17e | Ch10 Cost Behavior Determination

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 10 Determining How Costs Behave

Objective 10.1

1) A cost function is a:

A) process of calculating present value of projected cash flows

B) process of allocating costs to cost centers or cost objects

C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost

D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship between inputs and outputs

Diff: 2

Objective: 1

AACSB: Analytical thinking

2) Bennet Company employs 20 individuals. Eighteen employees are paid $18 per hour and the rest are salaried employees paid $3,000 a month. Which of the following is the total cost function of personnel?

A) y = a + bX

B) y = b

C) y = bX

D) y = a

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs of personnel be classified?

A) variable cost

B) mixed cost

C) irrelevant cost

D) fixed cost

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) For February, the cost components of a picture frame include $0.37 for the glass, $0.62 for the wooden frame, and $0.87 for assembly. The assembly desk and tools cost $590. Two hundred fifty frames are expected to be produced in the coming year. What cost function best represents these costs?

A) y = 1.86 + 590X

B) y = 590 + 1.86X

C) y = 590 + 0.99X

D) y = 0.99 + 590X

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) The cost components of a heater include $38 for the compressor, $14 for the sheet molded compound frame, and $70 per unit for assembly. The factory machines and tools cost is $53,000. The company expects to produce 1,400 heaters in the coming year. What cost function best represents these costs?

A) y = 53,000 + 122X

B) y = 1,400 + 53,000X

C) y = 53,000 + 1,400X

D) y = 1,400 + 122X

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following statements is true of a linear cost function?

A) It presents variable cost as a slope coefficient.

B) It presents total cost as an intercept.

C) It presents variable cost as an intercept.

D) It presents total cost as slope coefficient.

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) A finance manager has to select one of the four different suppliers of raw materials. The total cost functions under the four options are given below. Assume the quality of the raw material to be the same, which of the following is preferred by the finance manager?

A) y = 550 + 4.93X

B) y = 550 + 5.46X

C) y = 550 + 4.43X

D) y = 550 + 4.70X

Diff: 3

Objective: 1

AACSB: Analytical thinking

8) If the total cost function is y = 6,400 + 9X, calculate the variable cost for 4,900 units.

A) $50,500

B) $44,100

C) $57,600

D) $6,400

Diff: 2

Objective: 1

AACSB: Application of knowledge

9) The cost function y = 2,300 + 6X:

A) has a slope coefficient of 2,300

B) has an intercept of 6

C) is a straight line

D) represents a fixed cost

Diff: 2

Objective: 1

AACSB: Analytical thinking

10) The cost function y = 190 + 8X:

A) has a slope coefficient of 190

B) has an intercept of 190

C) is a nonlinear

D) represents a fixed cost

Diff: 2

Objective: 1

AACSB: Analytical thinking

11) The cost function y = 12,000 + 4X:

A) represents a mixed cost

B) will intersect the y-axis at 4

C) has a slope coefficient of 12,000

D) is a curved line

Diff: 2

Objective: 1

AACSB: Analytical thinking

12) Which of the following functions represents the least total cost assuming the number of units is equal in each case?

A) y = 240 + 9X

B) y = 100 + 6X

C) y = 100 + 9X

D) y = 240 + 6X

Diff: 3

Objective: 1

AACSB: Analytical thinking

13) Which of the following is an equation of a fixed cost function?

A) y = (a + b)X

B) y = a + bX

C) y = bX

D) y = a

Diff: 2

Objective: 1

AACSB: Analytical thinking

14) Relevant range cost-behavior patterns are:

A) applicable only over the long-run.

B) not linear over the short-run.

C) not relevant outside a specified range as they are always still linear but at a different linear slope.

D) valid for linear cost functions only within a specified range.

Diff: 2

Objective: 1

AACSB: Analytical thinking

15) One assumption frequently made in cost behavior estimation is that changes in total costs can be explained by changes in the level of a single activity.

Diff: 1

Objective: 1

AACSB: Analytical thinking

16) A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost.

Diff: 1

Objective: 1

AACSB: Analytical thinking

17) A cost function is a cost object that whose costs are mostly variable.

Diff: 1

Objective: 1

AACSB: Analytical thinking

18) All cost functions are linear.

Diff: 1

Objective: 1

AACSB: Analytical thinking

19) In a cost function y = 18,000, the slope coefficient is zero.

Diff: 2

Objective: 1

AACSB: Analytical thinking

20) When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range.

Diff: 2

Objective: 1

AACSB: Analytical thinking

21) If a cost item is fixed for one cost object, it will be fixed for all cost objects for which it is associated.

Diff: 1

Objective: 1

AACSB: Analytical thinking

22) All other things being equal, the longer the time horizon the more likely a cost will be fixed.

Diff: 1

Objective: 1

AACSB: Analytical thinking

23) Outside of the relevant range, variable and fixed cost-behavior patterns change, causing costs to become nonlinear.

Diff: 2

Objective: 1

AACSB: Analytical thinking

24) A particular cost item could be variable for one cost object and fixed for another cost object.

Diff: 1

Objective: 1

AACSB: Analytical thinking

25) A linear cost function can only represent fixed cost behavior.

Diff: 1

Objective: 2

AACSB: Analytical thinking

26) In a graphical display of a cost function, the steepness of a line represents the total amount of fixed costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

27) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.

a. Direct manufacturing labor is $15 per hour.

b. Direct materials cost $25.60 per cubic yard.

c. Utilities have a minimum charge of $500, plus a charge of $0.25 per kilowatt-hour.

d. Machine operating costs include $250,000 of machine depreciation per year, plus $100 of utility costs for each day the machinery is in operation.

a. y = $15X

b. y = $25.60X

c. y = $500 + $0.25X

d. y = $250,000 + $100 X

Diff: 2

Objective: 1

AACSB: Analytical thinking

28) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.

a. Direct materials cost is $2.70 per pound

b. Total cost is fixed at $800 per month regardless of the number of units produced.

c. Auto rental has a fixed fee of $90.00 per day plus $1.75 per mile driven.

d. Machine operating costs include $1,000 of maintenance per month, and $15.00 of coolant usage costs for each day the machinery is in operation.

a. y = $2.70X

b. y = $800

c. y = $90 + $1.75X

d. y = $1,000 + $15X

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 10.2

1) Which of the following is NOT true about the cause-and-effect criterion when estimating a cost function?

A) correlation of variables proves cause-and-effect

B) managers must be careful not to equate high correlation between two variables to mean that either variable causes the other

C) knowledge of operations can help managers discover cause-and-effect relationships

D) contractual arrangements may show a direct cause and effect between two variables

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) Which of the following would most likely exhibit a cause and effect relationship?

A) The use of materials in the production of bookcases.

B) The awarding of CEO fringe benefits and a new client contact.

C) The use of janitorial services of a subcontractor and providing client services of a CPA firm.

D) Square footage occupied in administrative offices and resources expended in the field to support sales representatives.

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) It can be inferred that when there is a high correlation between two variables, one is the cause of the other.

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) The high causality between two variables, is the most important factor in determining the cost function of the related cost object.

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year.

Diff: 2

Objective: 2

AACSB: Analytical thinking

7) A contractual agreement that specifies a fee per mile driven, such as with a rental of a truck, is not considered a cause-and-effect relationship between an activity and a cost.

Diff: 2

Objective: 2

AACSB: Analytical thinking

8) What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?

1) Variations in the level of a single activity (the cost driver) explain the variations in the related total costs; and

2) Cost behavior is approximated by a linear cost function within the relevant range. This means that total cost versus the level of a single activity that is related to that cost is a straight line within the relevant range.

Once linearity is established, there are three possible types of linearity:

1) A strictly variable cost of the form Y = bX, where b is the slope of the straight line and is the variable cost per unit of the cost driver;

2) A strictly constant cost of the form Y = a, where a is the total fixed cost or constant; and

3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fixed cost or constant, and b is the variable cost per unit of the driver or the slope of the straight line.

Diff: 2

Objective: 2

AACSB: Analytical thinking

9) The ability to understanding how costs behave is a valuable skill of a management accountant. Briefly explain what an accountant must be able to do, to understand cost behavior in an organization.

Diff: 1

Objective: 2

AACSB: Analytical thinking

Objective 10.3

1) The conference method estimates cost functions:

A) using quantitative methods that can be very time consuming and costly

B) based on analysis and opinions gathered from various departments

C) using time-and-motion studies

D) by mathematically analyzing the relationship between inputs and outputs in physical terms

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) The account analysis method estimates cost functions:

A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis

B) using time-and-motion studies

C) at a high cost, which renders it seldom used

D) in a manner that cannot be usefully combined with any other cost estimation methods

Diff: 2

Objective: 3

AACSB: Analytical thinking

3) Quantitative analysis methods estimate cost functions:

A) using the time-and-motion studies

B) based on analysis and opinions gathered from various departments

C) using a formal mathematical method to fit cost functions to past data observations

D) using the pooling of knowledge from each value chain function

Diff: 2

Objective: 3

AACSB: Analytical thinking

4) The four methods of cost estimation: industrial engineering, conference, account analysis, and quantitative analysis:

A) differ in how expensive they are to implement.

B) work from the same set of assumptions.

C) produce similar levels of accuracy.

D) are mutually exclusive; one method is usually adopted.

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) Variable cost per labor-hour is $0.91 Fixed cost is $19,500. Machine hours during the period are 80. Calculate the total cost for 340 labor hours.

A) $19,573

B) $19,809

C) $19,882

D) $382

Diff: 2

Objective: 3

AACSB: Application of knowledge

6) Which cost estimation method would involve analyzing direct labor subsidiary accounts and classifying costs as variable, fixed, or mixed to derive cost estimation formulas?

A) the account analysis method

B) the conference method

C) the marginal costing method

D) the incremental costing method

Diff: 1

Objective: 3

AACSB: Analytical thinking

7) Which cost estimation method uses a formal statistical method such as regression analysis to develop cost functions based on past data?

A) the cash accounting method

B) the conference method

C) the accrual accounting method

D) the quantitative analysis method

Diff: 1

Objective: 3

AACSB: Analytical thinking

8) Which cost estimation method uses time-and-motion studies to reveal that to make a high quality men's suit jacket, it takes of 3 hours of direct labor effort per jacket and 5 minutes of a salaried manager to perform quality control?

A) the accrual accounting method

B) the high-low method

C) the industrial engineering method

D) the cash accounting method

Diff: 1

Objective: 3

AACSB: Analytical thinking

9) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)

A) $38,220

B) $7,683

C) $142,879

D) $43,537

Diff: 2

Objective: 3

AACSB: Application of knowledge

10) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)

A) $27,795

B) $7,111

C) $116,030

D) $33,183

Diff: 2

Objective: 3

AACSB: Application of knowledge

11) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

Which cost estimation method is being used by Spring Valley Company?

A) the simple regression method

B) the conference method

C) the account analysis method

D) the marginal costing method

Diff: 3

Objective: 3

AACSB: Analytical thinking

12) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

Total library and information center costs are $208,000.

Which cost estimation method is being used by Wild Cat Group Company?

A) the regression analysis method

B) the marginal costing method

C) the conference method

D) the operating costing method

Diff: 3

Objective: 3

AACSB: Analytical thinking

13) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

Total library and information center costs are $204,000.

If the number of employees is considered the cost driver, what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.)

A) $36,505

B) $38,760

C) $17,739

D) $122,156

Diff: 2

Objective: 3

AACSB: Application of knowledge

14) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

Total library and information center costs are $204,000.

If the number of engineers is considered the cost driver, what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations two decimal places and your final answer to the nearest dollar.)

A) $31,733

B) $34,211

C) $10,200

D) $131,776

Diff: 2

Objective: 3

AACSB: Application of knowledge

15) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What was the variable cost per unit sold for 2020?

A) $35

B) $465

C) $800

D) $430

Diff: 2

Objective: 3

AACSB: Application of knowledge

16) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What were total fixed costs for 2020?

A) $945,000

B) $597,000

C) $348,000

D) $330,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

17) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What are the estimated total costs if the company expects to sell 3,100 units next year?

A) $1,581,800

B) $2,898,000

C) $2,550,000

D) $434,800

Diff: 3

Objective: 3

AACSB: Application of knowledge

18) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

Which cost estimation method is being used by M & G TV and Appliance Store?

A) the operating costing method

B) the marginal costing method

C) the account analysis method

D) the cost-volume-profit analysis method

Diff: 3

Objective: 3

AACSB: Analytical thinking

19) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

Which cost estimation method is being used by South Coast Appliance Store?

A) the account analysis method

B) the operating costing method

C) the marginal costing method

D) the cost-volume-profit analysis method

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What was the variable cost per unit sold for 2020?

A) $38.00

B) $140

C) $178.00

D) $256.60

Diff: 2

Objective: 3

AACSB: Application of knowledge

21) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What were the total fixed costs for 2020?

A) $1,349,325

B) $426,825

C) $395,000

D) $922,500

Diff: 2

Objective: 3

AACSB: Application of knowledge

22) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations.

What are the estimated total costs if South Coast's store expects to sell 8,800 units next year?

A) $3,480,200

B) $2,174,000

C) $3,850,200

D) $722,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

23) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $510,000. The company is labor intensive. Total labor hours during the period were 4,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($130,000 based on 8,900 hours of labor) and costs that are variable ($380,000) based on the number of labor-hours used. The company has estimated 7,500 labor hours during the next period.

Which of the following represents the correct linear cost function?

A) y = $380,000 + $42.70X

B) y = $130,000 + $127.50X

C) y = $130,000 + $95.00X

D) y = $380,000 + $57.30X

Diff: 2

Objective: 3

AACSB: Analytical thinking

24) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $490,000. The company is labor intensive. Total labor hours during the period were 4,800. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($190,000 based on 9,000 hours of labor) and costs that are variable ($300,000) based on the number of labor-hours used. The company has estimated 7,200 labor hours during the next period.

What will be the variable cost per hour?

A) $62.50

B) $33.33

C) $54.44

D) $102.08

Diff: 2

Objective: 3

AACSB: Application of knowledge

25) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 4,800. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($100,000 based on 9,000 hours of labor) and costs that are variable ($400,000) based on the number of labor-hours used. The company has estimated 7,500 labor hours during the next period.

What will be the total variable cost for the estimated 7,500 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $333,333

B) $624,975

C) $781,250

D) $416,667

Diff: 2

Objective: 3

AACSB: Application of knowledge

26) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $510,000. The company is labor intensive. Total labor hours during the period were 4,900. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($200,000 based on 8,100 hours of labor) and costs that are variable based on the number of labor-hours used. The company has estimated 7,900 labor hours during the next period.

What will be the total cost for the estimated 7,900 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $502,346

B) $697,407

C) $822,245

D) $699,833

Diff: 2

Objective: 3

AACSB: Application of knowledge

27) Which of the following cost estimation methods involves determination of cost functions based on analysis and opinions about costs and their drivers gathered from various departments of a company?

A) Industrial engineering method.

B) Conference method.

C) Account analysis method.

D) Quantitative analysis method

Diff: 2

Objective: 3

AACSB: Application of knowledge

28) When management develops cost estimations, they must choose one method, such as industrial engineering, conference, account analysis, or quantitative analysis, and stay consistently with that method as each method is mutually exclusive of the others.

Diff: 1

Objective: 3

AACSB: Analytical thinking

29) The account analysis method of cost estimation classifies account costs as fixed, mixed, or variable using qualitative judgments.

Diff: 1

Objective: 3

AACSB: Analytical thinking

30) The account analysis method estimates cost functions by classifying various cost accounts as variable, fixed, or mixed with respect to the identified level of activity.

Diff: 1

Objective: 3

AACSB: Analytical thinking

31) The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.

Diff: 1

Objective: 3

AACSB: Analytical thinking

32) The cost of the personnel department at the Speedy Process Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $200.000.

Department Department Department

Cost Driver A B C

Number of employees 390 325 65

The number of new hires 30 40 25

Required:

Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is:

a. number of employees.

b. the number of new hires.

c. Which cost estimation method is being used by Speedy Company?

Cost Driver A B C

a. Number of employees 390/780 × 200,000 325/780 × 200,000 65/780 × 200,000

$100,000 $83,333 $16,667

b. The number of new hires 30/95 × 180,000 40/95 × 200,000 25/95 × 200,000

$63,158 $84,211 $52,631

c. The Speedy Company is using the conference method for cost estimation.

Diff: 3

Objective: 3

AACSB: Application of knowledge

33) June Lockett, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches June can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver.

1. industrial engineering method

2. conference method

3. account analysis method

4. quantitative analysis of current or past cost relationships

The industrial engineering method, also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms.

The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.).

The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver.

Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression analysis, to fit linear cost functions to past data observations.

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 10.4

1) The cost to be predicted and managed is referred to as the:

A) independent variable

B) dependent variable

C) cost driver

D) regression

Diff: 2

Objective: 4

AACSB: Analytical thinking

2) In the estimation of a cost function using quantitative analysis, the independent variable:

A) is the cost to be predicted

B) is the product of fixed costs and slope coefficient

C) is the factor used to predict the dependent variable

D) is the product of total costs and slope coefficient

Diff: 2

Objective: 4

AACSB: Analytical thinking

A) that the cost driver can be identified in an economically feasible way

B) that the relationship is based on correlation

C) that the relationship is based on a cause -and-effect criterion and makes economic sense to management

D) that the relationship must be based on a physical relationship

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) Place the following steps in order for estimating a cost function using quantitative analysis.

A = Plot the data

B = Collect data on the dependent variable and the cost driver.

C = Choose the dependent variable

D = Identify the independent variable, or cost driver

E = Estimate the cost function

A) D C E A B

B) C D B A E

C) A D C E B

D) E D C B A

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) Which of the following is an example of time-series data?

A) loan processing times in each of 26 similar branch offices over the last 12 months

B) direct labor hours in the Boston, Massachusetts and the New York City facility for each of the last 12 months

C) indirect labor costs and machine-hours in a manufacturer's assembly department each month for the last 12 months

D) store sales for each U.S. based Wal-Mart for each the last 10 years

Diff: 2

Objective: 4

AACSB: Analytical thinking

6) Which of the following represents cross-sectional data?

A) indirect manufacturing labor costs for the past 5 years

B) number of machine-hours used for the past 10 years

C) personnel costs of a month at 10 different organizations

D) maintenance cost of machine in a plant for the past 3 years

Diff: 2

Objective: 4

AACSB: Analytical thinking

7) A plot of cost driver data and cost data may show all but the following:

A) a strong relationship

B) cause-and-effect relationship

C) a positive relationship

D) linear relationship

Diff: 3

Objective: 4

AACSB: Analytical thinking

8) A plot of data that results in one extreme observation most likely indicates that:

A) more than one cost pool should be used

B) an unusual event such as a plant shutdown occurred during that month

C) the cost-allocation base has been incorrectly identified

D) individual cost items do not have the same cost driver

Diff: 2

Objective: 4

AACSB: Analytical thinking

9) Cross-sectional data analysis includes:

A) using a variety of time periods to measure the dependent variable

B) using the highest and lowest observation

C) observing different entities during the same time period

D) comparing information in different cost pools

Diff: 2

Objective: 4

AACSB: Analytical thinking

10) Time-series data analysis includes:

A) using a variety of time periods to measure the dependent variable of the same entity (organization, plant, or activity)

B) using the highest and lowest observation for the same entity (organization, plant, or activity)

C) observing different entities during the same time period for the same entity (organization, plant, or activity)

D) comparing information in different cost pools for the same entity (organization, plant, or activity)

Diff: 2

Objective: 4

AACSB: Analytical thinking

11) When using the high-low method, the two observations used are the high and low observations of the:

A) cost driver

B) fixed cost component

C) slope coefficient

D) direct cost

Diff: 2

Objective: 4

AACSB: Analytical thinking

12) When using the high-low method, the numerator of the equation that determines the slope is the:

A) difference between the positive and negative values of dependent and independent variables

B) difference between the fixed cost and variable cost associated with the cost driver

C) difference between the high and low observations of the cost driver

D) difference between the costs associated with highest and lowest observations of the cost driver

Diff: 2

Objective: 4

AACSB: Analytical thinking

13) The high-low method:

A) measures the difference between actual cost and estimated cost for each observation of the cost driver

B) calculates the standard deviation of residuals

C) calculates the slope coefficient using only two observed values within the relevant range and their respective costs

D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations, Y

Diff: 3

Objective: 4

AACSB: Analytical thinking

14) Put the following steps in order for using the high-low method of estimating a cost function:

A = Identify the cost function

B = Calculate the constant

C = Calculate the slope coefficient

D = Identify the highest and lowest observed values

A) D C A B

B) C D A B

C) A D C B

D) D C B A

Diff: 2

Objective: 4

AACSB: Analytical thinking

15) Regression analysis:

A) calculates the slope coefficient using only two observed values within the relevant range and their respective costs

B) measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables

C) estimates the cost functions using the time-and-motion studies

D) measures the variability or dispersion in a set of data points

Diff: 3

Objective: 4

AACSB: Analytical thinking

16) Which of the following statements shows a difference between simple regression and multiple regression?

A) Simple regression uses more than one dependent and independent variables, whereas multiple regression uses only one dependent and independent variable.

B) Simple regression uses only the independent variables, whereas multiple regression uses only dependent variables.

C) Simple regression uses only one dependent and one independent variable, whereas multiple regression uses one dependent and more than one independent variable.

D) Simple regression uses only one dependent variable and more than one independent variables, whereas multiple regression uses more than one dependent variable and only one independent variable.

Diff: 2

Objective: 4

AACSB: Analytical thinking

17) The slope of the line of regression is the:

A) rate at which the dependent variable varies

B) rate at which the independent variable varies

C) difference between the fixed cost and variable cost associated with the cost driver

D) difference between actual cost and estimated cost for each observation of the cost driver

Diff: 2

Objective: 4

AACSB: Analytical thinking

18) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below:

What is the slope coefficient?

A) $65.00

B) $62.00

C) $50.00

D) $60.00

Diff: 2

Objective: 4

AACSB: Application of knowledge

19) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below:

What is the constant for the estimated cost equation?

A) $4,000

B) $8,000

C) $16,000

D) $20,000

Diff: 2

Objective: 4

AACSB: Application of knowledge

20) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below:

What is the estimated cost function for the above data?

A) y = 11,000 + 60.00X

B) y = 7,500 + 35.00X

C) y = 25,000 + 50.00X

D) y = 17,500 + 110.00X

Diff: 2

Objective: 4

AACSB: Application of knowledge

21) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below:

What is the estimated total cost when 300 machine-hours are used?

A) $33,000

B) $26,000

C) $15,000

D) $18,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

22) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:

What is the slope coefficient?

A) $100.00

B) $111.00

C) $45.00

D) $105.00

Diff: 2

Objective: 4

AACSB: Application of knowledge

23) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:

What is the constant for the estimated cost equation?

A) $250,000

B) $290,000

C) $90,000

D) $200,000

Diff: 2

Objective: 4

AACSB: Application of knowledge

24) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:

What is the estimated cost function for the above data?

A) y = 345,000 + 115X

B) y = 315,000 + 126X

C) y = 165,000 + 60.00X

D) y = 120.00X

Diff: 2

Objective: 4

AACSB: Application of knowledge

25) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:

What is the estimated total cost when 1,500 machine-hours are used?

A) $570,000

B) $285,000

C) $542,500

D) $232,500

Diff: 2

Objective: 4

AACSB: Application of knowledge

26) For Heavy Manufacturing Company, labor-hours are 48,000 and wages $156,000 at the high point of the relevant range, and labor-hours are 32,000 and wages $112,000 at the low point of the relevant range.

What is the slope coefficient?

A) $3.35

B) $2.75

C) $3.25

D) $3.50

Diff: 2

Objective: 4

AACSB: Application of knowledge

27) For Heavy Manufacturing Company, labor-hours are 40,000 and wages $144,000 at the high point of the relevant range, and labor-hours are 24,000 and wages $96,000 at the low point of the relevant range.

What is the constant?

A) $24,000

B) $48,000

C) $96,000

D) $144,000

Diff: 2

Objective: 4

AACSB: Application of knowledge

28) For Heavy Manufacturing Company, labor-hours are 50,000 and wages $148,000 at the high point of the relevant range, and labor-hours are 30,000 and wages $108,000 at the low point of the relevant range.

What is the estimated total labor costs at Heavy Manufacturing Company when 11,500 labor-hours are used?

A) $36,800

B) $71,000

C) $41,400

D) $34,040

Diff: 3

Objective: 4

AACSB: Application of knowledge

29) The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

What is the cost function?

A) y = $42,360 + $4.20X

B) y = $24,360 + $3.26X

C) y = $35,000 + $4.20X

D) y = $9,860 + $2.50X

Diff: 3

Objective: 4

AACSB: Application of knowledge

30) The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

What is the estimated total cost at an operating level of 8,400 hours?

A) $21,000

B) $30,860

C) $35,280

D) $27,371

Diff: 3

Objective: 4

AACSB: Application of knowledge

31) Presented below are the production data for the first six months of the year for the mixed costs incurred by Venus Company.

Venus Company uses the high-low method to analyze mixed costs.

How would the cost function be stated?

A) y = $595 + $1.13X

B) y = $5,650 + $1.30X

C) y = $2,760 + $1.13X

D) y = $10,200 + $1.20X

Diff: 3

Objective: 4

AACSB: Application of knowledge

32) Presented below are the production data for the first six months of the year for the mixed costs incurred by Venus Company.

Venus Company uses the high-low method to analyze mixed costs.

What is the estimated total cost at an operating level of 6,700 units?

A) $9,380

B) $8,326

C) $7,303

D) $8,040

Diff: 3

Objective: 4

AACSB: Application of knowledge

33) The White Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. White Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

How is the cost function stated?

A) y = $36,060 + $11.00X

B) y = $70,400 + $10.10X

C) y = $34,340 + $12.02X

D) y = $5,760 + $10.10X

Diff: 3

Objective: 4

AACSB: Application of knowledge

34) The White Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. White Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

What is the estimated total cost at an operating level of 3,200 hours?

A) $67,300

B) $33,348

C) $31,104

D) $34,418

Diff: 3

Objective: 4

AACSB: Application of knowledge

35) Because the cost driver is the same for the fringe benefits of life insurance and pension benefits cost is the same, those costs can be aggregated into one homogeneous cost pool.

Diff: 2

Objective: 4

AACSB: Analytical thinking

36) The first step in estimating a cost function using quantitative analysis is to plot the data.

Diff: 2

Objective: 4

AACSB: Analytical thinking

37) In estimating a cost function using quantitative analysis, the dependent variable is the factor used to predict the independent variable.

Diff: 2

Objective: 4

AACSB: Analytical thinking

38) Cross-sectional data pertain to the same entity (organization, plant, activity, and so on) over successive past periods.

Diff: 1

Objective: 4

AACSB: Analytical thinking

39) Simple regression analysis estimates the relationship between the dependent variable and one independent variable.

Diff: 2

Objective: 4

AACSB: Analytical thinking

40) Two common forms of quantitative analysis methods of cost estimation are the high-low method and regression analysis.

Diff: 1

Objective: 4

AACSB: Analytical thinking

41) The high-low method relies on only two observations, the highest and lowest, to estimate a linear cost function.

Diff: 1

Objective: 4

AACSB: Analytical thinking

42) The dependent variable is a cost to be predicted and managed, whereas an independent variable or cost driver is the factor used to predict the dependent variable.

Diff: 2

Objective: 4

AACSB: Analytical thinking

43) The vertical difference, called the residual term, measures the distance between actual cost of one period and estimated cost of the next period.

Diff: 2

Objective: 4

AACSB: Analytical thinking

44) Regression analysis is a statistical method that measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables.

Diff: 1

Objective: 4

AACSB: Analytical thinking

45) In using high-low method, the slope coefficient is calculated by dividing the difference between highest and lowest observations of the cost driver by the difference between costs associated with highest and lowest observations of the cost driver.

Diff: 2

Objective: 4

AACSB: Analytical thinking

46) Simple regression analysis estimates the relationship between the dependent variable and one independent variable.

Diff: 2

Objective: 4

AACSB: Analytical thinking

47) The advantages of the high-low method to estimate a cost function is that it is easy and accurate.

Diff: 2

Objective: 4

AACSB: Analytical thinking

48) Multiple regression analysis uses only independent variables and not dependent variables.

Diff: 2

Objective: 4

AACSB: Analytical thinking

49) Regression analysis is a statistical technique that measures the average amount of change in the independent variable associated with a unit change in one or more dependent variables.

Diff: 2

Objective: 4

AACSB: Analytical thinking

50) In regression analysis, the term "goodness of fit" indicates the strength of the relationship between the cost driver and the costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

51) Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables.

Diff: 2

Objective: 4

AACSB: Analytical thinking

52) With a cost driver, cost accounts should be able to identify a relationship based on a physical relationship, a contract, or knowledge of operations and makes economic sense to the operating manager and the management accountant.

Diff: 2

Objective: 4

AACSB: Analytical thinking

53) The managers of the production department have decided to use the production levels of 2019 and 2020 as examples of the highest and lowest years of operating levels. Data for those years are as follows:

Year Chemicals used Overhead Costs

2019 336,000 gallons $292,800

2020 288,000 gallons $254,400

Required:

What is the cost estimating equation for the department if gallons of chemicals are used as the cost driver?

Slope (variable cost) = ($292,800 − $254,400) / (336,000 − 288,000) = $0.80

Constant (fixed cost) = $292,800 - ($0.80 × 336,000) = $24,000

Estimating equation = $24,000 + ($0.80 per gallon of direct material × total number of gallons)

Diff: 2

Objective: 4

AACSB: Application of knowledge

54) Mountain Manufacturing Inc. ran its machines in March, a slow month, for 410 hours for a total cost of $63,000. In July, a peak month, the freezer ran for 756 hours for a total cost of $92,800.

Required:

a. What is the cost estimating equation for the department if hours of freezer use are used as the cost driver?

b. What is the estimated total cost at an operating level of 600 hours?

a. Slope (variable costs) = ($92,800 − $63,000) / (756 − 410) = $86.13

Constant (fixed cost) = $92,800 − (756 × $86.13) = $27,688

Estimating equation = $27,688 + ($86.13 per direct labor hour × number of direct labor hours)

b. Total costs of 600 hours = $27,688 + ($86.13 × 600) = $79,364

Diff: 2

Objective: 4

AACSB: Application of knowledge

55) The Michigan Manufacturing Company has provided the following information:

Units of Output 31,000 Units 45,000 Units

Direct materials $ 316,800 $ 443,520

Workers' wages 1,188,000 1,663,200

Supervisors' salaries 361,000 322,000

Equipment depreciation 166,320 166,320

Maintenance 75,000 86,000

Utilities 422,400 580,800

Total $2,528,720 $3,261,840

Using the high-low method and the information provided above,

a. identify the linear cost function equation and

b. estimate the total cost at 38,000 units of output.

a. Variable cost = ($3,261,840 − $2,528,720) / (45,000 − 31,000) = $52.37

Fixed cost = $3,261,840 - ($52.37 × 45,000) = $905,190

Cost function is y = $905,190 + $52.37X

b. Output level of 38,000 units = $905.190 + ($52.37 × 38,000) =

= $2,895,250 total cost

Diff: 2

Objective: 4

AACSB: Application of knowledge

56) As part of his job as cost analyst, John Kelly collected the following information concerning the operations of the Machining Department:

Observation Machine-hours Total Operating Costs

January 4,700 $43,000

February 5,060 45,395

March 4,180 42,535

April 4,500 43,600

May 4,250 42,890

Required:

a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.

b. If June's estimated machine-hours are 4,300, calculate the total estimated costs of the Machining Department?

a. Slope coefficient = ($45,395 − $42,535) / (5,060 − 4,180) = $3.25 per machine-hour

Constant = $45,395 − ($3.25 × 5,060) = $28,950

Estimating equation = $28,950 + $3.25X

b. June's estimated costs = $28,950 + ($3.25 × 4,300) = $42,925

Diff: 2

Objective: 4

AACSB: Application of knowledge

57) Salter Manufacturing Company produces inventory in a highly automated assembly plant in Fall River, Massachusetts. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:

Machine-hours Kilowatt-hours Total Overhead Costs

January 4,560 5,424,000 $405,600

February 4,380 5,208,000 404,160

March 4,680 5,400,000 407,040

April 3,960 5,148,000 404,160

May 3,900 5,040,000 391,200

June 3,720 4,944,000 384,000

Required:

a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.

b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.

c. For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power. The overhead costs totaled $365,000. Which cost driver was the best predictor for July?

a. Machine-hours:

Slope coefficient = ($407,040 − $384,000) / (4,680 − 3,720)

= $24.00 per machine-hour

Constant = $384,000 − ($24 × 3,720) = $294,720

Machine-hour estimating equation = $294,720 + $24X

b. Kilowatt-hours:

Slope coefficient = ($407,040 − $384,000) / (5,400,000 − 4,944,000) = $0.0505 per kilowatt-hour

Constant = $407,040 − ($0.0505 × 5,400,000) = $134,198

Kilowatt-hour estimating equation =$134,198 + ($0.0505 per KWH × number of KWH)

c. Julyʹs estimated costs:

with machine-hours = $294,720 + ($24 × 4,000) = $390,720

with kilowatt-hours = $134,198 + ($0.0505 × 4,550,000) = $363,973

The best estimator for July was the kilowatt-hour cost driver.

Diff: 3

Objective: 4

AACSB: Application of knowledge

58) Patrick Ross, the president of M & M Materials Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:

Month Machine-hours Overhead Costs

February 1,870 $22,500

March 3,080 24,475

April 1,100 24,321

May 2,750 23,650

June 3,850 31,196

Required:

Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.

Low: April 1,100 24,321

Difference 2,750 $ 6,875

Variable cost per MH: $6,875/2,750 = $2.50 per MH

Fixed cost: $24,321 = a + $2.50 × 1,100

a = $21,571

Cost function is Y = $21,571 + $2.50X

Diff: 2

Objective: 4

AACSB: Application of knowledge

59) List and briefly describe the six steps in estimating a cost function under quantitative analysis.

Diff: 2

Objective: 4

AACSB: Analytical thinking

60) Identify one advantage and one disadvantage of the hi low method.

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 10.5

1) If cost accountants decide to use production of prior periods as a cost driver for repair cost of the current period they understand that:

A) there is no correlation between repair costs and levels of production

B) repair costs tend to lag periods of high production

C) cost accountants do not need to understand operations

D) there is no cause-and-effect between production and repair costs

Diff: 2

Objective: 5

AACSB: Analytical thinking

2) Why is choosing the correct cost driver to estimate indirect manufacturing costs important?

A) identifying the wrong driver can lead management to incorrect and costly decisions

B) identifying the wrong driver can increase actual overhead costs

C) identifying the wrong driver can increase the usage of the correct driver

D) identifying the wrong driver can increase the direct costs of the cost object

Diff: 2

Objective: 5

AACSB: Analytical thinking

3) One of the reasons ABC systems may be popular is that they typically have a small number of cost drivers and cost pools, making it less expensive and more accurate to estimate cost relationships.

Diff: 2

Objective: 5

AACSB: Analytical thinking

4) What is a plausible explanation of a cost function has a slope coefficient of $30 for purchases of 1 to 1,000 units and $25 for production of 1,100 - 2,000 units, and $20 for production of 2,001 - 3,000 units?

A) the fixed cost per unit has decreased because of efficiencies

B) economies of scale allowing for lower cost purchases with larger orders

C) their is a linear cost function in effect

D) contribution margins are decreasing

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) If machine maintenance is scheduled at a time when production is at a low level, then:

A) low production is the cost driver of high repair costs

B) an understanding of operations is needed to determine an appropriate cost driver

C) low production should be avoided since it is the cause of machine maintenance

D) machine maintenance cannot be accurately predicted

Diff: 3

Objective: 5

AACSB: Analytical thinking

6) Goodness-of-fit measures how well the predicted values in a cost estimating equation:

A) match the cost driver

B) determine the level of activity

C) match the actual cost observations

D) rely on the independent variable

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) A step cost functions indicates that there are:

A) costs that remain the same over various ranges of activity but increases by discrete amounts as the level of activity increases

B) greater proportions of fixed costs than variable costs at lower levels of activities

C) increases in the number of units produced during the each month of the period

D) strong relationships between fixed costs and variable costs

Diff: 3

Objective: 5

AACSB: Analytical thinking

8) Which of the following best describes a step variable-cost function?

A) a step cost function in which cost remains the same over narrow ranges of the level of activity in each relevant range

B) a step cost function in which cost remains the same over narrow ranges of the level of activity outside the relevant range

C) step cost function where the cost remains the same over wide ranges of the activity in each relevant range

D) step cost function where the cost remains the same over wide ranges of the activity outside the relevant range

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) Which of the following statements is true of activity-based costing?

A) There is a clear cause-and-effect relationship between costs and the cost driver in the long run.

B) There is no variety of cost drivers and cost pools.

C) The system focuses on activities in together and not on individual activities.

D) A single cost driver should be identified for all the activities.

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) Which of the following statements is true of choosing cost drivers under activity-based costing?

A) All the cost drivers should be unit-level cost drivers.

B) There should be a clear cause-and-effect relationship between cost drivers and cost pools.

C) Cost drivers are independent variables.

D) A single cost driver should be identified for all the activities.

Diff: 2

Objective: 5

AACSB: Analytical thinking

11) Machine-hours is a more economically plausible cost driver of machine maintenance than number of direct manufacturing labor-hours.

Diff: 2

Objective: 5

AACSB: Analytical thinking

12) The larger the vertical difference between actual costs and predicted costs the better the goodness of fit.

Diff: 2

Objective: 5

AACSB: Analytical thinking

13) The major advantages of quantitative methods are that they are objective, so managers can use them to evaluate different cost drivers.

Diff: 2

Objective: 5

AACSB: Analytical thinking

14) A flat or slightly sloped regression line indicates a strong relationship between the cost driver and costs.

Diff: 2

Objective: 5

AACSB: Analytical thinking

15) When choosing among cost drivers, managers trade off level of detail, accuracy, feasibility, and costs of estimating functions.

Diff: 1

Objective: 5

AACSB: Analytical thinking

16) Activity-based costing systems use the quantitative analysis method exclusively for cost estimation because of its accuracy.

Diff: 2

Objective: 5

AACSB: Analytical thinking

17) When estimating the cost function for each cost pool, the manager must pay careful attention to the cost hierarchy because the cost pool may have more than one cost driver from different levels of the cost hierarchy.

Diff: 3

Objective: 5

AACSB: Analytical thinking

18) What are the three criteria a company should use to evaluate and choose a cost driver? Briefly explain each of the three criteria.

Economic plausibility involves the theoretical existence of a causal relationship between a driver and the costs it is supposed to drive.

Goodness of fit involves the observed differences between predictions of costs based on the cost driver and the actual costs that occurred.

Significance of the independent variable involves the steepness of the slope of the cost driver relative to the slope of other possible cost drivers. The steeper the slope (given the same goodness of fit) the stronger is the relationship between the cost driver and the related costs.

Diff: 2

Objective: 5

AACSB: Analytical thinking

Objective 10.6

1) Which of the following is NOT a nonlinear cost function?

A) increase of $20,000 revenues with increase in sales in units

B) total fixed cost of $25,000

C) variable cost of $5 per unit

D) a step cost function

Diff: 2

Objective: 6

AACSB: Analytical thinking

2) Which of the following is an example of nonlinear cost function?

A) variable-cost functions

B) fixed-cost functions

C) learning curves

D) mixed cost functions

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Lucy and Company is a large bakery. When purchasing flour, it takes advantage of volume discounts, which are granted at percentage discounts that increase at levels such as 100, 500, 1,000, 2,000, and 3,000 pound increments. Lucy and Company would use which type of function for the cost of flour?

A) decreasing cost function

B) linear cost functions

C) nonlinear cost function

D) stationary cost function

Diff: 2

Objective: 6

AACSB: Analytical thinking

4) With a step fixed-cost function:

A) the cost varies with the changes in the activity

B) fixed cost is often approximated with a continuous variable-cost function

C) fixed cost changes proportionally with the level of activity

D) the cost remains the same over wide ranges of the activity in each relevant range

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) A step variable-cost function:

A) is fixed over the long run but not over the short run

B) is often approximated with a continuous variable-cost function

C) remains the same over a wide range of activity

D) example includes adding additional warehouse space

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) A learning curve is a function:

A) that measures the decline in labor-hours per unit due to workers becoming better at a job

B) that increases at a greater rate as workers become more familiar with their tasks

C) where unit costs increase as productivity increases

D) that is linear

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) An experience curve:

A) is a narrower application of the learning curve

B) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases

C) only measures the decline in labor-hours per unit as units produced increases

D) measures the increase in cost per unit as productivity increases

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) To complete the first setup on a new machine took an employee 350 minutes. Using an 84% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take:

A) 147 minutes

B) 238 minutes

C) 322 minutes

D) 294 minutes

Diff: 3

Objective: 6

AACSB: Application of knowledge

9) To complete the first setup on a new machine took an employee 180 minutes. Using an 90% incremental unit-time learning model indicates that the second setup on the new machine is expected to take:

A) 162.0 minutes

B) 200.0 minutes

C) 342.0 minutes

D) 18.0 minutes

Diff: 2

Objective: 6

AACSB: Application of knowledge

10) As a result of learning curve:

A) unit costs increase as productivity increases and the unit-cost function behaves nonlinearly

B) unit costs decrease as productivity increases and the unit-cost function behaves nonlinearly

C) unit costs increase as productivity increases and the unit-cost function behaves linearly

D) unit costs decrease as productivity increases and the unit-cost function behaves linearly

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) The learning-curve models presented in the text examine:

A) how quality increases over time

B) how efficiency increases as more units are produced

C) how setup costs decline as more workers are added

D) the change in variable costs when quantity discounts are available

Diff: 2

Objective: 6

AACSB: Analytical thinking

12) Which of the following is a learning-curve model?

A) the cumulative average-time learning model and the incremental unit-time learning model

B) the simple regression model and the multiple regression model

C) the multicollinearity learning model and the goodness of fit learning model

D) the account analysis learning model and the conference learning method model

Diff: 2

Objective: 6

AACSB: Analytical thinking

13) An "economy of scale" function is an example of a linear cost function.

Diff: 1

Objective: 6

AACSB: Analytical thinking

14) A step cost function is an example of a linear cost function.

Diff: 1

Objective: 6

AACSB: Analytical thinking

15) Step fixed-cost functions are variable over the long run.

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) An experience curve is a function that measures the decline in cost per unit in various business functions of the value chain as the amount of these activities increases.

Diff: 1

Objective: 6

AACSB: Analytical thinking

17) Nonlinear cost functions can result because of learning curves.

Diff: 2

Objective: 5

AACSB: Analytical thinking

18) In the cumulative average-time learning model, cumulative average time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles.

Diff: 2

Objective: 6

AACSB: Analytical thinking

19) When new products are introduced, learning-curve effects can have a major influence on production scheduling.

Diff: 2

Objective: 6

AACSB: Analytical thinking

20) It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance.

Diff: 1

Objective: 6

AACSB: Analytical thinking

21) The cumulative average-time learning model with a 85% learning curve indicates that if it takes 200 minutes to manufacture the first unit of a new model, then the second unit will take only 170 minutes to manufacture.

Diff: 2

Objective: 6

AACSB: Application of knowledge

22) The incremental unit-time learning model with a 80% learning curve indicates that if it takes 150 minutes to manufacture the first unit of a new model, then the second unit will take only 120 minutes to manufacture.

Diff: 2

Objective: 6

AACSB: Application of knowledge

23) A learning curve is a function that measures how labor-hours per unit decrease, as units of production decrease.

Diff: 2

Objective: 6

AACSB: Analytical thinking

24) One of the most commonly used tools for building models in a world of "big data" is logistic regression.

Diff: 2

Objective: 6

AACSB: Analytical thinking

25) The essential difference between these two is that Logistic regression is used when the dependent variable is binary in nature.

Diff: 2

Objective: 6

AACSB: Analytical thinking

26) Logistic regression is another form of linear regression.

Diff: 2

Objective: 6

AACSB: Analytical thinking

27) Harold's Picture manufactures various picture frames. Each new employee takes 6 hours to make the first picture frame and 4.8 hours to make the second. The manufacturing overhead charge per hour is $25.

Required:

a. What is the learning-curve percentage, assuming the cumulative average method?

b. What is the time needed to build 8 picture frames by a new employee using the cumulative average-time method? You may use an index of −0.1520.

c. What is the time needed to produce the 16th frame by a new employee using the incremental unit-time method? You may use an index of −0.3219.

d. How much manufacturing overhead would be charged to the 16 picture frames using the average-time approach?

a. Job Hours Cumulative Cumulative Average

1 6 6 6

2 4.8 10.8 5.4

Learning percentage = 4.8/6 = 0.90

b. Y = p × q

= 6 × 8− 0.1520

= 4.37 hours

or 1 unit = 6

2 units = 6 × 0.9 = 5.4

4 units = 5.4 × 0.9 = 4.86

8 units = 4.86 × 0.9 = 4.37 hours

Time to build 8 units: 8 × 4.37 = 35 hours

c. Y = p × q

= 6 × 16−.0.3219

= 2.458 hours

or 1 unit = 6

2 units = 6 × 0.8 = 4.8

4 units = 4.8 × 0.8 = 3.84

8 units = 3.84 × 0.8 = 3.072

16 units = 3.072 × .8 = 2.458 hours

d. Total time = 2.458 × 16 = 39.328 hours

Overhead charge = 39.328 × $25 = $983.20

Diff: 3

Objective: 6

AACSB: Application of knowledge

28) Each time Mayberry Nursery hires a new employee, it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 40 hours and the second job averages 32 hours. Assume all jobs to be equal in size.

Required:

a. What is the learning-curve percentage, assuming the cumulative average-time method?

b. What is the time for a new employee to build 16 units with this learning curve using the cumulative average-time method? You may use an index of −0.1520.

a. Job Hours Cumulative Cumulative Average

1 40 40 40

2 32 72 36

Learning percentage = 36/40 = 0.90

b. Y = p × q

= 40 × 16−.1520

= 26.244 hours

or 1 unit = 40

2 units = 40 × 0.9 = 36

4 units = 36 × 0.9 = 32.4

8 units = 32.4 × 0.9 = 29.16

16 units = 29.16 × 0.9 = 26.244 hours

16 × 26.244 = 419.904 hours

Diff: 3

Objective: 6

AACSB: Application of knowledge

29) Jake's Copy Center hires a new employee. Jake knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Jake is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 50 minutes and the second job averages 40 minutes. Assume all jobs to be equal in size.

Required:

a. What is the learning-curve percentage, assuming the cumulative average-time method?

b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative average-time method? You may use an index of −0.1520.

a. Job Minutes Cumulative Cumulative Average

1 50 50 50

2 40 90 45

Learning percentage = 45/50 = 0.90

b. Y = p × q

= 50 × 16−.1520

= 29.525 minutes

or 1 unit = 50

2 units = 50 × 0.9 = 45

4 units = 45 × 0.9 = 40.5

8 units = 40.5 × 0.9 = 36.45

16 units = 36.45 × 0.9 = 32.805

32 units = 32.805 × 0.9 = 29.525 minutes

32 × 29.525 = 944.784 minutes = Approximately 15 hours and 45 minutes

Diff: 3

Objective: 6

AACSB: Application of knowledge

30) Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples.

Diff: 2

Objective: 6

AACSB: Application of knowledge

31) Explain the difference between the cumulative average-time learning model and the incremental unit-time learning model.

In the incremental unit-time learning model, incremental time needed to produce the last unit declines by a constant percentage each time the cumulative quantity of units produced doubles.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Objective 10.7

1) The ideal database for estimating cost functions contains:

A) numerous cost driver observations

B) only the independent variable and not the dependent variable

C) cost driver observations spanning a narrow range

D) a few values of the cost driver that are grouped closely together

Diff: 1

Objective: 7

AACSB: Analytical thinking

2) Data collection problems arise when:

A) data are recorded electronically rather than manually

B) accrual-basis costs are used rather than cash-basis costs

C) fixed and variable costs are not separately identified and both are allocated to products on a per unit basis

D) purely inflationary price effects are removed

Diff: 3

Objective: 7

AACSB: Analytical thinking

3) Which of the following is a step to overcome problems related to data collection for estimating cost function?

A) The analyst should remove the inflationary effects.

B) The analyst should consider fixed costs as variable.

C) The analyst should also use extreme values while calculating cost functions.

D) The analyst should not use accrual accounting.

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) Which of the following is a step followed by an analyst to overcome problems related to data collection for estimating cost function?

A) to use cash accounting

B) to consider fixed costs as variable costs and treat allocated fixed cost per unit as a variable cost

C) to eliminate unusual observations if extreme values of observations occur

D) to include the inflationary price effects in the data

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) Which of the following is a problem related to cost analysis?

A) fixed costs are allocated as if they are variable costs

B) extreme observations are adjusted or removed

C) a company keeps accounting records on the accrual basis

D) inflationary effects are removed

Diff: 2

Objective: 7

AACSB: Analytical thinking

6) Which of the following is considered the best approach to collecting data for the purposes of estimating cost functions?

A) Measure numerous and wide ranging observations of cost driver activity and the related costs on the accrual basis of accounting.

B) Measure two extreme highly accurate data points for cost driver activity and the related cash equivalent costs.

C) Measure many values spanning a wide range for the cost driver and the associated costs.

D) Measure numerous observations of cost driver activity and the related costs on a cash basis of accounting.

Diff: 2

Objective: 7

AACSB: Application of knowledge

7) Data collection problems can arise when extreme values of observations occur.

Diff: 1

Objective: 7

AACSB: Analytical thinking

8) Misinterpretation of data can arise when fixed costs are reported on a per unit basis.

Diff: 2

Objective: 7

AACSB: Analytical thinking

9) Inflation can distort data that are compared over time so purely inflationary effects should be removed.

Diff: 2

Objective: 7

AACSB: Analytical thinking

10) Fixed costs are sometimes allocated to individual products as part of the standard costing system. When this is the case, they should be treated as variable costs for purposes of future cost estimation.

Diff: 2

Objective: 7

AACSB: Analytical thinking

11) When building a database of cost driver activity and related costs, if necessary, costs should be modified to assure that fixed costs are allocated as if they are variable.

Diff: 2

Objective: 7

AACSB: Analytical thinking

12) Jack Williams has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. Williams does not like the former movie-budget concept and desires to establish a formal cost estimation system.

Required:

What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie making system?

Next will be the problem of determining which costs are fixed and which are variable under the budget system. It may be difficult to determine those that are truly variable.

Timing problems will also have to be reconciled. Some costs may be incurred monthly rather than by movie, and some type of accrual will have to be made to keep the costs allocated to the proper cost driver.

Finally, there may be gaps in the historical data because only total costs had to be maintained within the budget. There was probably little attention paid to cost categories, thereby causing reliable cost data to be scarce.

Diff: 2

Objective: 7

AACSB: Analytical thinking

Objective 10.A

1) The coefficient of determination is important in explaining variances in estimating equations. For a certain estimating equation, the unexplained variation was given as 52,000. The total variation was given as 65,000. What is the coefficient of determination for the equation?

A) 1.25

B) 0.80

C) 0.20

D) 1.80

Diff: 2

Objective: A

AACSB: Application of knowledge

2) The H.W. Grant Corporation used regression analysis to predict the annual cost of indirect materials. The results were as follows:

What is the cost estimation equation?

A) Y = $15,620 + $10.25X

B) Y = $3,800 + $8.04X

C) Y = $19,420 + $4.66X

D) Y = $11,820 + $10.25X

Diff: 2

Objective: A

AACSB: Application of knowledge

3) Grandy's Beer was to manufacture 460 cases of ale next week. The accountant provided the following analysis of total manufacturing costs.

What is the estimated cost of producing the 460 cases of ale?

A) $110,515

B) $53,140

C) $50,255

D) $37,789

Diff: 2

Objective: A

AACSB: Application of knowledge

4) Ben and Mildred's Stables used two different independent variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows:

Trainer's hours:

Number of horses:

What is the estimated total cost for the coming year if 15,300 trainer hours are incurred and the stable has 400 horses to be trained, based upon the best cost driver?

A) $10,165.65

B) $385,877.65

C) $351,375.65

D) $2,097,611.59

Diff: 3

Objective: A

AACSB: Application of knowledge

5) A major concern that arises with multiple regression is multicollinearity, which exists when:

A) the dependent variable is not normally distributed

B) the standard errors of the coefficients of the individual variables decrease

C) the R2 statistic is low

D) two or more independent variables are highly correlated with one another

Diff: 2

Objective: A

AACSB: Analytical thinking

6) In multiple regression, when two or more independent variables are highly correlated with one another, the situation is known as:

A) heteroscedasticity

B) homoscedasticity

C) multicollinearity

D) autocorrelation

Diff: 2

Objective: A

AACSB: Analytical thinking

7) Which of the following is the mathematical expression to calculate the coefficient of determination?

A) coefficient of determination = 1 - (Unexplained variation / Total variation)

B) coefficient of determination = (1 + Total variation) / Unexplained variation)

C) coefficient of determination = (1 - Unexplained variation) / Total variation)

D) coefficient of determination = 1 - Unexplained variation + Total variation)

Diff: 2

Objective: A

AACSB: Analytical thinking

8) The coefficient of determination (r2) measures the percentage of variation in X (the independent variable) explained by Y (the dependent variable).

Diff: 1

Objective: A

AACSB: Analytical thinking

9) Generally a coefficient of determination (r2) of 0.30 or higher passes a goodness of fit test.

Diff: 2

Objective: A

AACSB: Analytical thinking

10) Goodness of fit has meaning only if the relationship between the cost drivers and costs is economically plausible.

Diff: 2

Objective: A

AACSB: Analytical thinking

11) Multicollinearity exists in multiple regression when two or more independent variables are highly correlated with each other.

Diff: 2

Objective: A

AACSB: Analytical thinking

12) A coefficient of correlation between independent variables of .85 indicates multicollinearity.

Diff: 2

Objective: A

AACSB: Analytical thinking

13) The t-value of a coefficient measures how large the value of the estimated coefficient is relative to its standard error.

Diff: 2

Objective: A

AACSB: Analytical thinking

14) The standard error of the estimated coefficient indicates how much the estimated value, b, is likely to be affected by random factors.

Diff: 1

Objective: A

AACSB: Analytical thinking

15) The new cost analyst in your accounting department has just received a computer-generated report that contains the results of a simple regression program for cost estimation. The summary results of the report appear as follows:

Variable Coefficient Standard Error t-Value

Constant $74.79 $16.82 4.45

Independent variable $1,081.76 $215.67 5.02

r2 = 0.75

Required:

a. What is the cost estimation equation according to the report?

b. What is the goodness of fit? What does it tell about the estimating equation?

a. y = $74.79 + $1,081.76X

b. Goodness of fit is 0.75. It measures how well the predicted values match the actual observations. In this case, the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance.

Diff: 1

Objective: A

AACSB: Application of knowledge

16) South by Southwest Company used least squares regression analysis to obtain the following output:

Payroll Department Cost

Explained by Number of Employees

Constant $7,540

Standard error of Y estimate 819

r2 0.8924

Number of observations 20

X coefficient(s) $2.473

Standard error of coefficient(s) 0.0966

Required:

a. What is the total fixed cost?

b. What is the variable cost per employee?

c. Prepare the linear cost function.

d. What is the coefficient of determination? Comment on the goodness of fit.

a. The constant or intercept is the total fixed cost of $7,540.

b. The variable cost per employee is the X coefficient of $2.473.

c. y = $7,540 + $2.473X

d. The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees.

Diff: 2

Objective: A

AACSB: Analytical thinking

17) Dandy Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows:

Machine-hours:

Variable Coefficient Standard Error t-Value

Constant $748.30 $341.20 2.19

Independent Variable $52.90 $35.20 1.50

r2 = 0.33

Number of packages:

Variable Coefficient Standard Error t-Value

Constant $242.90 $75.04 3.24

Independent Variable $5.60 $2.00 2.80

r2 = 0.73

Required:

a. What are the estimating equations for each cost driver?

b. Which cost driver is best and why?

a. Machine-hours y = $748.30 + $52.90X

Number of packages y = $242.90 + $5.60X

b. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours, thereby making it less attractive than number of packages as a cost predictor.

Also, for the independent variable, number of packages, the t-value of 2.80 indicates that a relationship exists between the independent and dependent variables. For machine-hours, the t-value (1.50) is below 2.00, indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables.

The t-values of the constant terms (g) for both drivers is greater than 2.00, therefore, there is no distinguishing characteristic between the constants.

Given the above findings, it appears that number of packages is the best predictor of costs of the packing department.

Diff: 2

Objective: A

AACSB: Analytical thinking

18) Yancy Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labor and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 2020:

1. X = cutting time y = $19,500 + $20X r2 = 0.65

2. X = labor y = $5,000 + $25X r2 = 0.49

3. X = machinery y = $44,500 + $5X r2 = 0.55

Required:

a. Which equation should be selected for the analysis?

b. What other factors should be included in the selection of the estimating equation?

a. Equation 1 for cutting time is slightly better than the other two equations based on r2 values. Generally, an r2 above 0.30 indicates a goodness of fit that is acceptable for most situations. Therefore, all three equations are acceptable when considering only the coefficient of determination.

However, because the values are so close together, other factors should be considered.

b. Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination.

Diff: 2

Objective: A

AACSB: Analytical thinking