Question

1–5 What effect does an increase in the activity level have on—

a. Average fixed costs per unit?

b. Variable costs per unit?

c. Total fixed costs?

d. Total variable costs?

1–6 Define the following terms: (a) cost behavior and (b) relevant range.

1–7 What is meant by an activity base when dealing with variable costs? Give several

examples of activity bases.

1–8 Managers often assume a strictly linear relationship between cost and the level of activity.

Under what conditions would this be a valid or invalid assumption?

Answer 1

1-5 a. Unit fixed costs decrease as the activity level increases.

b. Unit variable costs remain constant as the activity level increases.

c. Total fixed costs remain constant as the activity level increases. d. Total variable costs increase as the activity level increases.

1-6 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.

1-7 An activity base is a measure of whatever causes the incurrence of a variable cost. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc.

1-8 The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.