more than one answer may be correct under limited business operating conditions. You are to
select only one answer. The one that is most correct under normal business operating conditions.
1 ABC Inc. uses a cost structure that includes some specific cost categories that behave as
fixed costs, some variable costs, and some mixed costs. As ABC\'s activity ( units produced and
sold) level increases the average cost (on a per unit basis) for each of the three cost types above
will
a) decrease, increase, increase
b) decrease, decrease, increase
c) not change, not change, not change
d) not change, increase, increase
e) increase, decrease, no change
f) decrease, no change, decrease
2 The budgeting process usually begins with forecasting the value of future
a) Cash Flow
b) Costs as a percentage of Sales
c) Sales
d) Labor costs
Solution
(1) (f)
Average Fixed Cost = Total Fixed Cost / Output
So, as output increases, AFC decreases.
Total variable cost increases with level of output, so average variable cost remains unchanged.
Mixed cost has a variable component and a fixed component. As the variable component remains
unchanged but the fixed component decreases, average mixed cost decreases with output.
(2) (c)
A budget is prepared for a specific level of sales (in units and in volume). Unless sales level is
determined, the budget for this target sales level cannot be determined..
more than one answer may be correct under limited business operating.pdf
1. more than one answer may be correct under limited business operating conditions. You are to
select only one answer. The one that is most correct under normal business operating conditions.
1 ABC Inc. uses a cost structure that includes some specific cost categories that behave as
fixed costs, some variable costs, and some mixed costs. As ABC's activity ( units produced and
sold) level increases the average cost (on a per unit basis) for each of the three cost types above
will
a) decrease, increase, increase
b) decrease, decrease, increase
c) not change, not change, not change
d) not change, increase, increase
e) increase, decrease, no change
f) decrease, no change, decrease
2 The budgeting process usually begins with forecasting the value of future
a) Cash Flow
b) Costs as a percentage of Sales
c) Sales
d) Labor costs
Solution
(1) (f)
Average Fixed Cost = Total Fixed Cost / Output
So, as output increases, AFC decreases.
Total variable cost increases with level of output, so average variable cost remains unchanged.
Mixed cost has a variable component and a fixed component. As the variable component remains
unchanged but the fixed component decreases, average mixed cost decreases with output.
(2) (c)
A budget is prepared for a specific level of sales (in units and in volume). Unless sales level is
determined, the budget for this target sales level cannot be determined.
