12e_GNB_CH05_Solutions_Manual

# 12e_GNB_CH05_Solutions_Manual - Chapter 5 Cost Behavior...

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Sheet1 Page 1 Chapter 5 Cost Behavior: Analysis and Use Solutions to Questions a. Variable cost: A variable cost remains con- stant on a per unit basis, but changes in to- tal in direct relation to changes in volume. b. Fixed cost: A fixed cost remains constant in total amount. The average fixed cost per unit varies inversely with changes in volume. c. Mixed cost: A mixed cost contains both vari- able and fixed cost elements. a. Unit fixed costs decrease as volume increas- es. b. Unit variable costs remain constant as vo- lume increases. c. Total fixed costs remain constant as volume increases. d. Total variable costs increase as volume in- creases. a. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed. b. Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid. 5-4 An activity base is a measure of what- ever causes the incurrence of a variable cost. Examples of activity bases include units pro- duced, units sold, letters typed, beds in a hos- pital, meals served in a cafe, service calls made, etc. a. Variable cost: A variable cost remains con- stant on a per unit basis, but increases or decreases in total in direct relation to

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Sheet1 Page 2 changes in activity. b. Mixed cost: A mixed cost is a cost that con- tains both variable and fixed cost elements. c. Step-variable cost: A step-variable cost is a cost that is incurred in large chunks, and which increases or decreases only in re- sponse to fairly wide changes in activity. 5-6 The linear assumption is reasonably va- lid providing that the cost formula is used only within the relevant range. CostActivityMixed CostVariable CostStep-Variable Cost 5-7 A discretionary fixed cost has a fairly short planning horizon° usually a year. Such costs arise from annual decisions by manage- ment to spend on certain fixed cost items, such as advertising, research, and management de- velopment. A committed fixed cost has a long planning horizon±generally many years. Such costs relate to a company ² s investment in facili- ties, equipment, and basic organization. Once such costs have been incurred, they are ³ locked in° for many years. i a. Committed d. Committed b. Discretionary e. Committed c. Discretionary f. Discretionary 5-9 Yes. As the anticipated level of activity changes, the level of fixed costs needed to sup- port operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity. 5-10 The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical since they represent extremes of activity.
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