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Exam 5: Planning Budgeting and Behaviour

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Question 1

True/False

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The term 'relevant range' refers to the levels of activity within which the assumptions relative to cost behavior are valid.

A) True
B) False

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verified

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Question 2

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The planning horizon for a discretionary fixed cost usually encompasses many years.

A) True
B) False

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Question 3

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Explain the reasoning for splitting cost into fixed and variable. Explain the different ways in which this is important.

European International has 3 separate business units in the following countries. Data for each of the business units is given below: $\begin{array}{|l|l|l|l|}\hline&\text { France } & 5 p \mathrm{a} i n & \text { italy }\\\hline \text { Selling price per unit } & £ 35 & £ 38 & £ 42 \\\hline \text { Manufacturing cost } & £ 4,000 \text { per month plus } £ 17 \text { per } & £ 3,500 \text { per month plus } £ 18 \text { per } & £ 5,000 \text { per month plus } £ 20 \text { per } \\& \text { unit } & \text { unit } & \text { unit } \\\hline \text { Administrative } & £ 2,500 \text { per month plus } £ 2.50 & £ 2,900 \text { per month plus } £ 2.90 & £ 3,500 \text { per month plus } £ 3.50 \\\text { expense } & \text { per unit } & \text { per unit } & \text { per unit } \\\hline \text { Sales commissions } & 15 \% \text { of sales } & 16 \% \text { of sales } & 20 \% \text { of sales } \\\hline \text { Advertising expense } & £ 2,000 \text { per month } & £ 3,000 \text { per month } & £ 2,000 \text { per month }\\\hline\end{array}$ - For planning, control, and decision-making purposes

The Blaine Company is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal £240,000. Of this amount, depreciation totals £80,000 (all fixed) and lubrication totals £72,000 (all variable) . The remaining £88,000 of the total overhead cost consists of utility cost (mixed) . At an activity level of 9,000 setups, utility cost totals £112,000. Assume that the relevant range includes all of the activity levels mentioned in this problem. -The variable cost per setup for utilities is most likely closest to

Factory overhead is an example of a

Marger, Inc., provided the following data for two recent months: $\begin{array}{lrr}&\text { April }&\text {May }\\ \text { Sales in Units.} &3,200&4,500 \\ \text { Cost: } &\\ \text { Cost T} &5,600&5,600 \\ \text {Cost U } &4,480&6,300\\ \text { Cost 'W } & 3,950&5,250\\\end{array}$ -Which of the following classifications best describes the behavior of Cost T?

Is labour a fixed or variable cost? Explain.

Carr Company reports the following data for the first six months of the year: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ MachineElectrica $\begin{array}{lrr} \text { Month } & \text { Hours } & \text { Cost } \\ \text { January. } &400&£40\\ \text {February } &300&£ 30\\ \text {March } &400& £ 50 \\ \text { April } &300 &£ 40 \\ \text { May} &200&£30\\\text {June } &200 &£ 20\end{array}$ - Using the least-squares regression method, the estimated monthly fixed component of the electrical cost is closest to

European International has 3 separate business units in the following countries. Data for each of the business units is given below: $\begin{array}{|l|l|l|l|}\hline&\text { France } & 5 p \mathrm{a} i n & \text { italy }\\\hline \text { Selling price per unit } & £ 35 & £ 38 & £ 42 \\\hline \text { Manufacturing cost } & £ 4,000 \text { per month plus } £ 17 \text { per } & £ 3,500 \text { per month plus } £ 18 \text { per } & £ 5,000 \text { per month plus } £ 20 \text { per } \\& \text { unit } & \text { unit } & \text { unit } \\\hline \text { Administrative } & £ 2,500 \text { per month plus } £ 2.50 & £ 2,900 \text { per month plus } £ 2.90 & £ 3,500 \text { per month plus } £ 3.50 \\\text { expense } & \text { per unit } & \text { per unit } & \text { per unit } \\\hline \text { Sales commissions } & 15 \% \text { of sales } & 16 \% \text { of sales } & 20 \% \text { of sales } \\\hline \text { Advertising expense } & £ 2,000 \text { per month } & £ 3,000 \text { per month } & £ 2,000 \text { per month }\\\hline\end{array}$ - If the business unit in Spain plans to produce and sell 4,000 units next month, the expected gross margin would be

Total production costs for Gallop, Inc. are budgeted at £230,000 for 50,000 units of budgeted output and at £280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 50,000 units. How much is Gallop's budgeted variable cost per unit of output

Committed fixed costs are those that relate to the investment in facilities, equipment and the basic organisational structure of a company, True or

The contribution approach to the income statement classifies costs by function rather than by behavior

Compton Company is a wholesale distributor of educational CD-ROMs. The company's records indicate the following: $\begin{array}{lrr}&\text { This Year}&\text { Last Year }\\ \text { Units Sold } &250,000&200,000\\ \text { Sales Revenue } & £ 1,250,000 &£ 1,000,000\\ \text { Less: Cost of Goods Sold } &\underline{875,000} &\underline{ 700,000} \\ \text {Gross Margin } &375,000 & 300,000 \\ \text {Less: Operating Expenses } &\underline{222,000} &\underline{210,000}\\ \text {Net Operating Income } &£ 153,000& £ 90,000\\\end{array}$ - Using the high-low method of analysis, what are the company's estimated variable operating expenses per unit

Which of the following types of firms likely would have a high proportion of variable costs in its cost structure?

A merchandising company typically will have a high proportion of which type of cost in its cost structure

An example of a discretionary fixed cost would be

The Blaine Company is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal £240,000. Of this amount, depreciation totals £80,000 (all fixed) and lubrication totals £72,000 (all variable) . The remaining £88,000 of the total overhead cost consists of utility cost (mixed) . At an activity level of 9,000 setups, utility cost totals £112,000. Assume that the relevant range includes all of the activity levels mentioned in this problem. -If 7,800 setups are projected for the next period, total expected overhead cost would be closest to

An example of a committed fixed cost would be

Paine Company wishes to determine the fixed portion of its electrical costs (a mixed cost) . Management believes that the variable portion of the electrical costs is driven by machine-hours. Information for the previous three months follows: $\begin{array}{lcc}&\text { Machine-hours }&\text {Electrical cost}\\ \text {January } &33,000 &£ 600 \\ \text { February } &31,000& £585\\ \text { March} &34,000& £610\end{array}$ Using the high-low method, the fixed portion of the company's electrical costs would be estimated to be closest to: