Nature and Classification of Costs

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Questions and Answers

Which of the following accurately describes a direct cost?

A cost that is fixed and does not vary with activity.

A cost that can be conveniently traced to a specific cost object. (correct)

A cost that varies proportionately with changes in activity.

A cost that must be allocated to a cost object.

What distinguishes variable costs from fixed costs?

Fixed costs change in direct proportion to activity levels.

Variable costs vary in total and remain constant on a per unit basis. (correct)

Variable costs can only be indirect costs.

Variable costs remain constant while fixed costs vary with activity.

Which statement correctly defines a mixed cost?

A cost made up of both fixed and variable components. (correct)

A cost that is entirely fixed without any variable component.

A cost that varies in total but not proportionally with activity changes.

A cost that is easy to allocate to a specific cost unit.

What is the total cost formula used for mixed costs?

Total costs = Total fixed costs + (Variable cost per unit × Activity level) Signup and view all the answers

Which type of cost is a supervisor's wages categorized as in a growing workforce scenario?

Step cost due to increasing need for supervision. Signup and view all the answers

Which of the following costs would be classified as an expired cost?

Costs of goods sold in the period. Signup and view all the answers

Which factor classify a cost as a period cost rather than a product cost?

The cost relates to selling and administrative functions. Signup and view all the answers

A telephone bill consisting of a fixed line rental and a variable cost per call is an example of which type of cost?

Mixed cost. Signup and view all the answers

What is the first step in applying the high-low method?

Select the highest and lowest activity levels and their associated costs. Signup and view all the answers

What is a major limitation of the high-low method?

It relies solely on historical cost data, which may not predict future costs reliably. Signup and view all the answers

In the equation $y = a + bx$, what does the variable 'b' represent?

Variable cost per unit. Signup and view all the answers

What assumption does the high-low method make regarding costs?

Only the change in activity affects costs, ignoring other variables. Signup and view all the answers

Which of the following best describes linear regression analysis?

A technique that analyzes associations and minimizes deviation between actual points and regression line. Signup and view all the answers

What is depicted by the equation $y = P5,000 + 10x$?

A linear relationship between fixed and variable costs with activity levels. Signup and view all the answers

Why is the high-low method considered easy to use?

It uses only two data points to ascertain costs. Signup and view all the answers

What does the least squares technique in linear regression aim to minimize?

The sum of squares of the vertical deviations between actual points and the regression line. Signup and view all the answers

Study Notes

Nature and Classification of Costs

Direct Costs: Traceable to a specific cost object (e.g., raw materials used in a product).
Indirect Costs: Cannot be directly traced to a cost object and must be allocated (e.g., factory rent).
Variable Costs: Costs that change in total with changes in activity levels (e.g., direct labor costs).
Fixed Costs: Costs remain constant within a relevant range of activity levels (e.g., rent).
Mixed Costs: Costs with both fixed and variable components.
Step Costs: Costs increase in distinct steps based on activity levels (e.g., warehouse space).

Separating Mixed Costs

High-Low Method: A simple approach to separating mixed costs using the highest and lowest activity levels.
- Steps: Identify highest and lowest activity levels, calculate variable cost per unit, use either high or low activity level to calculate fixed cost, use calculated values to estimate costs at different activity levels.
- Assumptions: Changes in cost are solely driven by activity changes, cost has both fixed and variable components, a linear relationship exists between cost and activity levels.
- Advantages: Easy to understand and implement.
- Limitations: Relies on historical data, assumes activity is the only factor impacting cost, uses only two data points, ignores potential discounts for larger quantities.
Linear Regression Analysis: A statistical technique that establishes a linear relationship between dependent and independent variables to separate fixed and variable costs.
- Equation: y = a + bx, where y is the total cost, x is the activity level, a is the fixed cost, and b is the variable cost per unit.
- Method: Determines the "line of best fit" by minimizing the deviations from the regression line.
- Benefits: More robust than the high-low method as it considers all data points.
- Drawbacks: Requires statistical software, can be complex to understand and utilize.

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Description

This quiz covers the different types of costs, including direct, indirect, variable, fixed, mixed, and step costs. Additionally, it explores methods for separating mixed costs, such as the high-low method, providing a practical approach to cost management. Test your understanding of these essential concepts in cost accounting.