Objective 10.1: Chapter 10 Determining How Costs Behave

USTESTBANK.
COM
Cost Accounting, 15e (Horngren/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 fows
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
Answer: C
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
Answer: A
Diff: 2
Objective: 1
3) Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs
of personnel be classifed?
A) variable cost
B) mixed cost
C) irrelevant cost
D) fxed cost
Answer: A
Diff: 2
Objective: 1
1
Copyright 2015 Pearson Education, Inc.
4) For February, the cost components of a picture frame include $0.30 for the glass, $0.75 for the wooden
frame, and $0.80 for assembly. The assembly desk and tools cost $500. Two hundred ffty frames are
expected to be produced in the coming year. What cost function best represents these costs?
A) y = 1.85 + 500X
B) y = 500 + 1.85X
C) y = 3.85 + 600X
D) y = 1.05 + 500X
Answer: B
Diff: 2
Objective: 1
5) The cost components of a heater include $30 for the compressor, $10 for the sheet molded compound
frame, and $75 per unit for assembly. The factory machines and tools cost is $60,000. The company
expects to produce 1,000 heaters in the coming year. What cost function best represents these costs?
A) y = 60,000 + 115X
B) y = 1,000 + 60,000X
C) y = 60,000 + 1,000X
D) y = 1,000 + 115X
Answer: A
Diff: 2
Objective: 1
6) Which of the following statements is true of a linear cost function?

A) It presents variable cost as a slope coefcient.
B) It presents total cost as an intercept.
C) It presents variable cost as an intercept.
D) It presents total cost as slope coefcient.
Answer: A
Diff: 2
Objective: 1
7) A fnance 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 fnance manager?
A) y = 200 + 5X
B) y = 200 + 5.50X
C) y = 200 + 4.50X
D) y = 200 + 4.70X
Answer: C
Diff: 3
Objective: 1
8) If the total cost function is y = 5,000 + 7X, calculate the variable cost for 4,000 units.
A) $33,000
B) $28,000
C) $20,000
D) $5,000
Answer: B
Explanation: B) Explanation: Variable cost for 4,000 units = $7 4,000 units = $28,000
Diff: 2
Objective: 1
AACSB: Application of knowledge
9) The cost function y = 2,000 + 6X .

A) has a slope coefcient of 2,000
B) has an intercept of 6
C) is a straight line
D) represents a fxed cost
Answer: C
Diff: 2
Objective: 1
10) The cost function y = 150 + 10X .

A) has a slope coefcient of 150
B) has an intercept of 150
C) is a nonlinear
D) represents a fxed cost
Answer: B
Diff: 2
Objective: 1
11) The cost function y = 10,000 + 3X .

A) represents a mixed cost
B) will intersect the y--axis at 3
C) has a slope coefcient of 10,000
D) is a curved line
Answer: A
Diff: 2
Objective: 1
12) Which of the following functions represents the least total cost assuming the number of units is equal
in each case?
A) y = 180 + 7X
B) y = 90 + 6X
C) y = 90 + 7X
D) y = 180 + 6X
Answer: B
Diff: 3
Objective: 1
13) Which of the following is an equation of a fxed cost function?

A) y = (a + b)X
B) y = a + bX
C) y = bX
D) y = a
Answer: D
Diff: 2
Objective: 1
14) 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.
Answer: TRUE
Diff: 1
Objective: 1
15) A cost function is a mathematical description of how a cost changes with changes in the level of an
activity relating to that cost.
Answer: TRUE
Diff: 1
Objective: 1
16) All cost functions are linear.

Answer: FALSE
Explanation: All cost functions are not linear, but for cost--behavior estimation we assume some are linear
within a relevant range.
Diff: 1
Objective: 1
17) In a cost function y = 18,000, the slope coefcient is zero.

Answer: TRUE
Diff: 2
Objective: 1
18) When estimating a cost function, cost behavior can be approximated by a linear cost function within
the relevant range.
Answer: TRUE
Diff: 2
Objective: 1
19) y = a + bX, y = a, and y = bX are the three basic types of linear cost
functions. Answer: TRUE
Diff: 1
Objective: 1
20) All other things being equal, the longer the time horizon the more likely a cost will be fxed.
Answer: FALSE
Explanation: All other things being equal, the longer the time horizon, the more likely the cost will be
variable.
Diff: 1
Objective: 1
21) Outside of the relevant range, variable and fxed cost--behavior patterns remain constant.
Answer: FALSE
Explanation: Outside of the relevant range, variable and fxed cost--behavior patterns may change.
Diff: 2
Objective: 1
22) A particular cost item could be variable for one cost object and fxed for another cost object.
Answer: TRUE
Diff: 1
Objective: 1
23) 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 $10 per hour.
b. Direct materials cost $15.60 per cubic yard.
c. Utilities have a minimum charge of $5,000, plus a charge of $0.30 per kilowatt--hour.
d. Machine operating costs include $300,000 of machine depreciation per year, plus $100 of utility costs
for each day the machinery is in operation.
Answer:
a. y = $10X
b. y = $15.60X
c. y = $5,000 + $0.30X
d. y = $300,000 + $100 X
Diff: 2
Objective: 1
24) 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 $1.70 per pound
b. Total cost is fxed at $8,000 per month regardless of the number of units produced.
c. Auto rental has a fxed fee of $80.00 per day plus $2.00 per mile driven.
d. Machine operating costs include $1,000 of maintenance per month, and $12.00 of coolant usage costs
for each day the machinery is in operation.
Answer:
a. y = $1.70X
b. y = $8,000
c. y = $80 + $2.00X
d. y = $1,000 + $12X
Diff: 2
Objective: 1
Objective 10.2
1) A linear cost function can only represent fxed cost behavior.

Answer: FALSE
Explanation: A linear cost function can represent fxed, mixed, or variable cost behavior.
Diff: 1
Objective: 2
2) In a graphical display of a cost function, the steepness of a line represents the total amount of fxed
costs.
Answer: FALSE
Explanation: In a graphical display of a cost function, the constant or the y--intercept represents the
amount of fxed costs whereas the steepness of a line represents the variable cost.
Diff: 2
Objective: 2
3) It can be inferred that when there is a high correlation between two variables, one is the cause of the
other.
Answer: FALSE
Explanation: It cannot be inferred that a high correlation between two variables indicates that one is the
cause of the other. A high correlation simply indicates that the variables move together.
Diff: 2
Objective: 2
4) An example of a physical cause--and--effect relationship is when additional units of production increase

total direct material costs.
Answer: TRUE
Diff: 2
Objective: 2
5) 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.
Answer: FALSE
Explanation: Managers are interested in estimating past cost--behavior functions because the estimates
can help them make more accurate cost predictions, or forecasts, about future costs. But better
management decisions, cost predictions, and estimation of cost functions can be achieved only if
managers correctly identify the factors that affect costs.
Diff: 2
Objective: 2
6) What are the two assumptions behind a simple linear cost function? Briefy explain the three ways that
a linear cost function may behave?
Answer: The two usual assumptions behind a simple linear cost function are:
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 fxed cost or constant; and
3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fxed 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
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
Answer: B
Diff: 2
Objective: 3
2) The account analysis method estimates cost functions .

A) by classifying cost accounts as variable, fxed, 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
Answer: A
Diff: 2
Objective: 3
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 ft cost functions to past data
observations D) using the pooling of knowledge from each value chain function
Answer: C
Diff: 2
Objective: 3
4) Variable cost per labor--hour is $8.50. Fixed cost is $10,500. Calculate the total cost for 350 labor hours.
Machine hours during the period are 50.
A) $10,925
B) $13,475
C) $13,900
D) $3,400
Answer: B
Explanation: B) Total cost = $10,500 + ($8.50 350) = $13,475
Diff: 2
Objective: 3
5) Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fxed, or mixed
using qualitative methods?
A) the account analysis method
B) the conference method
C) the marginal costing method
D) the incremental costing method
Answer: A
Diff: 1
Objective: 3
6) Which cost estimation method uses a formal mathematical method to develop cost functions based on
past data?
A) the cash accounting method
C) the accrual accounting method
D) the quantitative analysis method
Answer: D
Diff: 1
Objective: 3
7) Which cost estimation method may use time--and--motion studies to analyze the relationship between
inputs and outputs in physical terms?
A) the accrual accounting method
B) the high--low method
C) the industrial engineering method
D) the cash accounting method
Answer: C
Diff: 1
Objective: 3
At the Auric 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.
Total personnel department costs are $287,500.
Department A B C
Number of employees 70 280 225
Number of new hires 25 13 12
8) If the number of employees is considered the cost driver, what amount of personnel costs will be
allocated to Department A?
A) $35,000
B) $10,667
C) $140,000
D) $43,700
Answer: A
Explanation: A) Personnel costs of Department A = [70 / (70 + 280 + 225)] $287,500 = $35,000
Diff: 2
Objective: 3
9) If the number of new hires is considered the cost driver, what amount of personnel costs will be
allocated to Department A?
A) $35,000
B) $10,667
C) $143,750
D) $43,700
Answer: C
Explanation: C) Personnel costs of Department A = [25 / (25 + 13 + 12)] $287,500 = $143,750
Diff: 2
Objective: 3
10) Which cost estimation method is being used by Auric Company?

A) the simple regression method
C) the account analysis method
D) the marginal costing method
Answer: B
Diff: 3
Objective: 3
Answer the following questions using the information below:
At the Verill 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 $200,000.
Department A B C
Number of engineers 0 80 20
11) Which cost estimation method is being used by Verill Company?

A) the regression analysis method
B) the marginal costing method
C) the conference method
D) the operating costing method
Answer: C
Diff: 3
Objective: 3
12) If the number of employees is considered the cost driver, what amount of library and information
center costs will be allocated to Department A?
A) $30,000
B) $33,750
C) $0
D) $66,667
Answer: B
Explanation: B) Library and information costs of Department A = [135/ (135 + 530 + 135)] $200,000 =
$33,750 Diff:
2 Objective:
3
13) If the number of engineers is considered the cost driver, what amount of library and information
center costs will be allocated to Department A?
A) $30,000
B) $33,750
C) $0
D) $66,667
Answer: C
Explanation: C) Library and information costs of Department A = [0 / (0 + 80 + 20)] $200,000 = $0
Diff: 2
Objective: 3
Isondo's TV and Appliance Store is a small company that has hired you to perform some management
advisory services. The following information pertains to 2015 operations.
Sales (1,200 televisions) $ 1,200,000

Cost of goods sold 540,000
Store manager's salary per year 108,000
Operating costs per year 216,000
Advertising and promotion per year 24,000
Commissions (3% of sales) 36,000
14) What was the variable cost per unit sold for 2015?
A) $30
B) $480
C) $770
D) $450
Answer: B
Explanation: B) Variable cost per unit = ($540,000 + $36,000) / 1,200 = $480 per unit
Diff: 2
Objective: 3
15) What were total fxed costs for 2015?

A) $924,000
B) $576,000
C) $348,000
D) $224,000
Answer: C
Explanation: C) Fixed costs = $108,000 + $216,000 + $24,000 = $348,000
Diff: 2
Objective: 3
16) What are the estimated total costs if the company expects to sell 3,500 units next year?
A) $2,028,000
B) $3,619,000
C) $3,271,000
D) $1,429,000
Answer: A
Explanation: A) Total cost = fxed costs ($108,000 + $216,000 + $24,000) + variable costs (3,500 units $480
variable costs per unit) = $1,680,000 = $2,028,000 total estimated costs.

Diff: 3
Objective: 3
17) Which cost estimation method is being used by Isondo's TV and Appliance Store?
A) the operating costing method
B) the marginal costing method
C) the account analysis method
D) the cost--volume--proft analysis method

Answer: C
Diff: 3
Objective: 3
Genend's Good Value Appliance Store is a small company that has hired you to perform some
management advisory services. The following information pertains to 2015 operations.
Sales (6,000 microwave ovens) $ 1,740,000

Cost of goods sold 960,000
Store manager's salary per year 100,000
Operating costs per year 250,000
Advertising and promotion per year 30,000
Commissions (3% of sales) 52,200
18) Which cost estimation method is being used by Genend's Good Value Appliance Store?
A) the account analysis method
B) the operating costing method
C) the marginal costing method
D) the cost--volume--proft analysis method
Answer: A
Diff: 2
Objective: 3
19) What was the variable cost per unit sold for 2015?
A) $8.70
B) $160
C) $168.70
D) $232
Answer: C
Explanation: C) Variable cost per unit = ($960,000 + $52,200) / 6,000 = $168.70 per unit
Diff: 2
Objective: 3
20) What were the total fxed costs for 2015?
A) $1,392,200
B) $380,000
C) $350,000
D) $1,012,200
Answer: B
Diff: 2
Objective: 3
21) What are the estimated total costs if Genend's store expects to sell 8,000 units next year?
A) $812,117
B) $1,729,600
C) $1,952,200
D) $380,450
Answer: B
Explanation: B) Total cost = fxed cost ($100,000 + $250,000 + 30,000) + variable costs (8,000 units $168.70
variable costs per unit) = $1,349,600 = $1,729,600.
Diff: 3
Objective: 3
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is
labor intensive. Total labor hours during the period were 5,000. 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 driverlabor--hours. They separated the total indirect manufacturing
labor costs into costs that are fxed ($110,000 based on 8,000 hours of labor) and costs that are variable
($390,000) based on the number of labor--hours used. The company has estimated 7,000 labor hours
during the next period.
22) Which of the following represents the correct linear cost function?
A) y = $390,000 + $ 48.75X
B) y = $110,000 + $100 X
C) y = $110,000 + $78 X
D) y = $390,000 + $62.50 X
Answer: C
Explanation: C) Fixed costs are given at $110,000 based on 8,000 hours of labor; variable costs are
$390,000 during the period divided by 5,000 labor hours during the period = $78.00 variable cost per labor
hour. Diff: 2
Objective: 3
23) What will be the variable cost per hour?
A) $78
B) $48.75
C) $62.50
D) $100
Answer: A
Explanation: A) Variable cost per hour = ($390,000/5,000) =

$78
Diff: 2
Objective: 3
24) What will be the total variable cost for the estimated 7,000 hours?
A) $341,250
B) $546,000
C) $700,000
D) $437,500
Answer: B
Explanation: B) Total variable cost = ($390,000/5,000) 7,000 =
$546,000
Diff: 2
Objective: 3
25) What will be the total cost for the estimated 7,000 hours?
A) $451,250
B) $547,500
C) $700,000
D) $656,000
Answer: D
Explanation: D) Total cost = $110,000 + [($390,000/5,000) 7,000] =
$656,000
Diff: 2
Objective: 3
26) The quantitative analysis method of cost estimation is based on opinions from various departments
and is quick and of low cost to apply.
Answer: FALSE
Explanation: The conference method of cost estimation is based on opinions from various departments
and is quick and of low cost to apply.
Diff: 1
Objective: 3
27) The account analysis method of cost estimation classifes account costs as fxed, mixed, or variable
using qualitative judgments.
Answer: TRUE
Diff: 1
Objective: 3

28) The account analysis method estimates cost functions by classifying various cost accounts as variable,
fxed, or mixed with respect to the identifed level of activity.
Answer: TRUE
Diff: 1
Objective: 3
29) The quantitative analysis method uses a formal mathematical method to identify cause--and--effect
relationships among past data observations.
Answer: TRUE
Diff: 1
Objective: 3
30) The cost of the personnel department at the Binix 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 $180,000.
Department Department Department

Cost Driver A B C
The number of new hires 25 35 20
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 Binix Company?
Answer: Department Department Department
Cost Driver A B C
a. Number of employees 390/780 180,000 325/780 180,000 65/780 180,000
$90,000 $75,000 $15,000
b. The number of new hires 25/80180,000 35/80180,000 20/80180,000
$56,250 $78,750 $45,000
c. Binix Company is using the conference method for cost estimation.
Diff: 3
Objective: 3
31) Munir Hassan, controller, gathered data on overhead costs and direct labor--hours over the past 12
months. List and discuss the different approaches Munir can use to estimate a cost function for overhead
costs using direct labor--hours as the cost driver.
Answer: The four approaches to cost estimation are:
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,
fxed, or mixed with respect to the identifed cost driver.
Quantitative analysis of cost relationships are formal methods, such as the high--low method or regression
analysis, to ft linear cost functions to past data observations.
Diff: 2
Objective: 3
Objective 10.4
1) The cost to be predicted is referred to as the .

A) independent variable
B) dependent variable
C) cost driver
D) regression
Answer: B
Diff: 2
Objective: 4
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 fxed costs and slope coefcient
C) is the factor used to predict the dependent
variable D) is the product of total costs and slope
coefcient Answer: C
Diff: 2
Objective: 4
3) How many separate cost pools should be formed given the following information?
Cost Cost driver

Postage costs # of brochures mailed
Printing and paper costs # of brochures mailed
Quality control costs # of inspections
Customer service costs # of customers served
A) 1 cost pool
B) 2 cost pools
C) 3 cost pools
D) 4 cost pools
Answer: C
Diff: 2
Objective: 4
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
Answer: B
Diff: 2
Objective: 4
5) All individual cost items included in the dependent variable should have .
A) a different cost driver
B) an independent relationship with the independent variable
C) an economically plausible relationship with the cost
driver D) a heterogeneous cost pool
Answer: C
Diff: 2
Objective: 4
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
Answer: C
Diff: 2
Objective: 4
7) A plot of data that results in bunched points with little slope generally indicates .
A) a strong relationship
B) a weak relationship
C) a positive relationship
D) a negative relationship
Answer: B
Diff: 3
Objective: 4
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 identifed
D) individual cost items do not have the same cost driver
Answer: B
Diff: 2
Objective: 4
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
Answer: C
Diff: 2
Objective: 4
10) Time--series 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
Answer:
Diff: 2 A
Objective: 4
19
11) When using the high--low method, the two observations used are the high and low observations of the
.
A) cost driver
B) fxed cost component
C) slope coefcient
D) direct cost
Answer: A
Diff: 2
Objective: 4
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 fxed 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 Answer: D
Diff: 2
Objective: 4
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 coefcient 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
Answer: C
Diff: 3
Objective: 4
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 coefcient
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
Answer: C
15) Regression analysis .
A) calculates the slope coefcient 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
Answer: B
Diff: 3
Objective: 4
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.
Answer: C
Diff: 2
Objective: 4
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 fxed cost and variable cost associated with the cost driver
D) difference between actual cost and estimated cost for each observation of the cost driver
Answer: A
Diff: 2
Objective: 4
21
Uninder Company uses the high--low method to estimate the cost function. The information for 2015 is
provided below:
Machine--hours Labor Costs
Highest observation of cost driver 550 $22,000
Lowest observation of cost driver 250 $ 13,000
18) What is the slope coefcient?

A) $52.00
B) $43.75
C) $30.00
D) $40.00
Answer: C
Explanation: C) Slope = ($22,000 $13,000) / (550 250) =
$30
Diff: 2
Objective: 4
19) What is the constant for the estimated cost equation?

A) $5,500
B) $13,000
C) $16,500
D) $22,000
Answer: A
Explanation: A) Using highest observation: Constant = $22,000 ($30.00 550 hours) =
$5,500
OR: Using lowest observation: Constant = $13,000 ($30.00 250 hours) = $5,500
Diff: 2
Objective: 4
20) What is the estimated cost function for the above data?
A) y = 13,000 + 43.75X
B) y = 5,500 + 30X
C) y = 22,000 + 40X
D) y = 16,500 + 52X
Answer: B
Diff: 2
Objective: 4

21) What is the estimated total cost when 400 machine--hours are used?
A) $20,800
B) $29,000
C) $16,000
D) $17,500
Answer: D
Explanation: D) The total cost, y = $5,500 + ($30 400) = $17,500
Diff: 3
Objective: 4
Syosis Company uses the high--low method to estimate its cost function. The information for 2015 is
provided below:
Machine--hours Costs
Highest observation of cost driver 2,500 $300,000
Lowest observation of cost driver 1,500 $ 220,000

A) $120.00
B) $147.00
C) $80.00
D) $130.00
Answer: C
Explanation: C) Slope = ($300,000 $220,000) / (2,500 1,500) = $80
Diff: 2
Objective: 4
23) What is the constant for the estimated cost equation?

A) $220,000
B) $300,000
C) $100,000
D) $0
Answer: C
Explanation: C) EITHER: High observation: Constant = $300,000 ($80.00 2,500 hours) = $100,000
OR: Low observation: Constant = $220,000 ($80.00 1,500 hours) = $100,000
Diff: 2
Objective: 4
24) What is the estimated cost function for the above data?
A) y = 300,000 +120X
B) y = 220,000 +147X
C) y = 100,000 +80X
D) y = 130X
Answer: C
Diff: 2
Objective: 4
25) What is the estimated total cost when 1,300 machine--hours are used?
A) $411,100
B) $204,000
C) $456,000
D) $156,000
Answer: B
Explanation: B) The total cost, y = $100,000 + ($80 1,300) = $204,000
Diff: 2
Objective: 4
For Divaxo Company, labor--hours are 30,000 and wages $130,000 at the high point of the relevant range,
and labor--hours are 18,000 and wages $85,000 at the low point of the relevant range.

A) $4.45
B) $3.75
C) $4.33
D) $4.72
Answer: B
Explanation: B) Slope = ($130,000 $85,000) / (30,000 18,000) = $3.75 per labor--hour
Diff: 2
Objective: 4
27) What is the constant?

A) $17,500
B) $45,000
C) $7,000
D) $4,375
Answer: A
Explanation: A) High observation: Constant = $130,000 ($3.75 30,000) = $17,500
OR: Low observation: Constant = $85,000 ($3.75 18,000) = $17,500
Diff: 2
Objective: 4
28) What is the estimated total labor costs at Divaxo Company when 11,000 labor--hours are used?
A) $51,944
B) $58,750
C) $56,270
D) $52,042
Answer: B
Explanation: B) Total labor costs, y = $17,500 + ($3.75 11,000) = $58,750
Diff: 3
Objective: 4
The Frontive Company has assembled the following data pertaining to certain costs that cannot be easily
identifed as either fxed or variable. Frontive Company has heard about a method of measuring cost
functions called the high--low method and has decided to use it in this situation.
Cost Hours
$24,700 5,000
26,000 5,500
34,000 7,500
45,370 10,300
38,000 9,500
29) What is the cost function?

A) y = $45,370 + $4.19X
B) y = $24,700 + $4.40X
C) y = $34,000 + $4.94X
D) y = $5,200 + $3.90X
Answer: D
Explanation: D) b = ($45,370 $24,700) / (10,300 5,000) = $3.90 for the highest and lowest values of the
cost driver
Using highest observation: $45,370 = a + ($3.90 10,300)
a = $5,200
Cost function is Y = $5,200 + $3.90X
Diff: 3
Objective: 4
30) What is the estimated total cost at an operating level of 9,000 hours?
A) $35,100
B) $40,300
C) $44,460
D) $39,644
Answer: B
Explanation: B) b = ($45,370 $24,700) / (10,300 5,000) = $3.90 for the highest and lowest values of the
cost driver
$45,370 = a + ($3.90 10,300)
a = $5,200
Y = $5,200 + ($3.90 9,000)
Y = $40,300
Diff: 3
Objective: 4
Presented below are the production data for the frst six months of the year for the mixed costs incurred
by Vertise Company.
Month Cost Units

January $4,890 4,100
February 4,426 3,520
March 6,730 5,200
April 9,724 8,250
May 5,900 4,900
June 7,336 6,600
Vertise Company uses the high--low method to analyze mixed costs.
31) How would the cost function be stated?

A) y = $484 + $1.12X
B) y = $5,298 + $1.19X
C) y = $2,388 + $1.12
D) y = $7,850 + $1.18X
Answer: A
Explanation: A) b = ($9,724 $4,426) / (8,250 3,520) = $1.12
$9,724 = a + $1.12 8,250
a = $484
Cost function is Y=$484 + $1.12X
Diff: 3
Objective: 4
32) What is the estimated total cost at an operating level of 6,500 units?
A) $7,752.44
B) $7,764.00
C) $7,280.00
D) $7,661.33
Answer: B
Explanation: B) b = ($9,724 $4,426) / (8,250 3,520) = $1.12
$9,724 = a + $1.12 8,250
a = $484
Cost function is: Y = $484 + $1.12X
Y = $484 + $1.12 6,500 = $7,764
Diff: 3
Objective: 4
The Bovise Company has assembled the following data pertaining to certain costs that cannot be easily
identifed as either fxed or variable. Bovise Company has heard about a method of measuring cost
functions called the high--low method and has decided to use it in this situation.
Month Cost Hours

January $40,000 3,600
February 38,500 3,000
March 36,280 3,300
April 38,000 3,500
May 69,850 5,850
June 45,000 4,250
33) How is the cost function stated?

A) y = $26,672 + $11.94X
B) y = $1,360 + $11.37
C) y = $31,350 + $12.83X
D) y = $5,500 + $11X
Answer: D
Explanation: D) b = ($69,850 $38,500) / (5,850 3,000) = $11
$69,850 = a + ($11 5,850)
a = $5,500
Diff: 3
Objective: 4
34) What is the estimated total cost at an operating level of 3,100 hours?
A) $71,133
B) $39,600
C) $36,607
D) $63,687
Answer: B
Explanation: B) b = ($69,850 $38,500) / (5,850 3,000) =
$11
$69,850 = a + ($11 5,850)
a = $5,500
y = $5,500 + ($11 3,100) = $39,600
Diff: 3
Objective: 4
35) A homogeneous relationship exists when each activity whose costs are included in the dependent
variable has the same cost driver.
Answer: TRUE
Diff: 2
Objective: 4
36) The frst step in estimating a cost function using quantitative analysis is to plot the data.
Answer: FALSE
Explanation: The frst step in estimating a cost function using quantitative analysis is to choose the
dependent variable.
Diff: 2
Objective: 4
37) In estimating a cost function using quantitative analysis, the dependent variable is the factor used to
predict the independent variable.
Answer: FALSE
Explanation: In estimating a cost function using quantitative analysis, the independent variable is the
factor used to predict the dependent variable.
Diff: 2
Objective: 4
38) Cross--sectional data pertain to the same entity (organization, plant, activity, and so on)
over successive past periods.
Answer: FALSE
Explanation: Time--series data pertain to the same entity (organization, plant, activity, and so on)
over successive past periods.
Diff: 1
Objective: 4
39) Simple regression analysis estimates the relationship between the dependent variable
and one independent variable.
Answer: TRUE
Diff: 2
Objective: 4
40) Two common forms of quantitative analysis methods of cost estimation are the high--low method and
regression analysis.
Answer: TRUE
Diff: 1
Objective: 4
41) The high--low method relies on only two observations, the highest and lowest, to estimate a linear cost
function.
Answer: TRUE
Diff: 1
Objective: 4
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.
Answer: TRUE
Diff: 2
Objective: 4
43) The vertical difference, called the residual term, measures the distance between actual cost and
estimated cost for each observation of the cost driver.
Answer: TRUE
Diff: 2
Objective: 4
44) The high--low method is more accurate than the regression method of estimating a cost function.
Answer: FALSE
Explanation: The regression method is more accurate than the high--low method since it uses all available
data to estimate a cost function.
Diff: 1
Objective: 4
45) In using high--low method, the slope coefcient 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.
Answer: FALSE
Explanation: In high--low method, slope coefcient is calculated by dividing the difference between costs
associated with highest and lowest observations of the cost driver by the difference between highest and
lowest observations of the cost driver.
Diff: 2
Objective: 4
46) Simple regression analysis estimates the relationship between the dependent variable and one
independent variable.
Answer: TRUE
Diff: 2
Objective: 4
47) The high--low method involves choosing the period of highest cost driver activity and the period of
lowest cost driver activity.
Answer: TRUE
Diff: 2
Objective: 4
48) Multiple regression analysis uses only independent variables and not dependent variables.
Answer: FALSE
Explanation: Multiple regression analysis estimates the relationship between the dependent variable and
two or more independent variables.
Diff: 2
Objective: 4
49) In regression analysis, the term "goodness of ft" indicates the strength of the relationship between the
cost driver and the costs.
Answer: TRUE
Diff: 2
Objective: 4
50) Multiple regression analysis estimates the relationship between the dependent variable and two or
more independent variables.
Answer: TRUE
Diff: 2
Objective: 4
51) The managers of the production department have decided to use the production levels of 2015 and
2016 as examples of the highest and lowest years of operating levels. Data for those years are as follows:
Year Chemicals used Overhead Costs

2015 336,000 gallons $292,800
2016 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?
Answer: Slope (variable cost) = ($292,800 $254,400) / (336,000 288,000) = $0.80
Constant (fxed 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
52) Prelia's Storage ran its freezer in February, a slow month, for 378 hours for a total cost of $61,230. In
July, a peak month, the freezer ran for 756 hours for a total cost of $87,690.
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?
Answer:
a. Slope (variable costs) = ($87,690 $61,230) / (756 378) = $70
Constant (fxed cost) = $87,690 (756 $70) = $34,770
Estimating equation = $34,770 + ($70 per direct labor hour number of direct labor hours)
b. Total costs of 600 hours = $34,770 + ($70 600) = $76,770
Diff: 2
Objective: 4
53) The Bover Company has provided the following information:
Units of Output 33,000 Units 46,200 Units

Direct materials $ 316,800 $ 443,520
Workers' wages 1,188,000 1,663,200
Supervisors' salaries 343,200 343,200
Equipment depreciation 166,320 166,320
Maintenance 89,760 121,440
Utilities 422,400 580,800
Total $2,526,480 $3,318,480
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.
Answer:
a. Variable cost = ($3,318,480 $2,526,480) / (46,200 33,000) = $60.00
Fixed cost = $3,318,480 -- ($60.00 46,200) = $546,480
Cost function is y = $546,480 + $60.00X
b. Output level of 38,000 units= $546,480 + ($60.00 38,000) =
= $2,826,480 total cost
Diff: 2
Objective: 4
54) As part of his job as cost analyst, Max Thompson 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?
Answer:
a. Slope coefcient = ($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
55) Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe,
Kansas. The automated system is in its frst year of operation and management is still unsure of the best
way to estimate the overhead costs of operations for budgetary purposes. For the frst 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?
Answer:
a. Machine--hours:
Slope coefcient = ($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 coefcient = ($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. July's 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
56) Patrick Ross, the president of Corise's Wild Game Company, has asked for information about the cost
behavior of manufacturing overhead costs. Specifcally, he wants to know how much overhead cost is
fxed 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.
Answer: High: June 3,850 $31,196
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
Diff: 2
Objective: 4
57) List and briefy describe the six steps in estimating a cost function under quantitative analysis.
Answer: The frst step is to select the dependent variable. Selection of which dependent variable to use
will depend on the cost function being estimated. Once the dependent variable has been selected, it is
necessary to identify the independent variable or cost driver. The cost driver is the factor that is used to
predict the dependent variable costs. The cost driver should have an economically plausible relationship
with the dependent variable and be measurable. The third step involves collecting data on the dependent
variable and the cost driver. The data may be time--series data or they may be cross--sectional data. Once the
data are collected, they need to be plotted, which is step four. Plotting the data allows for the relationship
between the cost driver and the dependent variable to be more readily observed. This also allows for the
identifcation of extreme observations that should be further investigated. The ffth step is
to estimate the cost function, using some form of quantitative analysis. The last step is to evaluate the cost
driver of the estimated cost function to determine if the cost function provides a good estimation.
Diff: 2
Objective: 4
Objective 10.5
1) An inaccurate cost function with a slope coefcient that is estimated too low may most likely result in
.
A) predicting total costs that are too high
B) initiating cost cutting measures when they are unnecessary
C) evaluating a weak manager as having strong performance
D) promoting a product that is actually more proftable than budgeted

Answer: B
Diff: 2
Objective: 5
2) An inaccurate cost function with a constant that is estimated too high may most likely result in
.
A) evaluating a weak manager as providing strong performance
B) promoting a product that is actually less proftable than budgeted
C) predicting total costs that are too low
D) replicating processes that are truly cost saving
Answer: A
Diff: 2
Objective: 5
3) Which of the following is true if the constant in the cost function is low compared to the last year?
A) total variable costs have decreased
B) production has increased
C) the sales commission percentage has decreased
D) total fxed cost have decreased
Answer: D
Diff: 2
Objective: 5
4) Which of the following is true if a slope coefcient in a cost function is decreased from the last year?
A) fxed cost per unit has decreased
B) variable cost per unit has
decreased C) production has decreased
D) contribution margin has decreased

Answer: B
Diff: 2
Objective: 5
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
Answer: B
Diff: 3
Objective: 5
6) Goodness--of--ft 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
Answer: C
Diff: 2
Objective: 5
7) A steeply sloped regression line indicates .

A) a strong relationship between the cost driver and costs
B) a greater proportion of fxed costs than variable costs
C) an increase in number of units produced during the period
D) a strong relationship between fxed cost and variable cost
Answer: A
Diff: 3
Objective: 5
8) The smaller the residual terms, the .

A) better is the ft between the actual cost observations and estimated
costs B) weaker the relationship between the cost driver and costs
C) more the number of units produced during the period
D) stronger the relationship between fxed cost and variable cost
Answer: A
Diff: 2
Objective: 5
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 identifed for all the activities.
Answer: A
Diff: 2
Objective: 5
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 identifed for all the activities.
Answer: C
Diff: 2
Objective: 5
11) Machine--hours is a more economically plausible cost driver of machine maintenance than number of
direct manufacturing labor--hours.
Answer: TRUE
Diff: 2
Objective: 5
12) The larger the vertical difference between actual costs and predicted costs the better the goodness of
ft.
Answer: FALSE
Explanation: The smaller the vertical difference between actual costs and predicted costs the better the
goodness of ft.
Diff: 2
Objective: 5
13) The major advantages of quantitative methods are that they are objective, so managers can use them
to evaluate different cost drivers.
Answer: TRUE
Diff: 2
Objective: 5
14) A fat or slightly sloped regression line indicates a strong relationship between the cost driver and
costs.
Answer: FALSE
Explanation: A fat or slightly sloped regression line indicates a weak relationship between the cost driver
and costs.
Diff: 2
Objective: 5
15) To implement ABC systems, managers must identify a cost driver for each activity.
Answer: TRUE
Diff: 1
Objective: 5
16) Activity--based costing systems use the quantitative analysis method exclusively for cost estimation
because of its accuracy.
Answer: FALSE
Explanation: Because ABC systems have a great number and variety of cost drivers and cost pools it
requires many cost relationships to be estimated. ABC systems use a variety of estimation methods --
industrial engineering, conference, and quantitative analysis. In making the choice of method to use,
managers trade off detail, accuracy, feasibility, and costs of estimating cost functions.
Diff: 2
Objective: 5
17) The conference method and the account analysis method use subjective assessments to choose a cost
driver and to estimate the fxed and variable components of the cost function.
Answer: TRUE
Diff: 2
Objective: 5
18) What are the three criteria a company should use to evaluate and choose a cost driver? Briefy explain
each of the three criteria.
Answer: The three criteria a company should use to evaluate a cost driver are economic plausibility,
goodness of ft, and signifcance of the independent variable.
Economic plausibility involves the theoretical existence of a causal relationship between a driver and the
costs it is supposed to drive.
Goodness of ft involves the observed differences between predictions of costs based on the cost driver
and the actual costs that occurred.
Signifcance 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 ft) the stronger is
the relationship between the cost driver and the related costs.
Diff: 2
Objective: 5
Objective 10.6
1) Which of the following is a nonlinear cost function?

A) increase in revenues with increase in sales in units
B) total fxed cost of $25,000
C) variable cost of $5 per unit
D) learning curve function
Answer: D
Diff: 2
Objective: 6
2) Which of the following is an example of nonlinear cost function?

A) variable--cost functions
B) fxed--cost functions
C) learning curves
D) mixed cost functions
Answer: C
Diff: 2
Objective: 6
3) With a step fxed--cost function .

A) the cost varies with the changes in the activity
B) fxed cost is often approximated with a continuous variable--cost function
C) fxed cost changes proportionally with the level of activity
D) the cost remains the same over wide ranges of the activity in each relevant
range Answer: D
Diff: 2
Objective: 6
4) A step variable--cost function .

A) is fxed 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
Answer: B
Diff: 2
Objective: 6
5) 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
Answer: A
Diff: 2
Objective: 6
6) 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
Answer: B
Diff: 2
Objective: 6
7) To complete the frst setup on a new machine took an employee 300 minutes. Using an 85% cumulative
average--time learning curve indicates that the second setup on the new machine is expected to take
.
A) 127.50 minutes
B) 210 minutes
C) 277.50 minutes
D) 255 minutes
Answer: B
Explanation: B) The time taken for the second set up on machine = 300 0.85 = 255; (300 + X) / 2 = 255; X
=
210 minutes
Diff: 3
Objective: 6
8) To complete the frst setup on a new machine took an employee 100 minutes. Using an 80%
incremental unit--time learning model indicates that the second setup on the new machine is expected to
take .
A) 80 minutes
B) 120 minutes
C) 70 minutes
D) 60 minutes
Answer: A
Explanation: A) The time taken for the second set up on machine = 100 0.80 = 80 minutes
Diff: 2
Objective: 6
9) 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
Answer: B
Diff: 2
Objective: 6
10) The learning--curve models presented in the text examine .

A) how quality increases over time
B) how efciency 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
Answer: B
Diff: 2
Objective: 6
11) 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 ft learning model
D) the account analysis learning model and the conference learning method model
Answer: A
Diff: 2
Objective: 6
12) An "economy of scale" function is an example of a linear cost function.

Answer: FALSE
Explanation: A nonlinear cost function is a cost function for which the graph of total costs is not a
straight line within the relevant range. In an economy of scale situation, where there is a possibility of
producing double the product for less than double the cost; the function would be nonlinear.
Diff: 1
Objective: 6
13) A step cost function is an example of a linear cost function.

Answer: FALSE
Explanation: A step cost function is an example of a nonlinear cost function.
Diff: 1
Objective: 6
14) Step fxed--cost functions are variable over the long run.
Answer: TRUE
Diff: 2
Objective: 6
15) 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.
Answer: TRUE
Diff: 1
Objective: 6
16) A learning curve measures the effect of learning on efciency.

Answer: TRUE
Diff: 1
Objective: 6
17) 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.
Answer: TRUE
Diff: 2
Objective: 6
18) When new products are introduced, learning--curve effects can have a major infuence on production
scheduling.
Answer: TRUE
Diff: 2
Objective: 6
19) It is appropriate to incorporate expected learning--curve efciencies when evaluating performance.

Answer: TRUE
Diff: 1
Objective: 6
20) The cumulative average--time learning model with a 85% learning curve indicates that if it takes 200
minutes to manufacture the frst unit of a new model, then the second unit will take only 170 minutes to
manufacture.
Answer: FALSE
Explanation: Second unit set up time = 200 .85 = 170; (200 + X)/2 = 170; X = 140 minutes
Diff: 2
Objective: 6
21) The incremental unit--time learning model with a 80% learning curve indicates that if it takes 150
minutes to manufacture the frst unit of a new model, then the second unit will take only 120 minutes to
manufacture.
Answer: TRUE
Explanation: Second unit set up time = 150 .80 = 120 minutes
Diff: 2
Objective: 6
22) A learning curve is a function that measures how labor--hours per unit decrease, as units of
production decrease.
Answer: FALSE
Explanation: A learning curve is a function that measures how labor--hours per unit decrease, as units of
production increase.
Diff: 2
Objective: 6
23) Harold's Picture manufactures various picture frames. Each new employee takes 6 hours to make the
frst 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?
Answer:
a. Job Hours Cumulative Cumulative Ave rage
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
24) 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 frst 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.
Answer:
a. Job Hours Cumulative Cumulative Ave rage
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
25) 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 frst 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.
Answer:
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
26) Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples.
Answer: Cost functions are not always linear. A nonlinear cost function is a cost function for which the
graph of total costs is not a straight line within the relevant range of operations. One example is a series
of straight line segments that change their slopes at critical intersection points within the range of
operation. Another example would be a step function. A step function is a function where the cost
remains the same over various ranges of the level of activity, but the cost increases by discrete amounts
(or steps) as the level of activity advances from one range to another. In addition to the examples
mentioned above, there are situations where the cost or use of resources can be represented by a curve
instead of a single straight line or a group of segmented straight lines. One example of a curve is a
learning curve. A learning curve is a function that measures how labor--hours per unit decline as units of
production increase because workers are learning and becoming better at their jobs.
Diff: 2
Objective: 6
27) Explain the difference between the cumulative average--time learning model and the incremental unit--
time learning model.
Answer: 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.
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
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
Answer: A
Diff: 1
Objective: 7
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) fxed and variable costs are not separately identifed and both are allocated to products on a per unit
basis
D) purely infationary price effects are removed
Answer: C
Diff: 3
Objective: 7
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 infationary effects.
B) The analyst should consider fxed costs as variable.
C) The analyst should also use extreme values while calculating cost functions.
D) The analyst should not use accrual accounting.
Answer: A
Diff: 2
Objective: 7
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 fxed costs as variable costs and treat allocated fxed cost per unit as a variable cost
C) to eliminate unusual observations if extreme values of observations occur
D) to include the infationary price effects in the data
Answer: C
Diff: 2
Objective: 7
5) Which of the following is a problem related to cost analysis?

A) fxed 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) infationary effects are removed
Answer: A
Diff: 2
Objective: 7
6) Data collection problems can arise when extreme values of observations occur.
Answer: TRUE
Diff: 1
Objective: 7
7) Misinterpretation of data can arise when fxed costs are reported on a per unit basis.
Answer: TRUE
Diff: 2
Objective: 7
8) Infation can distort data that are compared over time so purely infationary effects should be removed.
Answer: TRUE
Diff: 2
Objective: 7
9) 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.
Answer: FALSE
Explanation: The danger is to regard these costs as variable rather than fxed. The analyst should
distinguish carefully fxed costs from variable costs and not treat allocated fxed cost per unit as a
variable cost.
Diff: 2
Objective: 7

10) Roger Moon has just purchased the flm 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. Moon 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?
Answer: One of the frst problems will be the timing of matching the cost drivers with the actual movie
production process. Under the former budget system, the relationships with many of the cost drivers
were probably forced to meet budget, or else poorly kept because they were substantially under budget
and control over them was weak.
Next will be the problem of determining which costs are fxed and which are variable under the budget
system. It may be difcult 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
Objective 10.A
1) The coefcient of determination is important in explaining variances in estimating equations. For a

certain estimating equation, the unexplained variation was given as 22,506. The total variation was given
as 51,150. What is the coefcient of determination for the equation?
A) 0.34
B) 0.43
C) 0.56
D) 0.75
Answer: C
Diff: 2
Objective: A
2) The Perize Corporation used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost Explained by Units Produced

Constant $15,685
Standard error of Y estimate $3,500
r2 0.7832
Number of observations 20
X coefcient(s) 10.25
Standard error of coefcient(s) 2.1876
A) Y = $15,685 + $10.25X
B) Y = $3,500 + $5.15X
C) Y = $19,185 + $4.48X
D) Y = $12,285 + $10.25X
Answer: A
Diff: 2
Objective: A
3) Corise's Cola was to manufacture 500 cases of cola next week. The accountant provided the following
analysis of total manufacturing costs.
Variable Coefcient Standard Error t--Value

Constant 115 82.73 1.39
Independent variable 230 105.50 2.18
r2 = 0.82
What is the estimated cost of producing the 500 cases of cola?

A) $115,115
B) $57,730
C) $24,380
D) $9,744
Answer: A
Explanation: A) y = $115 + ($230 500) = $115,115
Diff: 2
Objective: A
4) Midose'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:
Variable Coefficient Standard Error t-- Value
Constant $1,004.65 $217.93 4.61
Independent Variable $22.99 $3.23 7.11
r2 = 0.56
Number of horses:
Constant $5,240.95 $1,180.40 4.44
r2 = 0.63
What is the estimated total cost for the coming year if 15,000 trainer hours are incurred and the stable has
350 horses to be trained, based upon the best cost driver?
A) $96,327.90
B) $338,258.95
C) $345,854.65
D) $14,277,440.95
Answer: B
Explanation: B) y = $5,240.95 + ($951.48 350) = $338,258.95 based on highest r2, which uses # of horses as
the cost driver

Diff: 3
Objective: A
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 coefcients of the individual variables decrease
C) the R2 statistic is low
D) two or more independent variables are highly correlated with one another
Answer: D
Diff: 2
Objective: A
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
Answer: C
Diff: 2
Objective: A
7) Which of the following is the mathematical expression to calculate the coefcient of determination?
A) Coefcient of determination = 1 -- (Unexplained variation / Total variation)
B) Coefcient of determination = (1 + Total variation ) / Unexplained variation)
C) Coefcient of determination = (1 -- Unexplained variation ) / Total variation)
D) Coefcient of determination = 1 -- Unexplained variation + Total variation)
Answer: A
Diff: 2
Objective: A
8) The coefcient of determination (r2) measures the percentage of variation in X (the independent
variable) explained by Y (the dependent variable).
Answer: FALSE
Explanation: The coefcient of determination (r2) measures the percentage of variation in Y (the
dependent variable) explained by X (the independent variable).
Diff: 1
Objective: A
9) Generally a coefcient of determination (r2) of 0.30 or higher passes a goodness of ft test.

Answer: TRUE
Diff: 2
Objective: A
10) Goodness of ft has meaning only if the relationship between the cost drivers and costs is
economically plausible.
Answer: TRUE
Diff: 2
Objective: A
11) Multicollinearity exists in multiple regression when two or more independent variables are highly
correlated with each other.
Answer: TRUE
Diff: 2
Objective: A
12) The t--value of a coefcient measures how large the value of the estimated coefcient is relative to its
standard error.
Answer: TRUE
Diff: 2
Objective: A
13) The standard error of the estimated coefcient indicates how much the estimated value, b, is likely to
be affected by random factors.
Answer: TRUE
Diff: 1
Objective: A
14) 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 Coefcient 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 ft? What does it tell about the estimating equation?
Answer:
a. y = $74.79 + $1,081.76X
b. Goodness of ft is 0.75. It measures how well the predicted values match the actual observations. In
this case, the equation passes the goodness of ft test because it is substantially above 0.30, the threshold
of acceptance.
Diff: 1
Objective: A

15) Degen 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 coefcient(s) $2.473
Standard error of coefcient(s) 0.0966
Required:
a. What is the total fxed cost?
b. What is the variable cost per employee?
c. Prepare the linear cost function.
d. What is the coefcient of determination? Comment on the goodness of ft.
Answer:
a. The constant or intercept is the total fxed cost of $7,540.
b. The variable cost per employee is the X coefcient of $2.473.
c. y = $7,540 + $2.473X
d. The coefcient of determination is the r2 of 0.8924. This represents a very high goodness of ft. The
closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there
is a signifcant relationship between the cost of the payroll department and the number of employees. Diff:
2
Objective: A
16) Schotte 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:
Constant $748.30 $341.20 2.19
r2 = 0.33
Number of packages:
Constant $242.90 $75.04 3.24
r2 = 0.73
Required:
a. What are the estimating equations for each cost driver?
b. Which cost driver is best and why?
Answer:
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 coefcient is not signifcantly 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 fndings, it appears that number of packages is the best predictor of costs of the
packing department.
Diff: 2
Objective: A
17) Arfaei 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 20X5:
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?
Answer:
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 ft that is acceptable for most situations. Therefore, all
three equations are acceptable when considering only the coefcient 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 signifcance of independent variables,
and specifcation analysis. The best cost drivers of the dependent variables are those that meet all these
criteria plus that of best coefcient of determination.
Diff: 2
Objective: A

Objective 10.1: Chapter 10 Determining How Costs Behave

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Objective 10.1: Chapter 10 Determining How Costs Behave

Încărcat de

Drepturi de autor:

Formate disponibile

USTESTBANK.

Cost Accounting, 15e (Horngren/Datar/Rajan)

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

9) The cost function y = 2,000 + 6X .

10) The cost function y = 150 + 10X .

11) The cost function y = 10,000 + 3X .

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

16) All cost functions are linear.

17) In a cost function y = 18,000, the slope coefcient is zero.

1) A linear cost function can only represent fxed cost behavior.

4) An example of a physical cause--and--effect relationship is when additional units of production increase

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

1) The conference method estimates cost functions .

2) The account analysis method estimates cost functions .

3) Quantitative analysis methods estimate cost functions .

Total personnel department costs are $287,500.

10) Which cost estimation method is being used by Auric Company?

Total library and information center costs are $200,000.

11) Which cost estimation method is being used by Verill Company?

Sales (1,200 televisions) $ 1,200,000

15) What were total fxed costs for 2015?

variable costs per unit) = $1,680,000 = $2,028,000 total estimated costs.

D) the cost--volume--proft analysis method

Answer the following questions using the information below:

Sales (6,000 microwave ovens) $ 1,740,000

Answer the following questions using the information below:

Explanation: A) Variable cost per hour = ($390,000/5,000) =

AACSB: Analytical thinking

Department Department Department

1. industrial engineering method

1) The cost to be predicted is referred to as the .

Cost Cost driver

A = Plot the data

9) Cross--sectional data analysis includes .

10) Time--series data analysis includes .

13) The high--low method .

A = Identify the cost function

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

18) What is the slope coefcient?

19) What is the constant for the estimated cost equation?

AACSB: Application of knowledge

Answer the following questions using the information below:

22) What is the slope coefcient?

23) What is the constant for the estimated cost equation?

Answer the following questions using the information below:

26) What is the slope coefcient?

27) What is the constant?

Answer the following questions using the information below:

29) What is the cost function?

Answer the following questions using the information below:

Month Cost Units

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

31) How would the cost function be stated?

Answer the following questions using the information below:

Month Cost Hours

33) How is the cost function stated?

AACSB: Analytical thinking

Year Chemicals used Overhead Costs

Units of Output 33,000 Units 46,200 Units

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

Observation Machine--hours Total Operating Costs

Machine--hours Kilowatt--hours Total Overhead Costs

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