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exam 1 Fall14 Student: ___________________________________________________________________________ 1. If the level of activity increases within the relevant range: A. variable cost per unit and total fixed costs also increase. B. fixed cost per unit and total variable cost also increase. C. total cost will increase and fixed cost per unit will decrease. D. variable cost per unit and total cost also increase. 2. Data for Cost A and Cost B appear below: Which of the above best describes the behavior of Costs A and B? A. Cost A is fixed, Cost B is variable. B. Cost A is variable, Cost B is fixed. C. Both Cost A and Cost B are variable. D. Both Cost A and Cost B are fixed. Courses > Management Accounting > Cost Behavior and Analysis ✓ Checked for updates, April 2022. Accountingverse.com Costs, when categorized according to behavior (in relation to changes in level of activity), can be classified into: (1) fixed costs and (2) variable costs. Variable CostsWithin a relevant range and specified time period, the total variable costs vary directly (in proportion) to the change in activity level. The cost per unit is constant. For example: ABC Company spends $2.50 materials cost for every unit of Product A. If the company produces 1,000 units, it spends $2,500 ($2.50 x 1,000). If it produces 2,000 units, then the company will spend $5,000 ($2.50 x 2,000). Take note that the cost per unit does not change but the total cost varies directly with the level of activity. Total variable cost = Variable cost per unit x Number of units or activity Common examples of variable costs include direct materials, direct labor, supplies, fuel and power, spoilage costs, receiving costs, royalties, overtime premium, sales commissions, and delivery expenses. Fixed CostsWithin the relevant range, total fixed costs remain constant. Regardless of the level of activity, the business pays the same. However, the fixed cost per unit changes as the level of activity changes. As more units are produced, the fixed cost per unit decreases. For example: ABC Company pays monthly rent of $30,000 for a factory building. Regardless of how many units are produced, the company pays the same amount. If we are to compute for the fixed cost per unit at 1,000 units, it would be equal to $30 ($3,000/1,000 units). If the company produces 1,500 units, then fixed cost per unit would be $20 ($3,000/1,500 units). As the level of activity increases, the fixed cost per unit decreases. The total fixed cost remains the same. Examples of fixed costs include rent, depreciation, patent amortization, property insurance, property taxes, and fixed salaries of production executives and indirect labor. Mixed CostsMixed costs contain both fixed and variable elements. The company pays a constant fixed cost and a variable amount on top of it. Examples of mixed costs include: utilities, repairs and maintenance, inspection, fringe benefits, employer's payroll taxes, and salaries that contain a fixed amount plus commissions. Total cost = Fixed costs + Variable costs ExampleXYZ Company has entered into several contracts that require it to pay fixed selling costs of $100,000 per month. The cost accountant determined the variable selling cost at $30 per unit. Compute for the total selling cost that would be incurred if the company expects to sell 2,500 units next month. Solution:Total cost = Fixed cost + Variable costsTotal cost = $100,000 + ($30 x 2,500) Total cost = $175,000 Key Takeaways Total variable costs increase as number of units (cost driver) increase. Variable costs per unit are constant. Within a relevant range, total fixed costs are constant even if units increase. Fixed cost per unit decreases as units increase. Mixed costs have elements of both fixed and variable costs. For better analysis of costs, mixed costs are often segregated into variable and fixed. Web link APA format Fixed and variable costs (2022). Accountingverse. Next Lesson → Chapter Outline ≡ Cost Behavior and Analysis 35. When the level of activity decreases within the relevant range, the fixed costper unit will:A) decrease.B) increase.C) remain the same.D) The effect cannot be predicted.Ans: BLevel: MediumLO: 5AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingIn order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. When the level of activity decreases within relevant range the fixed cost per unit will?Unit fixed costs and total variable cost will change with a decrease in activity within the relevant range. Fixed costs are costs that are fixed in total and does not vary in relation to the changes in activity level, therefore as per unit of activity level decreases, the fixed cost per unit would increase.
What happens to fixed cost per unit as the activity level increases decreases?Fixed costs do not vary with the production level. Total fixed costs remain the same, within the relevant range. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.
When the level of activity increases the fixed cost per unit?As the level of activity increases, the fixed cost per unit decreases. The total fixed cost remains the same. Examples of fixed costs include rent, depreciation, patent amortization, property insurance, property taxes, and fixed salaries of production executives and indirect labor.
How does relevant range affect fixed costs?Definition of Relevant Range
The term relevant range is included in the definition of fixed costs, because if a company's volume were to decline to an extremely low level, the company would take action to decrease its total amount of fixed costs.
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When the level of activity decreases within the relevant range What is the fixed cost per unit?
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