method
d. Gives a precise mathematical fit of the points to the line

19. Which is an equation required for applying least square method of computing fixed and variable costs?
a. ∑𝑦 = 𝑎∑𝑥 + 𝑏∑𝑥 2 c. ∑𝑦 = 𝑛𝑎 + 𝑏∑𝑥
b. ∑𝑥𝑦 = 𝑛𝑎 + 𝑏∑𝑥 d. ∑𝑥𝑦 = 𝑛𝑎 + 𝑏∑𝑥 2
20. An analysis of maintenance cost at four levels of plant operations is shown below:
Hours Cost Hours x Cost Hours Squared
40 P1,000 40,000 1,600
30 900 27,000 900
60 1,300 78,000 3,600
50 1,150 57,500 2,500
180 P4,350 202,500 8,600
The company uses the ‘method of least square’ for splitting a semi-variable cost. How much is the fixed
cost of the maintenance?
a. P480 c. P520
b. P500 d. P600
21. The following cost data for different hours of operations are made available to you by the company for
your analysis:
Number of months 10
Sum of hours 350
Sum of costs 1,000
Sum of hours x costs 39,200
Sum of hours squared 14,250
How much is the fixed cost per year?
a. P26.50 c. P318.00
b. P35.00 d. P420.00
22. In regression analysis, which of the following correlation coefficients (r ) represents the strongest
relationships between dependent and independent variables?
a. -1.05 c. -0.03
b. 1.89 d. 0.78
23. If the coefficient of correlation (r ) between two variables is zero, how might a scatter diagram of these
variables appear?
a. Random points
b. A least squares line that slopes up to the right
c. A least squares line that slopes down to the right
d. Under this condition, a scatter diagram could not be plotted on a graph.

24. R-squared (𝑟 2 )is a measure of

a. The spurious relationship between cost and activity
b. The fixed cost component
c. The variable cost per unit of activity
d. How well the regression line accounts for the changes in the dependent variable

25. After constructing a scatter chart, the internal auditor of the company provided you with the following
information:
Independent variable: 1,000,000
Slope of the line: 0.25
Y-axis intercept: 7,500
The total cost is amounted to
a. P250,000 c. P1,000,000
b. P257,500 d. P1,007,500

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