Chapter 3 Exam Questions Cost Behavior And Cost Estimation

CHAPTER 3

COST BEHAVIOR AND ESTIMATION

CHAPTER LEARNING OBJECTIVES

1. Describe the fundamentals of cost behavior.
2. Demonstrate two straightforward methods of estimating costs.
3. Utilize regression analysis to estimate costs.
4. Estimate nonlinear costs using the learning curve.

Current count is:
Knowledge: 26
Comprehension: 35
Application: 37
Analysis: 4
Evaluation: 0
Synthesis: 0
Total: 102

Number and percentage of questions:

Easy: 27 questions, 26 percent (target of 25%)

Medium: 65 questions, 64 percent (target of 65%)
Hard: 10 questions, 10 percent (target of 10%)

Question types:
Multiple Choice: 60

Short Answer: 15

Brief Exercises: 15

Exercises: 9

Problems: 3

MULTIPLE CHOICE QUESTIONS

1. Which of the following is not a way to manage costs?
   a. Predict costs under different future conditions.
   b. Institute measures to control costs.

c. Plan and budget costs.

d. Compare actual costs to expected future costs.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. In a professional services firm such as a medical doctor’s practice, which of the following overhead costs most likely represents a mixed cost function?
2. Medical assistant salaries
3. Double-declining balance depreciation on office computers
4. Copy machine costs
5. Disposable patient gowns

Ans: C, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Which of the following is not a method of determining a cost driver?

a. Time-and-motion studies

b. Regression analysis

c. Classifying costs
d. Intuition

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. A cost driver is a(n)
2. system that tracks prior costs.
3. activity that causes a particular cost.
4. group of accumulated costs.
5. rate used to assign costs.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Why is identification of a relevant range important?
2. Product costs are higher outside of the relevant range
3. Cost behavior outside of the relevant range is linear, which distorts CVP analysis.
4. It directly impacts the number of units of product a company must sell to be profitable.
5. It allows a company to rely on cost behavior for planning purposes.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management

1. A mixed cost

a. can be fixed one period and then, change to variable in a subsequent period.

b. changes inversely with changes in volume.

c. includes both a variable cost and a fixed cost component.

d. is omitted from CVP analysis since it does not fit either a fixed or variable category.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Which of the following would most likely be considered a mixed cost for an attorney’s office?

a. Electricity costs for the attorney’s office complex

b. Cost of the copy machine

c. Cost of wages of paralegal clerks

d. Cost of auto expenses for office vehicles driven to and from the courthouse.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. The relevant range is
2. a band of activity with a specific relationship between activity levels and the cost of being measured.
3. the slope of the cost line based on a cost equation.
4. the y-intercept of a cost line based on a cost equation.
5. the range in which a company earns a profit.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. A linear cost equation
2. is derived from two elements - the relevant range and the level of activity.
3. is used to estimate future costs.
4. includes three components - fixed costs, variable costs and mixed costs.
5. is fixed when the volume is zero and increases at a constant rate per activity level after that.
   

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. If a company expands capacity by 40% or 40,000 units by increasing its fixed costs, and its unit selling price and unit variable cost remain the same, its total profit will
2. stay the same if no additional units are sold because the revenue remains the same.
3. increase if 2,000 additional units are sold.
4. decrease by the amount of the additional fixed costs if no additional units are sold.
5. increase by the selling price per unit if 2,000 additional units are sold.

Ans: C, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost

Accounting.

1. You are planning a retirement party and have rented space at a capacity of 80 people at a total cost of $800 for the evening. Food is expected to cost $34 per person. Drinks will be provided to attendees at a rate of $8 per drink and each attendee is expected to have on average, two drinks. By how much will the variable cost line rise on a graph for each additional attendee?
   a. $42

b. $50

c. $52

d. $60

Ans: B, LO 1, Bloom: AP, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Food cost + Drink cost = Total Variable cost per attendee; $34 + (2 x $8) = $50

1. You are planning a retirement party and have rented space at a capacity of 80 people at a total cost of $800 for the evening. Food is expected to cost $34 per person. Drinks will be provided to attendees at a rate of $8 per drink and each attendee is expected to have on average, two drinks. At capacity, how much total cost will you generate if you charge each attendee $62?
2. $3,360
3. $4,160
4. $4,000
5. $4,800

Ans: D, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.
Solution: Food cost + Drink cost = Total Variable cost per attendee; $34 + (2 x $8) = $50; Total cost = Total fixed cost + Total variable cost = $800 + (80 x $50) = $4,800

1. Given the mixed cost graph below, what is the amount of the slope?

1. $1.00
2. $0.50
3. $2.00
4. $.040

Ans: C, LO 1, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Slope is the difference in the x-axis amounts divided into the difference in the y-axis amounts.

Choose any point on the total cost line: ($700 - $600) ÷ (250 – 200) = $2.00

1. $1,575
2. $2,086
3. $2,770

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Using January as the high activity point, and April as the low activity point, we can compute the unit variable cost as (High cost – Low cost) / (High activity – Low activity) = ($11,320 - $9,745) / (3,800 – 3,100) = $1,575 / 700 = $2.25. Total fixed costs (at high) = $11,320 – (3,800 x $2.25) = $2,770.

1. Y = $6.84X + $18,480
2. Y = $4.40X + $18,480

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Units Sold = Sales Revenue ÷ Unit Selling Price = $67,200 ÷ $16 = 4,200 units; Unit variable cost

= Total variable costs ÷ Units sold = $18,480 ÷ 4,200 = $4.40. The cost equation is the total costs = (Unit

Variable cost * X) + Total Fixed Costs = $4.40X + $28,728.

1. Mow Power produces and sells custom lawn mowers. Each lawn mower sells for $220 and has a contribution margin of $132 per unit. Monthly fixed costs are $35,200 The cost equation for Mow Power’s lawn mowers is
2. Y = $132X + $35,200
3. Y = $88X + $35,200
4. Y = $220X - $35,200
5. Y = $88X - $35,200
   

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Unit variable cost = Unit selling price – Unit contribution margin = $220 - $132 = $88; The cost

equation is the total costs = (Unit Variable cost * X) + Total Fixed Costs = $88X + $35,200.

1. A line with a positive slope indicates that the
2. independent variable increases due to an increase in the dependent variable.
3. independent variable increases due to a decrease in the dependent variable.
4. dependent variable increases due to an increase in the independent variable.
5. dependent variable decreases due to a decrease in the independent variable.

Ans: C, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Which of the following is considered to be a risk of the high-low method?
2. The relevant range
3. Outliers
4. Requires judgment
5. Requires software to handle all the data points

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Use of a scatter-plot
2. mitigates the risk of using outliers as a basis for the cost equation.
3. depicts a line using the two high and low data points.
4. obscures extreme data points.
5. can help identify the most important data point.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Visualizing data on a scatter-plot
2. requires the selection of the highest and lowest data points.
3. results in a single cost equation line.
4. allows the user to see actual data points.
5. presents a plot of the expected data points.

Ans: C, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. In creating a scatter plot using Excel, which of the following is true?
2. Upon selecting the data then scatter chart icon, the scatter chart is displayed with the data.
3. After the scatter chart icon is selected, the date selected.
4. The cost driver is graphed on the horizontal axis.
5. The chart title is selected at the same time the data is selected to ensure the chart contains the proper title once created.

Ans: C, LO 2, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. A leak in the roof ruined part of the data needed to complete the high-low method calculation. The high point related to 50 units indicates a total cost of $1,840. Total fixed costs are estimated at $1,200. The plans are to produce 60 units in the current month. How much is the variable cost per unit?
2. $11.20
3. $12.80
4. $20.00
5. $64.00

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Total Cost (at high) – fixed costs = Total Variable cost (high); $1,840 - $1,200 = $640; Unit variable cost = Total variable cost (high) ÷ units (high) = $640 ÷ 50 = $12.80

1. DMX anticipates producing 500 license plates during his stay in a Miami jail during July. The budgeted costs for July are $5,600 with $4,200 being related to variable costs. How much will the total cost be if DMX produces 600 license plates?
2. $3,500
3. $4,200
4. $5,600
5. $6,440

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Unit variable cost = Total variable costs ÷ units produced; $4,200 ÷ 500 plates = $8.40;

Total fixed costs = Total costs – Total variable costs = $5,600 - $4,200 = $1,400; Total cost (600 plates) =

(Unit variable cost x plates produced) + Total fixed costs = ($8.40 x 600) + $1,400 = $6,440.

1. Given the graph shown below, what is the variable cost per unit to be used in the cost equation for the line at 400 units?

1. $1.00
2. $1.25
3. $2.00
4. $2.25

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Total cost – Fixed cost = Total variable cost; TC (400 units) of $1,000 – Fixed cost (400 units) of $500 = Total variable cost (400 units) of $500; $500 ÷ 400 units = $1.25

1. Anwar Industries has the following activity and cost data for the past year:

What will the total cost be when 615 units are produced?

1. $7,010
2. $10,455
3. $15,620
4. $16,385

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: High point is at 660 machine hours and low point is at 360 hours; Variable cost per unit = (Total cost at 660 hours, $16,250 – Total cost at 360 hours $12,050) ÷ Total hours at high point 660 – Total hours at low point 360) = $14.00; Total cost at high point $16,250 − (Variable cost per unit $14.00 × Number of units at high point 660) = $7,010; Total cost at 615 units = Total fixed cost $7,010 = (Variable cost per unit $14.00 × Units at desired level 615) = $15,620.

1. The regression method
2. uses only two actual data points to estimate a cost line.
3. can estimate a cost line but cannot separate total costs into variable and fixed costs.
4. uses every point in a data set to create a straight-line equation to estimate future costs.
5. uses the same methodology as the high-low method.

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. The “line of best fit” created in the regression method to generate a straight-line equation
2. is used to estimate future costs.
3. determines variability in estimated and actual costs for a given period.
4. helps to analyze the cause-and-effect relationship of actual costs.
5. allows the estimate of costs to be exactly the same as those costs actually incurred.

Ans: A, LO 3, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. In graphing the “line of best fit” in the regression method
2. one would expect to not see any residuals scattered around the cost line.
3. none of the data points have to touch the cost line.
4. some of the data points must touch the cost line.
5. a straight line will not exist within the relevant range.
   

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. What is the common goal of the high-low method and the regression method?
2. To accurately predict future costs with no variation.
3. To compare and analyze future and past costs for predictive purposes.
4. To separate total costs into their fixed and variable cost components to help in predicting future costs with a derived equation.
5. To determine a cause-and-effect relationship between various costs.

Ans: C, LO 3, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. When using cost prediction methods, output
2. always establishes a cause-and-effect relationship if positively correlated.
3. reliability depends on thoughtful, rational relationships between cost drivers and their costs.
4. Is dependable regardless of the input as long as a regression method is use.
5. Is less reliable if a regression method is used instead of a high-low or account analysis method.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. In the regression method, residual refers to the
2. data points that are not used in creating the line of best fit.
3. number of data points that do not fall directly on the line of best fit.
4. vertical distance between each known data point and the line of best fit.
5. slope of the cost-line .

Ans: B, LO 3, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. If the (X,Y) relationship is purely variable,
2. regression analysis must be used.
3. the equation of a line becomes Y = m(X).
4. the equation of a line that must be used is Y = m(X) + b
5. account analysis must be used.

Ans: B, LO 3, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. If costs are purely fixed in determining the cost line equation,
2. regression analysis must be used.
3. the equation of the line becomes Y = m(X).
4. the equation of the line becomes Y = b.
5. the equation of the line remains Y= m(X) + b.
   

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. Which of the following metrics would not be used to evaluate the validity of the regression model?
2. Economic plausibility
3. Statistical significance of the slope
4. Cause-and-effect negative relationships
5. Goodness of fit

Ans: C, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. In evaluating the economic plausibility of a regression model, the analyst is determining
2. the statistical significance of the relationship of the independent variable, X with the dependent variable, Y.
3. whether the chosen independent variable, X, is a viable, sensible predictor of the dependent variable, Y, using judgment and understanding of cause-and-effect relationships.
4. the degree to which the regression line fits the actual observations.
5. the correlation of variable costs to fixed costs in the total cost line determination.

Ans: B, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. In using a regression method, and determining the statistical significance of the slope of the cost line, the larger the t-statistic,
2. the stronger or more significant the relationship between the independent variable, X and the dependent variable, Y.
3. the weaker or less significant the relationship between the independent variable, X and the dependent variable, Y.
4. the more relevant the intercept is in the cost equation.
5. the less relevant the intercept is in the cost equation.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. The fixed portion of the cost equation is called the
2. p value.
3. Intercept coefficient.
4. t statistic.
5. standard deviation.

Ans: B, LO 3, Bloom: K, Easy: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Which of the following is not an assumption of the regression method?
2. Abnormality of the residuals
3. Independence of the residuals
4. Constant variance of the residuals
5. Linearity

Ans: A, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. What is meant by a multiple regression?
2. The same variables (both independent and dependent) are simply run multiple times in the same regression to ensure statistical significance.
3. The same regression is run as was previously run, but with multiple independent variables (X) to estimate one cost function.
4. The same regression is run with the same variables, but with supporting analyses such as account analysis and high-low method.
5. The use of the same regression run multiple times to eliminate the need for the evaluation criteria for the validity of the input and output.

Ans: B, LO 3, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. When evaluating the output of a multiple regression model, one needs to check
2. the validity of the entire model using the criteria of economic plausibility, goodness of fit, and significance of slope.
3. the validity of the entire model using the criteria of economic plausibility only since the goodness of fit and significance of slope validity have been addressed in the multiple regression runs of data.
4. the validity of the last data set run using the criteria of economic plausibility, goodness of fit, and significance of slope.
5. the validity of the model using the first and last set of data run using the criteria of economic plausibility, goodness of fit, and significance of slope.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. The essence of the learning curve is that
2. as the number of units of output increases, the labor hours per unit increase in a corresponding, observable, linear relationship.
3. as the number of units of output decreases, the labor hours per unit decline in a corresponding, observable, linear relationship.
4. as the number of units of output increases, the labor hours per unit decline in a corresponding, observable, nonlinear relationship.
5. as the number of units of output decreases, the labor hours per unit increase in a corresponding, observable, nonlinear relationship.

Ans: C, LO 4, Bloom: K, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Greta’s Gadgets has a learning curve of 90%. The time observed to complete the first gadget was 1 hour (60 minutes). What is the expected time to complete the 5^th unit assuming the learning curve of 90%?
2. 36.3 minutes
3. 47.98 minutes
4. 48.6 minutes
5. 54 minutes

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution: Unit #2: 60 min. x (2^-.152) = 54 min.; Unit #3: 60 min. x (3^-.152) = 50.8 min.; Unit #4: 60 min. x (4^-.152) = 48.6 min.; Unit #5: 60 min. x (5^-.152) = 47.98 min.

1. If one were to apply a linear cost function to labor, the implication would be that
   1. the time to make an additional unit increases over time.
   2. the time to make each additional unit decreased over time.
   3. each unit requires the same amount of time to produce.
   4. there is an inverse relationship between cost and the cost driver.

Ans: C, LO 4, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

1. The learning curve approach assumes a
2. linear cost function.
3. nonlinear cost function.
4. that each unit will take the same amount of time to produce.
5. regardless of training, production time per unit cannot be reduced.

Ans: B, LO 4, Bloom: K, Difficulty: Medium, AACSB: Ethics, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. In applying a linear cost approach as compared to a nonlinear approach results in
2. labor costs being higher.
3. labor costs being lower.
4. labor costs being the same.
5. operating income being higher.

Ans: A, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Chandra Corporation has an observed and documented a learning curve of 90%, and production of units has increased from 10 to 20 units per week. If it is known that it takes 60 minutes to produce the 10^th unit, what amount of time will it take to product the 20^th unit?

a. 45 minutes

b. 50 minutes

c. 54 minutes

d. 60 minutes

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

Solution: Since the number of units produced doubled, then the 90% is applied to the original 60 minutes

(.90 x 60) = 54 minutes to complete the 20^th unit.

1. Which of the following statements is true regarding the concept of a learning curve?
2. As additional units are produced, it will require the same amount of time, but cost per unit will decrease.
3. As additional units are produced, each additional unit will require less time, and thus, will result in cost savings.
4. As additional units are produced, the amount of time required may increase or decrease depending on the training of the production worker.
5. As additional units are produced, each additional unit will require less time, but the cost will increase per unit due to increased training costs for the production worker.

Ans: B, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Which of the following is the ultimate limitation of the concept of a learning curve?
2. It typically requires additional training and education of production workers.
3. Innovation such as when a company creates a new product or production process, the learning curve requires a new learning curve to be started.
4. It cuts operating costs by saving time.
5. It improves skill improvement and learning for production employees.

Ans: B, LO 4, Bloom: K, Difficulty: Medium, AACSB: none, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. You and another company are currently bidding on a construction project. Your competitor is an experienced construction company with an observed learning curve of 90%. You are a new company with no observed learning curve. Assuming the company with the lowest bid will be granted the contract and both companies determined their bid based on a 40% markup on cost, who will most likely get the construction contract?
2. You will get the contract since you are new and most likely offered a low bid.
3. Your competitor will most likely get the bid since its costs are probably lower than those of a new company because of the learning curve of 90%.
4. Each company is equally likely to receive the contract since a learning curve does not affect costs or the related contract pricing.
5. Not enough information is given to make this determination.

Ans: B, LO 4, Bloom: C, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge

1. The method(s) which can be used to separate mixed costs into their fixed and variable cost components to predict future costs is (are)
2. high-low method.
3. account analysis method.
4. regression method.
5. all of these methods can be used.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. If a company was to plot its learning curve on a graph with the time per unit and number of units on each axis, one would expect the curve to be
2. downward sloping.
3. upward sloping.
4. a horizontal straight line.
5. a vertical straight line.

Ans: A, LO 1, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. When computing the time required for the production of each additional unit with a learning curve, one would
2. multiply the time to produce the immediately preceding unit by the learning curve percentage.
3. divide the time of the immediately preceding unit by the learning curve percentage.
4. multiply the time to produce one unit by the cumulative number of units at this point by the learning rate [ln learning rate %/ ln 2]
5. divide the time of the immediately preceding unit by the one minus the learning curve percentage.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Which of the following methods would be the most comprehensive and reliable predictor of future costs for linear cost functions?
2. Account analysis method.
3. High-low method.
4. Regression method.
5. Learning curve method.

Ans: C, LO 2, 3, 4, Bloom: C, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge.

1. Alpine Corporation has been manufacturing the same model of snowboards for several years. The original time to produce one snowboard was 2 hours (120 minutes). Over the last year, the production line has steam-lined the production process with a learning curve of 80%. Recently, the company has introduced a new model of snowboard which now requires 3 hours of production time, but with a 90% learning curve. How much time will it take to produce the third unit of the new snowboard?
2. 146 minutes
3. 152 minutes
4. 162 minutes
5. 180 minutes

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Business Acumen & Operations: Operational Knowledge

Solution: Unit #1: 180 min. x 1 = 180 min.; Unit #2: 180 min x (2^-.152) = 162 min.; Unit #3: 180 min. x (3^-.152)

= 152 min. The old learning curve is no longer used given the newer model.

BRIEF EXERCISES

1. Futuristic Fashions reports the following cost information for the period:

Determine the linear cost function equation of a line using the data provide for Futuristic Fashions.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Answer: Total Cost at a Given Activity Level = Unit Variable Cost x Activity Level) + Fixed Costs = ($21.50 x Activity Level) + $1,540

Solution:

Total Unit Variable Cost = Direct Materials + Direct Labor + Indirect Materials = $12 + $8 + 1.50 = $21.50; Total Fixed Costs = Factory Rent + Factory Utilities + Factory Insurance = $1,200 + $230 + $110 = $1,540; Equation: Total Cost at a Given Activity Level = Unit Variable Cost x Activity Level) + Fixed Costs = ($21.50 x Activity Level) + $1,540

1. Sustainable Solutions, Inc. incurred the following costs during the previous month:

Determine which of the costs in the table are variable, fixed or mixed and give an explanation for your classification for each cost.

Ans: N/A, LO 1, Bloom: AN, Difficulty: Easy, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution:

1. Makito Manufacturers incurs the following costs in manufacturing computers. Match

the cost driver with the related cost which would most likely cause the cost to change.

_____ 1. Production workers Wages A. Labor hours

_____ 2. Power Costs B. Machine hours

_____ 3. Computer chips, Memory boards, C. Units produced

Keyboard assemblies

_____ 4. Indirect production materials

_____ 5. Indirect production labor wages

Ans: N/A, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution:

__A__ 1. Production workers Wages

__B__ 2. Power Costs

__C__ 3. Computer chips, Memory boards,

Keyboard assemblies

__C__ 4. Indirect production materials

__A__ 5. Indirect production labor wages

1. You have recently decided to open a miniature golf course on a tract of land that you inherited. You have estimated that your monthly fixed costs will be $150 and your variable cost per customer will be $4. Prepare a graph showing your fixed cost line, total variable costs, and total cost line for 10 customers.

Ans: N/A, LO 1, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management, Reporting & Control: Cost Accounting.

Solution:

1. The finance manager has provided you with the following overhead cost function in a Y = m(X) + b format: Total monthly overhead costs = $2.50 (machine hours used) + $4,300. Given this cost function, identify the (a) variable cost; (b) the cost driver; (c) the fixed costs; and whether these monthly overhead costs are considered variable, fixed, or mixed in total.

Ans: N/A, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution:

1. Ahmed Company had a high level of activity in June of 7,000 machine hours and related electrical costs of $20,000. In February had a month of low activity of 2,000 machine hours with electrical costs of $10,000. Using the high-low method, what are the variable cost per unit and the estimated fixed cost element of electrical costs?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Answer: Fixed cost element = $6,000

Solution:

(High Activity Cost – Low Activity Cost) ÷ (High Activity – Low Activity) = Unit variable cost; ($20,000 - $10,000) / (7,000 – 2,000) = $10,000 / 5,000 = $2.00

High Activity: Total Cost – (Unit Variable Cost) X High Activity) = Fixed Cost Element

[$20,000 – ($2.00 x 7,000)] = $6,000

1. Sanchez Manufacturing Company collected the following production data for the past year:

Units Produced Total Cost

1,600 $66,000

1,300 57,000

1,500 67,500

1,100 49,500

If the high-low method is used, what is cost equation for the year?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: Total cost = $33/unit + $13,200

Solution:
(High Activity Cost – Low Activity Cost) ÷ (High Activity – Low Activity) = Unit variable cost; ($66,000 - $49,500) / (1,600 – 1,100) = $16,500 / 500 = $33.00

High Activity: Total Cost – (Unit Variable Cost) X High Activity) = Fixed Cost Element

[$66,000 – ($33.00 x 1,600)] = $13,200

1. Nina and Marco having been working their accounting internship at Pino’s Pizzeria. The owner of Pino’s has provided them with the following information for the month of July, and has asked them to compute a cost equation for the pizzeria.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Answer: $2.80 per unit + $5,500

Solution:
Total Costs = Total Variable Costs + Total Fixed Costs; $19,500 = (*$2.80 x 5,000 units) +

$5,500; ($14,000 ÷ 5,000 units = $2.80 per unit)

1. Brianna Wellington is the new accountant at Advanced Auto Corporation. She has been assigned the task of determining the next month’s costs for her department. She only has partial information available from the previous month as follows: high activity level of 350 units at a total cost of $3,280. She also knows from the accounting records, that the total fixed costs are estimated at $970. Determine the amount of the variable cost per unit and the estimated total costs for next month assuming that 330 units are going to be produced.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Answer: Variable cost per unit = $6.60

Total costs at 330 units = $3,148

Solution:

High Activity Total Cost – Fixed Cost = Variable Cost; $3,280 - $970 = $2,310

Unit Variable cost = Variable Cost ÷ Units = $2,310 ÷ 350 = $6.60 per unit

Total cost at 330 units = ($6.60 x 330 units) + $970 = $3,148

1. The controller of MGX Industries is trying to estimate the upcoming quarter’s cell phone

costs for the company. The phone cost has been determined to be a mixed cost, of

which $100 is the monthly base fee, and the total bill for the last quarter for employee

cell phone usage was $780. Assume that 2 additional employees were given company

cell phones to use for the upcoming quarter which should increase usage-related

charges to increase by 20%. Using an account analysis approach, what do you expect

the total cost to be for the company cell phones for the upcoming quarter?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation,

IMA: Strategy, Planning & Performance: Strategic Cost Management.

Answer: $916

Solution: Total Costs = Fixed Cost + Total Variable Costs = $100 + [($780 – 100) x

1.20]) = $100 + $816 = $916

1. Carl’s Canine Cuts has just recently opened for business offering grooming services for all breeds of dogs. Carl has just finished his first day of service and has noted a remarkable improvement in the amount of time that it takes him to complete a grooming service for each dog. Currently, he managed to groom the 4^th dog by the end of the day in 2 hours (120 minutes) time. If Carl has an 80% learning curve, how much time should it take him to groom the 8^th dog? The 16^th dog?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: 8^th Dog Grooming Time = 96 minutes: 16^th Dog Grooming Time = 76.8 minutes

Solution: 8^th Dog Grooming Time = 120 minutes x 80% = 96 minutes or 1 hour 36

minutes

16^th Dog Grooming Time = 96 minutes x 80% = 76.8 minutes or 1 hour and 16.8 minutes

1. If Baxter’s Barber Shop is able to cut the 1^st customer’s hair in 30 minutes, the 2^nd customer’s hair in 28.5 minutes, the 4^th customer’s hair in 27.08 minutes, and the 8^th customer’s hair in 25.72 minutes, what is Baxter’s learning curve?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: Learning Curve = 95%

Solution: 30 x (X%) = 28.5; 28.5 ÷ 30 = 95%; or 28.5 x (X%) = 27.08; 27.08 ÷ 28.5 =

95%; or 27.08 x (X%) = 25.72; 25.72 ÷ 27.08 = 95%

1. Jaimin reported the following amount of time to production of the MCG products:

1^st Unit = 120 minutes

2^nd Unit = 84 minutes

3^rd Unit = 68.18 minutes

4^th Unit = ?

Based on this data, what is Jaimin’s learning curve? How much time should it take him

to complete his 4^th unit?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: Learning Curve = 70%; 4^th Unit = 58.8 minutes

Solution: Learning Curve = 84 ÷ 120 = 70%; 4^th Unit = 84 x 70% Learning Curve = 58.8

Minutes

1. Mario Finzelli has just learned how to make his grandfather’s famous pizza recipe. To make his first pizza, it took him 15 minutes. It should take him only 10 minutes to make a pizza. What learning curve percentage will he need to experience in order to get to the 10 minute mark by the time he makes his 4 pizzas?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: 80% Learning Curve since the 10 minute mark is reached between the 3^rd and

4^th pizza

Solution: 1^st Unit =15 minutes

2^nd Unit = 15 minutes x 80% = 12.0 minutes

3^rd Unit = 15 minutes x (3^-0.32) = 15 x .8462 = 10.55 minutes

4^th Unit = 12 minutes x 80% = 9.6 minutes

1. Imani is studying for her first accounting exam. She is unsure of what the teacher will ask on the exam or the material covered, so she plans to study for 4 hours. On the second exam, Imani feels more comfortable with the exam format and material, and given that she believes she has an 85% learning curve, how long should she have to study in order to achieve the same results as she received on the first exam?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: 3.4 hours

Solution: 1^st Exam Study Time = 4.0 hours

2^nd Exam Study Time = 4 hours x 85% = 3.4 hours

EXERCISES

1. Ventner Manufacturing manufactures a single product. Monthly costs incurred in the production process of 1,000 units are shown below.

Costs Incurred

Production in Units 1,000 3,000

Production Costs

1. Direct Materials $ 8,000 ?

2. Indirect Labor 3,000 ?

3. Utilities (fixed portion is $600) 1,400 ?

4. Equipment Depreciation 3,000 ?

5. Direct Labor 11,000 ?

6. Manager Salaries 2,800 ?

7. Maintenance (fixed portion is $300) 1,000 ?

8. Factory Rent 3,500 ?

Compute the expected costs to be incurred when production is 3,000 units using your understanding of cost classifications to determine which of the costs are fixed or variable.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management.

Solution:
Costs Incurred

Production in Units 1,000 3,000 (3 times original production)

Production Costs

1. Direct Materials $ 8,000 $24,000 (3 x $8,000) Variable

2. Indirect Labor 3,000 9,000 (3 x $3,000) Variable

3. Utilities (fixed portion is $600) 1,400 3,000 (3 x $800) + $600 Mixed

4. Equipment Depreciation 3,000 3,000 Fixed – No Change

5. Direct Labor 11,000 33,000 (3 x $11,000) Variable

6. Manager Salaries 2,800 2,800 Fixed – No Change

7. Maintenance (fixed portion is $300) 1,000 2,400 (3 x $700) + $300 Mixed

8. Factory Rent 3,500 3,500 Fixed – No Change

Total $33,700 $ 80,700

1. ZZZZ Best Accounting and Tax Services pays $300 per month for a tax software license. In addition, for each tax return prepared, the business incurs variable costs of $65 per return. The relevant range for ZZZZ Best Accounting and Tax Services is 100 – 400 tax returns per month.

What is the total monthly cost and per unit cost if the business prepares

1. 150 returns?
2. 200 returns?
3. 300 returns?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer:

1. Total Monthly Cost = $10,050; Per Unit Cost = $67.00
2. Total Monthly Cost = $13,300; Per Unit Cost = $66.50
3. Total Monthly Cost = $19,800; Per unit Cost = $66.00

Solution:

1. Total Monthly Cost = (150 x $65) + $300 = $10,050;

Per Unit Cost = $10,050 ÷ 150 = $67.00

1. Total Monthly Cost = (200 x $65) + $300 = $13,300;

Per Unit Cost = $13,300 ÷ 200 = $66.50

1. Total Monthly Cost = (300 x $65) + $300 = $19,800;

Per Unit Cost = $19,800 ÷ 300 = $66.00

1. You have been provided with the following cost information for your factory at various levels of production activity. You job is to review the provided data, and based on your knowledge of cost behavior analysis, to classify the costs as either variable, fixed or mixed.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. You have just started your new job as a staff accountant for a local business. The President and owner of the company has asked you to help him to create a budget for utility costs for next year. He is specifically interested in estimating the cost for the electric for the upcoming fiscal year. He has provided you with the utility bills for the last 6 months, along with the login for the online account with the utility company to access additional information.

Required: The company President is asking you to budget for the total annual electric costs using the account analysis method using the following information with the expectation that the total kWH usage for the next fiscal year will be based on the average usage over the last six months for a monthly usage to be annualized, with an increase in the kWH rate of 10% (the monthly base fee will not change for next year):

Monthly Base Fee……………………………………………………$280

Monthly Usage kWH:

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: $4,681.72

Solution:

The monthly kWH rate is computed by taking any of the charges given in the

data, then deducting the monthly base feel of $280, and dividing the remaining charges

by the total usage. For example, for the month of January, $373.93 - $280.00 = $93.93 ÷

1,010 kWH = $.093 per kWH. This rate will then increase by 10% next fiscal year, so the

new variable rate per kWH will be $.093 x 1.10 = $.1023 per kWH.

Next, the annual usage should be based on an average of the six months usage given,

as (1,010 + 980 + 1,080 + 1,120 + 1,050 + 1,220) = 6,460 ÷ 6 = 1,076.67; Then project

this by 12 months, 12 x 1,076.67 kWH = 12,920.04 kWH; Then, the new rate will be

multiplied by the projected annual usage as 12,920.04 kWH x $.1093 = $1,321.72 of

total variable charges per kWH.

Then the fixed charges should be computed, ($280 per month x 12 months) = $3,360

per year, and then added to the annual variable charges to arrive at the total estimated

electric costs for the upcoming year, $1,321.72 (Variable Cost) + $3,360 (Fixed Cost) =

$4,681.72.

1. The following information is available for Crescent Computer Company for its monthly maintenance costs:

Using the high-low method:

1. Estimate the variable cost component of the maintenance cost for Crescent.
2. Estimate the fixed cost component of the maintenance cost for Crescent.
3. Determine the estimated cost function for Crescent Computer’s maintenance cost.
4. If Crescent expects to produce 230 units in September, what are the expected total maintenance costs to be incurred?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer:

• 1. Variable cost component = $25 per unit
  2. Total fixed cost component = $2,100
  3. Estimated cost function: Y = ($25 per unit x Units Produced) + $2,100
  4. Estimated September Maintenance Costs = $7,850

Solution:

1. To determine the variable cost component of the maintenance cost for Crescent, it is first necessary to identify the high level of activity, which occurs in the month of June, and the low level of activity, which occurs in the month of February. Using the following equation: (High Level Cost – Low Level Cost) / (High Activity Level – Low Activity Level) = ($8,100 - $3,600) / (240 – 60) = $4,500/180 = $25 per unit variable cost component.
2. The fixed cost component of the maintenance cost for Crescent is then computed by computing the total variable cost at either the high and or low level of activity and deducting it from the total cost at the level of activity. At the high level of activity, the total variable cost = (240 units x $25 per unit) = $6,000; Total Cost – Total Variable Cost = Total Fixed Cost; $8,100 - $6,000 = $2,100 Total Fixed Cost. Or, at the low level of activity, the total variable cost = (60 units x $25 per unit) = $1,500; Total Cost – Total Variable Cost = Total Fixed Cost; $3,600 - $1,500 = $2,100 Total Fixed Cost.
3. The estimated cost function for Crescent Computer’s maintenance cost is thus, Y (Total Maintenance Cost) = mX + b = ($25 per unit x Units Produced) + $2,100.
4. If Crescent produces 230 units in September, the expected total maintenance costs will be ($25 per unit x 230 units) + $2,100 = $5,750 + $2,100 = $7,850.
5. You have been provided with the following data regarding shipments and costs for Brighton Boutiques:

Required: Plot the data points on a scatter graph, and then using the high-low method, determine the cost function of the line that will connect the high and low points on the graph. Does the cost function appear to be linear in nature?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis

Solution:

Equation of the line is determined as: First: (High Level Cost – Low Level Cost)/ (High

Activity – Low Activity Level) = ($202 - $142)/(120 – 70) = $60/50 = $1.20 per unit of

variable costs; Fixed Costs = Total Costs – Fixed Costs; At high level, FC = $202 – (120

x $1.20) = $202 - $144 = $58; or at the low, FC = $142 – (70 x $1.20) = $142 - $84 =

$58; Therefore, the cost function of the line is Y = ($1.20 x Shipments Received) + $58.

Yes, the line connecting the graphed points is linear in nature.

1. Mama Leone is canning her fresh tomatoes so that she can make spaghetti sauce later in the year. It took her 30 minutes from start to finish for her first canning jar, and she has 4 hours (240 minutes) to complete the canning process. If she has a learning curve of 90%, how many jars of tomatoes will she be able can?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and

Interpretation, IMA: Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Answer: 10 jars

Solution: 1^st Unit = 30.0 minutes

2^nd Unit = 30.0 minutes x 90% = 27.0 minutes

3^rd Unit = 30.0 minutes x (3^-0.152) = 30 x .8462 = 25.4 minutes

4^th Unit = 27.0 minutes x 90% = 24.3 minutes

5^th Unit = 30.0 minutes x ((5^-0.152) = 30 x .783 = 23.5 minutes

6^th Unit = 25.4 minutes x 90% = 22.9 minutes

7^th Unit = 30 minutes x (7^-0.152) = 30 x .744 = 22.3 minutes

8^th Unit = 24.3 minutes x 90% = 21.9 minutes

9^th Unit = 30.0 minutes x (9^-0.152) = 30 x .716 = 21.5 minutes

10^th Unit = 23.5 minutes x 90% = 21.2 minutes

240.0 minutes

1. Lennox Custom Home Designs has just hired Janesh to pack all orders for shipping to customers. It took Janesh 3 minutes to pack her first box of goods, with an estimated learning curve of 85%. Compute the time predicted per unit when packaging the following quantities for customer shipment and total time to package.

Solution:

1. Cyril’s Cycling Enthusiasts sells specialty bikes. Cyril has just hired a new assistant to assemble the bikes purchased by customers. Since Cyril is new to bike assembly, he was shocked to find that it took his new assistant 5 hours to assemble his first bike. Cyril has done some research on the internet and found that a learning curve of 90% is normal for bike assembly. Cyril would therefore, like to predict what the average time would be for his assistant to assemble 32 bikes, considering he is expecting a large customer order and wants to give the customer an accurate timeframe for the completion of the assembly.

Ans: N/A, LO 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Solution:

PROBLEMS

1. Tracy has started her own business producing custom candles. For now, she is starting slowly, and offering only certain designs in the custom candles. Her favorite design, which was her first candle produced, had the following production time and costs:

Tracy expects to experience a learning curve of 90% in making subsequent candles for

her customers.

Required:

1. Computer the total cost of for the first candle that Tracy produced.
2. Compute the cost of four candles if Tracy does not account for a learning curve.
3. Compute the total cost of four candles and the cost per unit if Tracy does account for a learning curve.

Ans: N/A, LO 1, 4, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

Solution:

1. Cost for first candle = (.5 lbs. x $6) + (1 hr. x $12) + (1 hr. x $4) = $19 per candle
2. Cost for four candles (without learning curve) = 4 x $19 (per a) = $76
3. Cost for four candles (with learning curve):

4 x [(.5 lbs. x $6) + (.81 hrs. x $12) + (.81 x $4)] = 4 x ($3 + $9.72 + $3.24) = $63.84; Per candle = $63.84 ÷ 4 = $15.96 or [(.5 lbs. x $6) + (.81 hrs. x $12) + (.81 x $4)] = ($3 + $9.72 + $3.24)

1. The town of Jim Thorpe, Pennsylvania operates a scenic railway business for tourists. The town is trying to create a cost function for labor costs, which has been identified as a mixed cost, associated with operating the railway. The following data has been gathered related to the labor costs and two possible cost drivers, the number of trips and gross ticket revenues by month.

Required:

1. Using the high-low method, determine the cost function for labor costs using (1) Number of Trips as a cost driver, and (2) Ticket Revenues as a cost driver.
2. Prepare a scatter plot for labor costs using (1) Number of Trips as a cost driver, and (2) Ticket Revenues as a cost driver using the templates below. Based on the scatter plot, which appears to be a more relevant cost driver?

(1)

(2)

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management and Decision Analysis.

.

Solution:

• 1. (1) (High Level Cost – Low Level Cost) / (High Activity Level – Low Activity Level) = ($68,000 - $16,000) / (100 – 10) = $52,000/90 = $577.78 per trip variable cost component. Fixed Cost = Total Cost – Total Variable Cost; At high level, Fixed Cost = $68,000 – (100 x $578) = $68,000 - $57,800 = $10,200 or at low level, Fixed Cost = $16,000 – (10 x $578) = $16,000 – $5,780 = $10,220 (off by $20 due to rounding).

(2) (High Level Cost – Low Level Cost) / (High Activity Level – Low Activity Level) = ($68,000 - $16,000) / (120,000 – 12,000) = $52,000/$108,000 = $0.48 per dollar of ticket revenue variable cost component. Fixed Cost = Total Cost – Total Variable Cost; At high level, Fixed Cost = $68,000 – ($120,000 x $0.48) = $68,000 - $57,600 = $10,400 or at low level, Fixed Cost = $16,000 – ($12,000 x $0.48) = $16,000 - $5,760 = $10,240 (off due to rounding).

• 1. (1)

(2)

Based on the results of the scatter plot, if a straight-line were to be drawn between the high and low points, the most linear relationship will be with ticket revenues as a cost driver for labor costs.

1. Septa Bus Company accumulates the following data concerning a mixed cost, using miles as the activity level.

Miles Driven Total Cost

March 10,000 $17,000

April 9,500 15,200

May 8,000 13,500

June 7,500 13,000

July 7,000 12,700

August 9,000 14,400

Required:

1. Using the high-low method, determine the cost function for total costs using miles driven as a cost driver, separating the cost into its respective variable cost component and fixed cost component.
2. Prepare a scatter plot for total costs using miles driven as a cost driver using the graph template below.
3. Septa expects that it buses will be driven 12,000 miles in September due to a new route being added. What are the predicted total costs for September?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation,

IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost and Decision Analysis.

Solution:

1. To determine the variable cost component of the maintenance cost for Septa, it is first necessary to identify the high level of activity, which occurs in the month of March, and the low level of activity, which occurs in the month of July. Using the following equation: (High Level Cost – Low Level Cost) / (High Activity Level – Low Activity Level) = ($17,200 - $12,700) / (10,000 – 7,000) = $4,500/3,000 = $1.50 per mile variable cost component.

The fixed cost component of the maintenance cost for Septa is then computed by computing the total variable cost at either the high and or low level of activity and deducting it from the total cost at the level of activity. At the high level of activity, the total variable cost = (10,000 miles x $1.50 per mile) = $15,000; Total Cost – Total Variable Cost = Total Fixed Cost; $17,200 - $15,000 = $2,200 Total Fixed Cost. Or, at the low level of activity, the total variable cost = (7,000 miles x $1.50 per mile) = $10,500; Total Cost – Total Variable Cost = Total Fixed Cost; $12,700 - $10,500 = $2,200 Total Fixed Cost.

The estimated cost function for Septa Bus Company cost is thus, Y (Total Cost) = mX + b = ($1.50 per mile x Miles Driven) + $2,200.

1. If Septa Bus Company has 12,000 miles driven in September, the expected total costs will be ($1.50 per mile x 12,000 units) + $2,200 = $18,000 + $2,200 = $20,200.

SHORT ANSWER

1. Describe the fundamentals of cost behavior.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution: Costs must be monitored and managed in order to optimize business results.

Before costs can be analyzed, cost drivers, the activities which cause certain costs, must

be identified. Costs are then categorized based on their behavior as either fixed costs,

variable costs, or mixed costs. Mixed costs are further separated into their respective

fixed cost and variable cost components. These cost classifications are then used to

develop a cost function equation set as Y = m(X) + b which is linear in nature, to help

predict future costs within a relevant range.

1. Define variable costs, fixed costs and mixed costs and explain their relevance in predicting future costs.

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution:

Variable costs are costs that change in total based on a change in the level of activity, or

usage of their cost driver, but are constant on a per unit basis.

Fixed costs are costs that remain the same in total within a relevant range, but change

inversely with a change in a given level of activity or use of their cost driver.

Mixed Costs include both a variable and a fixed cost component. For cost prediction

purposes, mixed costs must be separated into their respective variable and fixed

components.

The relevance of these cost classifications in predicting future costs is seen in the linear

cost function equation set as Y = m(X) + b, where Y = Total Cost, m = Unit Variable

Cost, X = Activity Level, and b = Total Fixed Cost. This equation is used to predict

future costs.

1. What is the relevant range and how is it important in predicting future costs?

Ans: N/A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution: The relevant ranged is a band of activity with a specific relationship between

activity levels and that cost being measured. Within the relevant range, fixed costs

remain fixed, unit variable costs are constant, and a linear relationship exists between

fixed costs, variable costs, and total costs. Given the predictably linear function, one can

use actual costs to estimate future costs with the linear cost function formula, Y = m(X) + b, but for it to work as accurately as possible, the relevant range must be defined.

1. Identify the two, straightforward methods for predicting costs and explain the how each method is used to predict future costs?

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution: The two straightforward methods for predicting costs are the account analysis

method and the high-low method. The account analysis uses actual costs usually at an

invoice level and requires a good understanding of how the cost behaves. The high-low

method uses several data points with the highest and lowest activity levels being used to

create a possible equation of a line to use for predicting future costs. It is quick to use,

but a bit more difficult to estimate.

1. What are two limitations of the high-low method for predicting future costs?

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution:

Two limitations of the high-low method for predicting future costs are:

• 1. The highest and the lowest points of activity in the range may not be representative of the remaining coordinates in the sample.

1. One or more of the data points might be outliers, making the resulting equation when connecting the highest activity level point with the lowest activity level point a poor predictor of future costs. Or, the outlier points might be indicative of seasonality and necessary to estimating future costs, but are not factored into the resulting equation.
2. How is a scatter plot used to predict future costs?

Ans: N/A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Applications, Cost Management.

Solution:

A scatter plot is a data-visualization method depicting all (X, Y) coordinates in a sample

on a graph. Using this method, a user can identify any outliers, and make other relevant

observations about the data set. The scatter plot provides analysis to supplement the

other cost estimation methods by mitigating the risk of selecting the highest and lowest X

values when either or both of them appears to be an outlier in the data set.

1. Describe the regression method and explain why it is a better method for estimating future costs.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution:

The regression method is a more comprehensive method of estimating costs that is

usually done with statistical tools such as Excel (computer) instead of manually. This

analysis uses every point in the data set in a mathematical determination to minimize the

vertical distance among the data points (residual) to generate a straight-line equation,

referred to as a line of best fit. Using the regression method allows one to analyze

multiple (X, Y) relationships to see which ones are the best potential cost drivers.

1. What are the metrics that can be used to evaluate the validity of a regression model?

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Applications, Cost Management.

Solution: The metrics that can be used to evaluate the validity of a regression model are

as follows:

• 1. Economic plausibility – Is the chosen variable, X, a viable predictor for the variable, Y

1. Goodness of fit – degree to which the regression line fits the actual observations, measured by the coefficient of determination.
2. Statistical significance of the slope – slope of the regression line is statistically significant in that the independent variable or the cost driver, X, is said to have a statistically significant relationship with Y, if the slope of the line is different from zero.
3. Identify and describe on what four assumptions the nature of the regression method relies.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, IMA: Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution:

• 1. Linearity – observations when plotted on an (X, Y) scatter plot should exhibit a linear relationship

1. Constant of variance of the residuals – variability of residuals is constant across all

(X) values

1. Independence of the residuals – one observation does not differ predictably based on a previous observation.
2. Normality of the residuals – residuals are normally distributed
3. What are the two major reasons to use the account analysis method, the high-low method, and the regression method?

Ans: N/A, LO 2, 3, 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement,

Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge. Strategy, Planning & Performance: Strategic Cost Management.

Solution:

• 1. To separate mixed costs into their respective fixed and variable cost components
  2. To predict future costs.

1. Which method is the most comprehensive method for estimating costs? Explain.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge.

Solution:

Regression analysis is the most comprehensive method for estimating costs because it allows for the use of multiple (X,Y) relationships. This method is typically done with statistical analysis tools such as Excel rather than computed manually.

1. When evaluating a regression analysis output, what should one check for?

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge.

Solution:

When evaluating a regression output, one should check for economic plausibility, goodness of fit, and the statistical significance of the slope.

1. Identify the four assumptions that cause a regression model to be most likely considered reliable.

Ans: N/A, LO 3, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge.

Solution: The four assumptions that cause a regression model to most likely be

considered reliable are as follows:

1. Linearity;
2. Constant variance of the residuals;
3. Independence of the residuals; and
4. Normality of the residuals.
5. A manager of an insurance agency was working on the portion of a time budget for one

of his new insurance agent hires. He knows that based on past experience with new hires, that there is a learning curve, but that due to the complexity of the work assignments, that the new hire will not be able to significantly reduce time spent on any of the new tasks, as he will still be learning. If the manager wishes then to use a very small learning curve for the work of the new hire, should the learning curve be set at 95% or 5%? Explain answer.

Ans: N/A, LO 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis,

and Interpretation, Business Acumen & Operations: Operational Knowledge.

Solution: The learning curve should be set at 95%. First, it is important to understand

how a learning curve works. If we suppose that a learning curve of 95% has been

observed and documented, then as the number of units doubles, the time it takes to

produced the doubled amount should take 95% of the time it took to make the original

amount. This represents a minimal amount of time being saved based on 95% learning

curve. If the learning curve was set at 5%, as the number of units doubles, the time it

takes to produce the doubled amount would take 5% of the time it took to make the

original amount, which represents a significant amount of time saved performing the

same task, which does not match the facts given for the new hire.

1. If there is a learning curve in effect, what would be expected as more units of output are

produced with regards to production time and costs?

Ans: N/A, LO 4, Bloom: C, Difficulty: Medium, AACSB: Communication, AICPA: FC, Measurement, Analysis, and Interpretation, Business Acumen & Operations: Operational Knowledge.

Solution: If there is a learning curve in effect, then the production hours per unit will

decrease as the number of units of output increases, in a corresponding, observable, but

nonlinear relationship. Likewise, the production costs in total will decrease over time,

due to the decrease in overall production time.