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5010
Cost Accounting, 13e (Horngren et al.) 
Chapter 10   

Determining How Costs Behave

1) 

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 
Terms:  

cost estimation 
Objective:  

1 
AACSB:  

Analytical skills

2) 

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 
Terms:  

cost function 
Objective:  

1 
AACSB:  

Reflective thinking

3) 

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 
Terms:  

cost function 
Objective:  

1 
AACSB:  

Reflective thinking

4) 

When plotted on a graph, cost functions are usually displayed by having the level of activity (machine hours, etc.) plotted on the vertical axis (called the y-axis ) and the amount of total costs corresponding to (or dependent on) the levels of that activity on the horizontal axis (called the x-axis).  
Answer:  

FALSE 
Explanation:  

When plotted on a graph, cost functions are usually displayed by having the level of activity (machine hours, etc.) plotted on the horizontal axis (called the x-axis ) and the amount of total costs corresponding to (or dependent on) the levels of that activity on the vertical axis (called the y-axis).  
Diff: 1 
Terms:  

cost function 
Objective:  

1 
AACSB:  

Reflective thinking

5) 

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

TRUE 
Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

1 
AACSB:  

Reflective thinking

6) 

y = a + bX represents the general form of the linear cost function.  
Answer:  

TRUE 
Diff: 1 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking 
7) 

A linear cost function can only represent fixed cost behavior.  
Answer:  

FALSE 
Explanation:  

A linear cost function can represent fixed, mixed, or variable cost behavior. 
Diff: 1 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

8) 

In a graphical display of a cost function, the steepness of the slope represents the total amount of fixed costs.  
Answer:  

FALSE 
Explanation:  

In a graphical display of a cost function, the constant or the y-intercept represents the amount of fixed costs. 
Diff: 1 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

9) 

The longer the time horizon, the more likely that a cost will have a fixed cost behavior.  
Answer:  

FALSE 
Explanation:  

The longer the time horizon, the more likely a cost will be variable. 
Diff: 2 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

10) 

Outside of the relevant range, variable and fixed cost-behavior patterns may change.  
Answer:  

TRUE 
Diff: 2 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

11) 

Any linear cost function can be graphed by knowing only the slope coefficient.  
Answer:  

FALSE 
Explanation:  

A linear function can be graphed if the slope coefficient and the intercept are known. 
Diff: 1 
Terms:  

cost function, linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

12) 

Knowing the proper relevant range is essential to properly classify costs.  
Answer:  

TRUE 
Diff: 1 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Reflective thinking

13) 

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 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Analytical skills 
14) 

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

TRUE 
Diff: 2 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Analytical skills

15) 

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 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Reflective thinking

16) 

The industrial engineering 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 
Terms:  

cost estimation, industrial engineering method 
Objective:  

3 
AACSB:  

Communication

17) 

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

TRUE 
Diff: 1 
Terms:  

cost estimation, account analysis method 
Objective:  

3 
AACSB:  

Reflective thinking

18) 

The industrial engineering method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.  
Answer:  

FALSE 
Explanation:  

Quantitative analysis methods use a formal mathematical method to identify cause-and-effect relationships among past data observations. 
Diff: 1 
Terms:  

industrial engineering method 
Objective:  

3 
AACSB:  

Reflective thinking

19) 

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

TRUE 
Diff: 1 
Terms:  

quantitative analysis method 
Objective:  

3 
AACSB:  

Reflective thinking 
20) 

Individual cost items included in the dependent variable should have the same cost driver or more than one cost function should be estimated.  
Answer:  

TRUE 
Diff: 2 
Terms:  

cost function, dependent variable 
Objective:  

4 
AACSB:  

Reflective thinking

21) 

The first step in estimating a cost function using quantitative analysis is to identify the independent variable.  
Answer:  

FALSE 
Explanation:  

The first step in estimating a cost function using quantitative analysis is to identify the dependent variable.  
Diff: 2 
Terms:  

cost function, dependent variable 
Objective:  

4 
AACSB:  

Reflective thinking

22) 

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

TRUE 
Diff: 2 
Terms:  

cost function, dependent variable, independent variable 
Objective:  

4 
AACSB:  

Reflective thinking

23) 

An example of time-series data is to compile maintenance costs of twelve different manufacturing plants incurred during 20X5.  
Answer:  

FALSE 
Explanation:  

An example of cross-sectional data is to compile maintenance costs of twelve different manufacturing plants incurred during 20X5. 
Diff: 1 
Terms:  

cost estimation, cost function 
Objective:  

4 
AACSB:  

Reflective thinking

24) 

Evidence of relationships and extreme observations are highlighted when costs and their cost drivers are plotted graphically.  
Answer:  

TRUE 
Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

4 
AACSB:  

Reflective thinking

25) 

The most common forms of quantitative analysis are the conference method and the account analysis method.  
Answer:  

FALSE 
Explanation:  

The most common forms of quantitative analysis are the high-low method and regression analysis. 
Diff: 1 
Terms:  

conference, account analysis, high-low method; regression analysis 
Objective:  

4 
AACSB:  

Reflective thinking 

26) 

Regression analysis relies on only two observations to estimate a linear cost function.  
Answer:  

FALSE 
Explanation:  

The high-low method relies on only two observations to estimate a linear cost function. 
Diff: 1 
Terms:  

regression analysis, linear cost function 
Objective:  

4 
AACSB:  

Reflective thinking

27) 

The y-intercept of a linear cost function is an accurate cost assessment of using zero machine-hours, even if zero machine-hours is outside of the relevant range.  
Answer:  

FALSE 
Explanation:  

The y-intercept of a linear cost function is an accurate cost assessment of using zero machine-hours, only if zero machine-hours are within the relevant range. 
Diff: 2 
Terms:  

linear cost function 
Objective:  

4 
AACSB:  

Reflective thinking

28) 

A positive slope of a regression line indicates that total costs are lower for higher values of the cost driver.  
Answer:  

FALSE 
Explanation:  

A positive slope of a regression line indicates that costs are higher for higher values of the cost driver. 
Diff: 2 
Terms:  

regression analysis 
Objective:  

4 
AACSB:  

Reflective thinking

29) 

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 
Terms:  

high-low method, regression analysis 
Objective:  

4 
AACSB:  

Reflective thinking

30) 

If inaccurate cost estimates are too high, then a company may unknowingly reward a manager for poor performance.  
Answer:  

TRUE 
Diff: 3 
Terms:  

cost estimation 
Objective:  

4 
AACSB:  

Ethical reasoning

31) 

Simple regression is known as "simple" because it is much less complex than the high-low method.  
Answer:  

FALSE 
Explanation:  

Simple regression is known as "simple" because it includes only one cost driver. 
Diff: 2 
Terms:  

simple regression 
Objective:  

4 
AACSB:  

Reflective thinking 

32) 

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 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Reflective thinking

33) 

A strength of the high-low method of cost estimation is that the high point and the low point are representative of all data points.  
Answer:  

FALSE 
Explanation:  

A weakness of the high-low method of cost estimation is that the high point and the low point are not representative of all data points. 
Diff: 2 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Reflective thinking

34) 

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

TRUE 
Diff: 2 
Terms:  

regression analysis 
Objective:  

4 
AACSB:  

Reflective thinking

35) 

Accurate cost estimation is useful both in understanding past cost relationships and as a means of predicting costs.  
Answer:  

TRUE 
Diff: 2 
Terms:  

cost estimation, cost predictions 
Objective:  

4 
AACSB:  

Communication

36) 

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

TRUE 
Diff: 2 
Terms:  

cost function 
Objective:  

5 
AACSB:  

Reflective thinking

37) 

The smaller the vertical difference between actual costs and predicted costs the better the goodness of fit.  
Answer:  

TRUE 
Diff: 2 
Terms:  

residual term, regression analysis 
Objective:  

5 
AACSB:  

Reflective thinking 

38) 

Choosing an economically plausible cost driver for indirect costs is fairly simple and knowledge of operations is unnecessary.  
Answer:  

FALSE 
Explanation:  

Finding an economically plausible cost driver is not always simple and many times knowledge of operations is necessary. 
Diff: 2 
Terms:  

cost function 
Objective:  

5 
AACSB:  

Reflective thinking

39) 

A flat or slightly sloped regression line indicates a strong relationship.  
Answer:  

FALSE 
Explanation:  

A flat or slightly sloped regression line indicates a weak relationship. 
Diff: 3 
Terms:  

regression analysis 
Objective:  

5 
AACSB:  

Reflective thinking

40) 

When using an activity-based costing system, a batch-level cost must have a batch-level cost driver.  
Answer:  

TRUE 
Diff: 2 
Terms:  

cost function, cost driver 
Objective:  

5 
AACSB:  

Reflective thinking

41) 

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 
Terms:  

cost function, cost driver 
Objective:  

5 
AACSB:  

Reflective thinking

42) 

Economic plausibility is an important criterion for choosing a cost driver.  
Answer:  

TRUE 
Diff: 1 
Terms:  

cost function 
Objective:  

5 
AACSB:  

Reflective thinking

43) 

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 strait line within the relevant range. In an economy of scale situation, where there is a possibility of producting double the product for less than double the cost; the function would be nonlinear. 
Diff: 1 
Terms:  

nonlinear cost function 
Objective:  

6 
AACSB:  

Reflective thinking 

44) 

A step cost function is an example of a nonlinear cost function.  
Answer:  

TRUE 
Diff: 1 
Terms:  

nonlinear cost function 
Objective:  

6 
AACSB:  

Reflective thinking

45) 

Step fixed-cost functions are variable over the long run.  
Answer:  

TRUE 
Diff: 2 
Terms:  

nonlinear cost function, step cost function 
Objective:  

6 
AACSB:  

Reflective thinking

46) 

An example of a step variable-cost function is the cost of material-handling labor when inputs are acquired in discrete quantities.  
Answer:  

TRUE 
Diff: 2 
Terms:  

nonlinear cost function, step cost function 
Objective:  

6 
AACSB:  

Reflective thinking

47) 

A learning curve measures the effect of learning on efficiency.  
Answer:  

TRUE 
Diff: 1 
Terms:  

learning curve 
Objective:  

6 
AACSB:  

Reflective thinking

48) 

Plotting learning curve observations is helpful in selecting the appropriate learning curve model.  
Answer:  

TRUE 
Diff: 1 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Reflective thinking

49) 

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

TRUE 
Diff: 2 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Reflective thinking

50) 

It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance.  
Answer:  

TRUE 
Diff: 1 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Ethical reasoning 

51) 

The cumulative average-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.  
Answer:  

FALSE 
Explanation:  

100 × .90 = 90; (100 + X)/2 = 90; X = 80 minutes 
Diff: 3 
Terms:  

learning curve, cumulative average-time learning model 
Objective:  

7 
AACSB:  

Reflective thinking

52) 

The incremental unit-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture.  
Answer:  

TRUE 
Diff: 2 
Terms:  

incremental unit-time learning model 
Objective:  

7 
AACSB:  

Reflective thinking

53) 

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

TRUE 
Diff: 2 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Reflective thinking

54) 

Data collection problems can arise when data is recorded manually rather than electronically.  
Answer:  

TRUE 
Diff: 1 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Use of Information Technology

55) 

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

TRUE 
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking

56) 

Inflation is a fact, and therefore its influence should not be removed from the data.  
Answer:  

FALSE 
Explanation:  

Inflation can distort data that are compared over time so purely inflationary effects should be removed. 
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking 

57) 

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 fixed. The analyst should distinguish carefully  fixed costs from variable costs and not treat allocated fixed cost per unit as a variable cost. 
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking

58) 

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

TRUE 
Diff: 1 
Terms:  

coefficient of determination (r2), regression analysis 
Objective:  

A 
AACSB:  

Reflective thinking

59) 

Generally a coefficient of determination (r2) that is less than 0.30 indicates a goodness of fit.  
Answer:  

FALSE 
Explanation:  

Generally a coefficient of determination (r2) that is 0.30 or higher indicates a goodness of fit. 
Diff: 2 
Terms:  

coefficient of determination (r2), regression analysis 
Objective:  

A 
AACSB:  

Reflective thinking

60) 

Multicollinearity is NOT a concern in simple regression.  
Answer:  

TRUE 
Diff: 2 
Terms:  

simple regression, multicollinearity 
Objective:  

A 
AACSB:  

Reflective thinking

61) 

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

TRUE 
Diff: 2 
Terms:  

multiple regression, multicollinearity 
Objective:  

A 
AACSB:  

Reflective thinking

62) 

Which of the following statements related to assumptions about estimating linear cost functions is FALSE?  
A) 

Variations in a single cost driver explain variations in total costs.  
B) 

A cost object is anything for which a separate measurement of costs is desired.  
C) 

A linear function approximates cost behavior within the relevant range of the cost driver.  
D) 

A high correlation between two variables ensures that a cause-and-effect relationship exists.  
Answer:  

D 
Diff: 2 
Terms:  

cost estimation, linear cost function 
Objective:  

1 
AACSB:  

Reflective thinking 

63) 

A high correlation between two variables s and t indicates that:  
A) 

s may cause t, or t may cause s  
B) 

both may be affected by a third variable  
C) 

the correlation may be due to random chance  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Reflective thinking

64) 

Which of the following does NOT represent a cause-and-effect relationship?  
A) 

Material costs increase as the number of units produced increases.  
B) 

A company is charged 40 cents for each brochure printed and mailed.  
C) 

Utility costs increase at the same time that insurance costs increase.  
D) 

It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts.  
Answer:  

C 
Diff: 3 
Terms:  

cost function 
Objective:  

2 
AACSB:  

Reflective thinking

65) 

Dougherty Company employs 20 individuals. Eight employees are paid $12 per hour and the rest are salaried employees paid $3,000 a month. How would total costs of personnel be classified?  
A) 

variable  
B) 

mixed  
C) 

a variable cost within a relevant range  
D) 

a fixed cost within a relevant range  
Answer:  

B 
Diff: 2 
Terms:  

mixed cost 
Objective:  

2 
AACSB:  

Analytical skills

66) 

McDevitt Company employs 6 individuals. They are all paid $12.50 per hour. How would total costs of personnel be classified?  
A) 

variable  
B) 

mixed  
C) 

a variable cost within a relevant range  
D) 

a fixed cost within a relevant range  
Answer:  

A 
Diff: 2 
Terms:  

variable cost 
Objective:  

2 
AACSB:  

Analytical skills 

67) 

For January, the cost components of a picture frame include $0.35 for the glass, $.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $400. 1,000 frames are expected to be produced in the coming year. What cost function best represents these costs?  
A) 

y = 1.80 + 400X  
B) 

y = 400 +1.80X  
C) 

y = 2.20 + 1,000X  
D) 

y = 1.00 + 400X  
Answer:  

B 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

68) 

 The cost components of an air conditioner include $35 for the compressor, $11.50 for the sheet molded compound frame, and $80 per unit for assembly. The factory machines and tools cost is $55,000. The company expects to produce 1,500 air conditioners in the coming year. What cost function best represents these costs?  
A) 

y = 1500 + 126.5X  
B) 

y = 1,500 +55,000X  
C) 

y = 55,000 + 1,500X  
D) 

y = 55,000 +126.50X  
Answer:  

D 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

69) 

A linear cost function can represent:  
A) 

mixed cost behaviors  
B) 

fixed cost behaviors  
C) 

variable cost behaviors  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Reflective thinking

70) 

The cost function y = 1,000 + 5X: 
A) 

has a slope coefficient of 1,000  
B) 

has an intercept of 5  
C) 

is a straight line  
D) 

represents a fixed cost  
Answer:  

C 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills 

71) 

The cost function y = 100 + 10X: 
A) 

has a slope coefficient of 100  
B) 

has an intercept of 100  
C) 

is a nonlinear  
D) 

represents a fixed cost  
Answer:  

B 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

72) 

The cost function y = 8,000 + 4X: 
A) 

represents a mixed cost  
B) 

will intersect the y-axis at 4  
C) 

has a slope coefficient of 8,000  
D) 

is a curved line  
Answer:  

A 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

73) 

The cost function y = 80 + 4X: 
A) 

has a slope coefficient of -4 
B) 

will intersect the y-axis at 4  
C) 

has a slope coefficient of 4 
D) 

is a curved line  
Answer:  

C 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

74) 

Which of the following is an equation of a variable cost function?  
A) 

y = b  
B) 

y = a + bX  
C) 

y = bX  
D) 

y = a  
Answer:  

C 
Diff: 2 
Terms:  

linear cost function 
Objective:  

2 
AACSB:  

Analytical skills

75) 

The industrial engineering method estimates cost functions:  
A) 

based on analysis and opinions gathered from various departments  
B) 

quickly while incurring little cost  
C) 

using qualitative rather than quantitative analysis  
D) 

by analyzing the relationship between inputs and outputs in physical terms  
Answer:  

D 
Diff: 2 
Terms:  

cost estimation, industrial engineering method 
Objective:  

3 
AACSB:  

Reflective thinking 
76) 

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 
Terms:  

conference method, cost estimation 
Objective:  

3 
AACSB:  

Communication

77) 

The account analysis method estimates cost functions:  
A) 

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

using time-and-motion studies  
C) 

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

in a manner that cannot be usefully combined with any other cost estimation methods  
Answer:  

A 
Diff: 2 
Terms:  

account analysis method 
Objective:  

3 
AACSB:  

Reflective thinking

78) 

Quantitative analysis methods estimate cost functions:  
A) 

which depend on the experience and judgment of the analyst for accuracy  
B) 

based on analysis and opinions gathered from various departments  
C) 

using significant amounts of historical data  
D) 

using the pooling of knowledge from each value chain function  
Answer:  

C 
Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

3 
AACSB:  

Reflective thinking

79) 

Gathering cost information through observations and interviews from departments within an organization is known as the:  
A) 

account analysis method  
B) 

conference method  
C) 

industrial engineering method  
D) 

quantitative analysis method  
Answer:  

B 
Diff: 1 
Terms:  

account analysis method 
Objective:  

3 
AACSB:  

Communication


80) 

Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?  
A) 

the account analysis method  
B) 

the conference method  
C) 

the industrial engineering method  
D) 

the quantitative analysis method  
Answer:  

A 
Diff: 1 
Terms:  

account analysis method 
Objective:  

3 
AACSB:  

Reflective thinking 
81) 

Which cost estimation method uses a formal mathematical method to develop cost functions based on past data?  
A) 

the account analysis method  
B) 

the conference method  
C) 

the industrial engineering method  
D) 

the quantitative analysis method  
Answer:  

D 
Diff: 1 
Terms:  

cost function 
Objective:  

3 
AACSB:  

Reflective thinking

82) 

Which cost estimation method may use time-and-motion studies to analyze the relationship between inputs and outputs in physical terms?  
A) 

the account analysis method  
B) 

the conference method  
C) 

the industrial engineering method  
D) 

the quantitative analysis method  
Answer:  

C 
Diff: 1 
Terms:  

cost estimation, industrial engineering method 
Objective:  

3 
AACSB:  

Reflective thinking


Answer the following questions using the information below: 

At the Jordan 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 $160,000.

  Department  A  B  C
  Number of employees  30  270  100
  The number of new hires  8  12  5
 
83) 

If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A?  
A) 

$12,000  
B) 

$5,333  
C) 

$51,200  
D) 

$20,000  
Answer:  

A 
Explanation:  

A) 

[30 / (30 + 270 + 100)] × $160,000 = $12,000  
Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Communication 
84) 

If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A?  
A) 

$12,000  
B) 

$5,333  
C) 

$51,200  
D) 

$20,000  
Answer:  

C 
Explanation:  

C) 

[8 / (8 + 12 + 5)] × $160,000 = $51,200 

Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Analytical skills

85) 

Which cost estimation method is being used by Jordan Company?  
A) 

the industrial engineering method  
B) 

the conference method  
C) 

the account analysis method  
D) 

the quantitative analysis method  
Answer:  

B 
Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Analytical skills


Answer the following questions using the information below: 

At the Holden 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 $75,000.

  Department  A  B  C
  Number of employees  125  500  125
  The number of engineers  0  75  25
 
86) 

Which cost estimation method is being used by Holden Company?  
A) 

the quantitative analysis method   
B) 

the industrial engineering method 
C) 

the conference method  
D) 

the account analysis method 
Answer:  

C 
Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Communication 
87) 

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) 

$50,000  
B) 

$12,500  
C) 

$0 
D) 

$56,250  
Answer:  

B 
Explanation:  

B) 

[125/ (125 + 500 + 125)] × $75,000 = $12,500

Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Analytical skills

88) 

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) 

$50,000  
B) 

$12,500  
C) 

$0 
D) 

$56,250  
Answer:  

C 
Explanation:  

C) 

[0 / (0 + 75 + 25)] × $75,000 = $0

Diff: 2 
Terms:  

cost estimation 
Objective:  

3 
AACSB:  

Analytical skills


Answer the following questions using the information below: 

Penny's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 20X8 operations.

  Sales (2,000 televisions)  $ 900,000
  Cost of goods sold  400,000
  Store manager's salary per year  70,000
  Operating costs per year  157,000
  Advertising and promotion per year  15,000
  Commissions (4% of sales)  36,000
 
89) 

What was the variable cost per unit sold for 20X8?  
A) 

$18  
B) 

$218  
C) 

$339  
D) 

$200  
Answer:  

B 
Explanation:  

B) 

($400,000 + $36,000) / 2,000 = $218 per unit 

Diff: 2 
Terms:  

cost estimation, slope coefficient 
Objective:  

3 
AACSB:  

Analytical skills 
90) 

What were total fixed costs for 20X8?  
A) 

$678,000  
B) 

$436,000  
C) 

$242,000  
D) 

$227,000  
Answer:  

C 
Explanation:  

C) 

$70,000 + $157,000 + $15,000 = $242,000 

Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

3 
AACSB:  

Analytical skills

91) 

What are the estimated total costs if Penny's expects to sell 3,000 units next year?  
A) 

$896,000  
B) 

$678,000  
C) 

$1,017,000  
D) 

$799,000  
Answer:  

A 
Explanation:  

A) 

$896,000 = $70,000 + $157,000 + $15,000 + [($400,000 + $36,000) / 2,000 ] × 3,000 
Diff: 3 
Terms:  

cost predictions 
Objective:  

3 
AACSB:  

Analytical skills


92) 

Which cost estimation method is being used by Penny's TV and Appliance Store?  
A) 

the industrial engineering method  
B) 

the conference method  
C) 

the account analysis method  
D) 

the quantitative analysis method  
Answer:  

C 
Diff: 2 
Terms:  

cost estimation, account analysis method 
Objective:  

3 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2008 operations.

  Sales (5,000 microwave ovens)  $ 1,350,000
  Cost of goods sold  540,000
  Store manager's salary per year  75,000
  Operating costs per year  225,000
  Advertising and promotion per year  25,000
  Commissions (4% of sales)  67,500
 
93) 

Which cost estimation method is being used by Miller's Good Value Appliance Store?  
A) 

the account analysis method 
B) 

the conference method  
C) 

the quantitative analysis method   
D) 

the industrial engineering method  
Answer:  

A 
Diff: 2 
Terms:  

cost estimation, account analysis method 
Objective:  

3 
AACSB:  

Analytical skills

94) 

What was the variable cost per unit sold for 2008?  
A) 

$13.50 
B) 

$108  
C) 

$121.50 
D) 

$186.50 
Answer:  

C 
Explanation:  

C) 

($540,000 + $67,500) / 5,000 = $121.50 per unit 

Diff: 2 
Terms:  

cost estimation, slope coefficient 
Objective:  

3 
AACSB:  

Analytical skills


95) 

What were total fixed costs for 2008?  
A) 

$932,500  
B) 

$325,000  
C) 

$250,000  
D) 

$225,000  
Answer:  

B 
Explanation:  

C) 

$75,000 + $225,000 + $25,000 = $325,000 

Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

3 
AACSB:  

Analytical skills 
96) 

What are the estimated total costs if Miller's expects to sell 6,500 units next year?  
A) 

$932,500 
B) 

$1,104,750  
C) 

$1,017,500  
D) 

$665,000 
Answer:  

B 
Explanation:  

B) 

$1,104,750 = $75,000 + $225,000 + 15,000 + [($540,000 + $67,500) / 5,0006,500 

Diff: 3 
Terms:  

cost predictions 
Objective:  

3 
AACSB:  

Analytical skills

97) 

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 
Terms:  

dependent variable, cost function 
Objective:  

4 
AACSB:  

Reflective thinking

98) 

The independent variable:  
A) 

is also referred to as the cost driver  
B) 

may also be called the cost-allocation base if referring to an indirect cost  
C) 

should have an economically plausible relationship with the dependent variable  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

independent variable, cost function 
Objective:  

4 
AACSB:  

Reflective thinking


99) 

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 
Terms:  

cost function, cost estimation 
Objective:  

4 
AACSB:  

Analytical skills 
100) 

Place the following steps in order for estimating a cost function using quantitative analysis:
  A = Plot the data
  B = Estimate the cost function
  C = Choose the dependent variable
  D = Identify the cost driver 
 
A) 

D C A B  
B) 

C D A B  
C) 

A D C B  
D) 

D C B A  
Answer:  

B 
Diff: 2 
Terms:  

cost function 
Objective:  

4 
AACSB:  

Analytical skills

101) 

All individual cost items included in the dependent variable should have:  
A) 

the same cost driver  
B) 

a cause-and-effect relationship with the independent variable  
C) 

an economically plausible relationship with the independent variable  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

dependent variable 
Objective:  

4 
AACSB:  

Reflective thinking

102) 

Collecting data on the dependent variable and the cost driver may include:  
A) 

interviews with managers  
B) 

collecting data over a long period of time  
C) 

collecting data from different entities over the same period of time  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

cost function, dependent variable 
Objective:  

4 
AACSB:  

Reflective thinking

103) 

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 
Terms:  

cost estimation, cost function 
Objective:  

4 
AACSB:  

Reflective thinking 
104) 

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

more than one cost pool should be used  
B) 

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

the cost-allocation base has been incorrectly identified  
D) 

individual cost items do not have the same cost driver  
Answer:  

B 
Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

4 
AACSB:  

Reflective thinking

105) 

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 
Terms:  

cost estimation 
Objective:  

4 
AACSB:  

Reflective thinking

106) 

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:  

A 
Diff: 2 
Terms:  

cost estimation 
Objective:  

4 
AACSB:  

Reflective thinking

107) 

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

cost driver  
B) 

dependent variables  
C) 

slope coefficient  
D) 

residual term  
Answer:  

A 
Diff: 2 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Reflective thinking

108) 

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

dependent variable  
B) 

independent variable  
C) 

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

difference between the high and low observations of the dependent variables  
Answer:  

C 
Diff: 2 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Reflective thinking 
109) 

The high-low method:  
A) 

easily handles estimating the relationship between the dependent variable and two or more independent variables  
B) 

is more accurate than the regression method  
C) 

calculates the slope coefficient using only two observed values within the relevant range  
D) 

uses the residual term to measure goodness of fit  
Answer:  

C 
Diff: 3 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Reflective thinking

110) 

Put the following steps in order for using the high-low method of estimating a cost function:
  A = Identify the cost function
  B = Calculate the constant
  C = Calculate the slope coefficient
  D = Identify the highest and lowest observed values 
 
A) 

D C A B  
B) 

C D A B  
C) 

A D C B  
D) 

D C B A  
Answer:  

D 
Diff: 2 
Terms:  

cost estimation, cost function 
Objective:  

4 
AACSB:  

Analytical skills

111) 

Regression analysis:  
A) 

is simple to compute  
B) 

measures the change in a dependent variable associated with one or more independent variables  
C) 

is mathematical so it does not require an understanding of operations  
D) 

uses the constant to measure goodness of fit  
Answer:  

D 
Diff: 3 
Terms:  

regression analysis 
Objective:  

4 
AACSB:  

Reflective thinking


112) 

Simple regression differs from multiple regression in that:  
A) 

multiple regression uses all available data to estimate the cost function, whereas simple regression only uses simple data  
B) 

simple regression is limited to the use of only the dependent variables and multiple regression can use both dependent and independent variables  
C) 

simple regression uses only one independent variable and multiple regression uses more than one independent variable  
D) 

simple regression uses only one dependent variable and multiple regression uses more than one dependent variable  
Answer:  

C 
Diff: 2 
Terms:  

simple regression 
Objective:  

4 
AACSB:  

Reflective thinking 
113) 

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) 

level of total fixed costs  
D) 

level of total variable costs  
Answer:  

A 
Diff: 2 
Terms:  

regression analysis, slope coefficient 
Objective:  

4 
AACSB:  

Reflective thinking

Answer the following questions using the information below: 

The Hunter Company uses the high-low method to estimate the cost function. The information for 20X5 is provided below:
  Machine-hours  Labor Costs
  Highest observation of cost driver  400  $10,000
  Lowest observation of cost driver  240  $ 6,800
 
114) 

What is the slope coefficient per machine-hour?  
A) 

$28.33  
B) 

$0.05  
C) 

$20.00  
D) 

$25.00  
Answer:  

C 
Explanation:  

C) 

Slope = ($10,000 - $6,800) / (400 - 240) = $20 

Diff: 2 
Terms:  

high-low method, slope coefficient 
Objective:  

4 
AACSB:  

Analytical skills


115) 

What is the constant for the estimating cost equation?  
A) 

$2,000  
B) 

$6,800  
C) 

$8,000  
D) 

$10,000  
Answer:  

A 
Explanation:  

A) 

EITHER: Constant = $10,000 - ($20.00 × 400 hours) = $2,000
OR: Constant = $6,800 - ($20.00 × 240 hours) = $2,000  
Diff: 2 
Terms:  

high-low method, cost estimation 
Objective:  

4 
AACSB:  

Analytical skills

116) 

What is the estimate of the total cost when 300 machine-hours are used?  
A) 

$2,000  
B) 

$4,000  
C) 

$6,000  
D) 

$8,000  
Answer:  

D 
Explanation:  

D) 

y = $2,000 + ($20 × 300) = $8,000 

Diff: 3 
Terms:  

cost predictions, high-low method 
Objective:  

4 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

The Taranto Company uses the high-low method to estimate it's cost function. The information for 2008 is provided below:
  Machine-hours   Costs
  Highest observation of cost driver  2,000  $225,000
  Lowest observation of cost driver  1,000  $ 125,000
 
117) 

What is the slope coefficient per machine-hour?  
A) 

$125.00 
B) 

$12.50 
C) 

$10.00 
D) 

$100.00 
Answer:  

D 
Explanation:  

D) 

Slope = ($225,000 - $125,000) / (2,000 - 1,000) = $100

Diff: 2 
Terms:  

high-low method, slope coefficient 
Objective:  

4 
AACSB:  

Analytical skills


118) 

What is the constant for the estimating cost equation?  
A) 

$125,000  
B) 

$225,000 
C) 

$25,000 
D) 

$0 
Answer:  

C 
Explanation:  

C) 

EITHER: Constant = $225,000 - ($100.00 × 2,000 hours) = $25,000
OR: Constant = $125,000 - ($100.00 × 1,000 hours) = $25,000

Diff: 2 
Terms:  

high-low method, cost estimation 
Objective:  

4 
AACSB:  

Analytical skills

119) 

What is the estimate of the total cost when 1,100 machine-hours are used?  
A) 

$125,000  
B) 

$135,000 
C) 

$150,000 
D) 

$200,000 
Answer:  

B 
Explanation:  

B) 

y = $25,000 + ($100 × 1,100) = $135,000

Diff: 3 
Terms:  

cost predictions, high-low method 
Objective:  

4 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

For Carroll Company, labor-hours are 12,500 and wages $47,000 at the high point of the relevant range, and labor-hours are 7,500 and wages $35,000 at the low point of the relevant range.
 
120) 

What is the slope coefficient per labor-hour?  
A) 

$4.67  
B) 

$3.76  
C) 

$2.40  
D) 

$0.42  
Answer:  

C 
Explanation:  

C) 

Slope = ($47,000 - $35,000) / (12,500 - 7,500) = $2.40 per labor-hour 

Diff: 2 
Terms:  

high-low method, slope coefficient 
Objective:  

4 
AACSB:  

Analytical skills


121) 

What is the constant?  
A) 

$17,000  
B) 

$12,000  
C) 

$5,000  
D) 

$41,750  
Answer:  

A 
Explanation:  

A) 

Constant = $47,000 - ($2.40 × 12,500) = $17,000
OR: Constant = $35,000 - ($2.40 × 7,500) = $17,000  
Diff: 2 
Terms:  

high-low method 
Objective:  

4 
AACSB:  

Analytical skills

122) 

What is the estimate of total labor costs at Carroll Company when 10,000 labor-hours are used?  
A) 

$17,000  
B) 

$41,000  
C) 

$21,167  
D) 

$27,000  
Answer:  

B 
Explanation:  

B) 

y = $17,000 + ($2.40 × 10,000) = $41,000 

Diff: 3 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

The Barnett Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Barnett 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
  $24,900  5,250
  24,000  5,500
  36,400  7,500
  44,160  9,750
  45,000  9,500
 
123) 

What is the cost function?  
A) 

y = $43,191 + $0.19X  
B) 

y = $4,875 + $5.25X  
C) 

y = $41,900 + $0.23X  
D) 

y = $2,430 + $4.28X  
Answer:  

D 
Explanation:  

D) 

b = ($44,160 - $24,900) / (9,750 - 5,250) = $4.28 for the highest and lowest values of the cost driver
$44,160 = a + ($4.28 × 9.750)
a = $2,430 

Diff: 3 
Terms:  

cost function, high-low method 
Objective:  

4 
AACSB:  

Analytical skills

124) 

What is the estimated total cost at an operating level of 8,000 hours?  
A) 

$43,740  
B) 

$36,670  
C) 

$46,875  
D) 

$37,125  
Answer:  

B 
Explanation:  

B) 

b = ($44,160 - $24,900) / (9,750 - 5,250) = $4.28 for the highest and lowest values of the cost driver
$44,160 = a + ($4.28 × 9.750)
a = $2,430 

$36,670 = $2,430 + ($4.28 × 8,000) 

Diff: 3 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

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

  Month  Cost  Units
  January  $4,890  4,100
  February  4,024  3,200
  March  6,480  5,300
  April  8,840  7,500
  May  5,800  4,800
  June  7,336  6,600

Gallup Company uses the high-low method to analyze mixed costs.
 
125) 

How would the cost function be stated?  
A) 

y = $440 + $1.12X  
B) 

y = $3,562.30 + $0.144X  
C) 

y = $107.20 + $1.224X  
D) 

y = $7,850 + $0.132X  
Answer:  

A 
Explanation:  

A) 

b = ($8,840 - $4,024) / (7,500 - 3,200) = $1.12
$8,840 = a + $1.12 × 7,500
a = $440  
Diff: 3 
Terms:  

high-low method, cost function 
Objective:  

4 
AACSB:  

Analytical skills


126) 

What is the estimated total cost at an operating level of 5,000 units?  
A) 

$6,227.20  
B) 

$6,040.00  
C) 

$4,283.20  
D) 

$8,510.00  
Answer:  

B 
Explanation:  

B) 

b = ($8,840 - $4,024) / (7,500 - 3,200) = $1.12
$8,840 = a + $1.12 × 7,500
a = $440 

y = $440 + $1.12 × 5,000 = $6,040

Diff: 3 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills 
Answer the following questions using the information below: 

The Gangwere Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Gangwere 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  3,500
  February  24,400  2,000
  March  31,280  2,450
  April  36,400  3,000
  May  44,160  3,900
  June  42,400  3,740
 
127) 

How is the cost function stated?  
A) 

y = $26,672 + $1.84X  
B) 

y = $21,360 + $1.52X  
C) 

y = $10,112 + $8.64X  
D) 

y = $3,600 + $10.40X  
Answer:  

D 
Explanation:  

D) 

b = ($44,160 - $24,400) / (3,900 - 2,000) = $10.40
$44,160 = a + $10.40 × 3,900
a = $3,600 

Diff: 3 
Terms:  

cost function, high-low method 
Objective:  

4 
AACSB:  

Analytical skills


128) 

What is the estimated total cost at an operating level of 2,850 hours?  
A) 

$25,692  
B) 

$33,240  
C) 

$32,016  
D) 

$34,736  
Answer:  

B 
Explanation:  

B) 

b = ($44,160 - $24,400) / (3,900 - 2,000) = $10.40
$44,160 = a + $10.40 × 3,900
a = $3,600 

y = $3,600 + $10.40 × 2,850 = $33,240

Diff: 3 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills

129) 

An inaccurate cost function with a slope coefficient 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 profitable than budgeted  
Answer:  

B 
Diff: 3 
Terms:  

cost function, slope coefficient 
Objective:  

5 
AACSB:  

Analytical skills 
130) 

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 profitable than budgeted  
C) 

predicting total costs that are too low  
D) 

replicating processes that are truly cost saving  
Answer:  

A 
Diff: 3 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Analytical skills

131) 

A cost function with a lower constant than a year ago could indicate all of the following EXCEPT:  
A) 

last year's cost function was inaccurate  
B) 

a new operations manager is being effective  
C) 

the sales commission percentage has decreased  
D) 

insurance premiums have decreased  
Answer:  

C 
Diff: 3 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Reflective thinking


132) 

A cost function with a lower slope coefficient than a year ago could indicate that:  
A) 

total variable costs have decreased  
B) 

new cost-cutting initiatives are beneficial  
C) 

production has decreased  
D) 

rental costs have decreased  
Answer:  

B 
Diff: 3 
Terms:  

cost function, cost estimation, slope coefficient 
Objective:  

5 
AACSB:  

Analytical skills

133) 

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 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Reflective thinking

134) 

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

match the cost driver  
B) 

determine the level of activity  
C) 

match the actual cost observations  
D) 

rely on the independent variable  
Answer:  

C 
Diff: 2 
Terms:  

cost function, cost estimation, regression analysis 
Objective:  

5 
AACSB:  

Reflective thinking 
135) 

A steeply sloped regression line indicates:  
A) 

a strong relationship between the cost driver and costs  
B) 

a greater proportion of fixed costs than variable costs  
C) 

an economically plausible relationship exists  
D) 

management should cut costs  
Answer:  

A 
Diff: 3 
Terms:  

regression analysis, slope coefficient 
Objective:  

5 
AACSB:  

Reflective thinking

136) 

The smaller the residual term the:  
A) 

stronger the relationship between the cost driver and costs  
B) 

weaker the relationship between the cost driver and costs  
C) 

steeper the slope of the cost function  
D) 

gentler the slope of the cost function  
Answer:  

A 
Diff: 2 
Terms:  

regression analysis, cost function 
Objective:  

5 
AACSB:  

Reflective thinking

137) 

When using activity-based costing all of the following are true EXCEPT that:  
A) 

all cost drivers should be output unit-level cost drivers  
B) 

there are a great number and variety of cost drivers and cost pools  
C) 

industrial engineering, conference, and regression analysis can be used to estimate slope coefficients  
D) 

the more cost pools, the greater the chance of estimation error  
Answer:  

A 
Diff: 2 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Reflective thinking

138) 

When evaluating and choosing cost drivers all of the following are true EXCEPT:  
A) 

the cost driver is economically plausible. 
B) 

there is a significance of effect of the independent variable 
C) 

there is an independent verification of the relationship by a committee of cost accountants  
D) 

there is a goodness of fit between the various data points and the regression line 
Answer:  

C 
Diff: 2 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Reflective thinking

139) 

Over the short run, a nonlinear cost function would MOST likely result from all of the following EXCEPT:  
A) 

quantity discounts for each additional 10,000 parts purchased  
B) 

purchasing another $250,000 printing machine to double production  
C) 

hiring a third production supervisor  
D) 

incurring greater total utility costs for each machine-hour of operation  
Answer:  

D 
Diff: 3 
Terms:  

cost function, nonlinear cost function 
Objective:  

6 
AACSB:  

Analytical skills 
140) 

Examples of nonlinear cost functions include all of the following EXCEPT:  
A) 

step variable-cost functions  
B) 

step fixed-cost functions  
C) 

learning curves  
D) 

mixed cost functions  
Answer:  

D 
Diff: 2 
Terms:  

nonlinear cost function 
Objective:  

6 
AACSB:  

Reflective thinking

141) 

A step fixed-cost function:  
A) 

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

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

remains the same over a narrow range of activity  
D) 

example includes setup costs  
Answer:  

A 
Diff: 2 
Terms:  

step cost function 
Objective:  

6 
AACSB:  

Reflective thinking

142) 

A step variable-cost function:  
A) 

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

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

remains the same over a wide range of activity  
D) 

example includes adding additional warehouse space  
Answer:  

B 
Diff: 2 
Terms:  

step cost function 
Objective:  

6 
AACSB:  

Reflective thinking

143) 

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 
Terms:  

learning curve 
Objective:  

6 
AACSB:  

Reflective thinking

144) 

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 
Terms:  

experience curve 
Objective:  

6 
AACSB:  

Reflective thinking 
145) 

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take:  
A) 

160 minutes  
B) 

120 minutes  
C) 

80 minutes  
D) 

60 minutes  
Answer:  

B 
Explanation:  

B) 

200 × .80 = 160; (200 + X)/2 = 160; X = 120 minutes 

Diff: 3 
Terms:  

learning curve, cumulative average-time learning model 
Objective:  

7 
AACSB:  

Analytical skills


146) 

To complete the first setup on a new machine took an employee 200 minutes. Using an 80% incremental unit-time learning model indicates that the second setup on the new machine is expected to take:  
A) 

160 minutes  
B) 

120 minutes  
C) 

80 minutes  
D) 

60 minutes  
Answer:  

A 
Explanation:  

A) 

200 × .80 = 160 minutes  
Diff: 2 
Terms:  

learning curve, incremental unit-time learning model 
Objective:  

7 
AACSB:  

Analytical skills

147) 

Learning curve effects can be incorporated:  
A) 

into performance evaluations  
B) 

into production schedules  
C) 

when using costs to price products  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Reflective thinking

148) 

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

how quality increases over time  
B) 

how efficiency increases as more units are produced  
C) 

how setup costs decline as more workers are added  
D) 

the change in variable costs when quantity discounts are available  
Answer:  

B 
Diff: 2 
Terms:  

learning curve 
Objective:  

7 
AACSB:  

Reflective thinking 
149) 

The ideal database contains:  
A) 

numerous cost driver observations  
B) 

reliably measured observations  
C) 

cost driver observations spanning a wide range  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 1 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking


150) 

Data collection problems arise when:  
A) 

data are recorded electronically rather than manually  
B) 

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

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

purely inflationary price effects are removed  
Answer:  

C 
Diff: 3 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking

151) 

Managers who design data collection reports that regularly and routinely obtain required data are helping to ensure that:  
A) 

inflationary effects are removed  
B) 

all data are recorded  
C) 

extreme values are not used to calculate cost functions  
D) 

the relationship between the cost driver and the cost remains stable over time  
Answer:  

B 
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking

152) 

Extreme values of observations may be the result of:  
A) 

a misplaced decimal point in the recorded data  
B) 

classifying a cost incorrectly  
C) 

a temporary plant shutdown  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking

153) 

All of the following are cost analysis problems EXCEPT:  
A) 

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

extreme observations are adjusted or removed  
C) 

time periods differ for measuring items included in the dependent variable and the cost driver(s)  
D) 

homogeneous relationships between individual cost items in the dependent variable pool and cost drivers may not be present  
Answer:  

B 
Diff: 3 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking 

154) 

The coefficient of determination is important in explaining variances in estimating equations. For a certain estimating equation, the unexplained variation was given as 26,505. The total variation was given as 46,500. What is the coefficient of determination for the equation?  
A) 

0.34  
B) 

0.43  
C) 

0.57  
D) 

0.66  
Answer:  

B 
Explanation:  

B) 

r2 = 1 - (26,505/46,500) = 0.43 

Diff: 2 
Terms:  

coefficient of determination (r2) 
Objective:  

A 
AACSB:  

Analytical skills

155) 

The Bhaskara 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  $21,890
  Standard error of Y estimate  $4,560
  r2  0.7832
  Number of observations  22

  X coefficient(s)  11.75
  Standard error of coefficient(s)  2.1876

What is the linear cost function?  
A) 

Y = $21,890 + $11.75X  
B) 

Y = $4,560 + $5.15X  
C) 

Y = $20,100 + $4.60X  
D) 

None of these answers is correct.  
Answer:  

A 
Diff: 2 
Terms:  

simple regression, cost function 
Objective:  

A 
AACSB:  

Analytical skills 

156) 

Craig's Cola was to manufacture 1,000 cases of cola next week. The accountant provided the following analysis of total manufacturing costs. 

  Variable  Coefficient  Standard Error  t-Value
  Constant  100  71.94  1.39
  Independent variable  200  91.74  2.18

  r2 = 0.82 

What is the estimated cost of producing the 1,000 cases of cola?  
A) 

$200,100  
B) 

$142,071  
C) 

$100,200  
D) 

$9,000  
Answer:  

A 
Explanation:  

A) 

y = $100 + ($200 × 1,000) = $200,100  
Diff: 2 
Terms:  

simple regression, cost predictions 
Objective:  

A 
AACSB:  

Analytical skills

157) 

Pam'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  $913.32  $198.12  4.61
Independent Variable  $20.90  $2.94  7.11

r2 = 0.56

Number of horses:
Variable  Coefficient  Standard Error  t-Value
Constant  $4,764.50  $1,073.09  4.44
Independent Variable  $864.98  $247.14  3.50

r2 = 0.63

What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver?  
A) 

$99,929.09  
B) 

$350,756.50  
C) 

$335,313.32  
D) 

$13,844,444.50  
Answer:  

B 
Explanation:  

B) 

y = $4,764.50 + $864.98 × 400 = $350,756.50 based on highest r2, which uses # of horses as the cost driver

Diff: 3 
Terms:  

simple regression, cost predictions 
Objective:  

A 
AACSB:  

Analytical skills 
158) 

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

in simple regression, when the dependent variable is not normally distributed  
B) 

in simple regression, when the R2 statistic is low  
C) 

in multiple regression, when the R2 statistic is low  
D) 

in multiple regression, when two or more independent variables are correlated with one another  
Answer:  

D 
Diff: 2 
Terms:  

multiple regression, multicollinearity 
Objective:  

A 
AACSB:  

Analytical skills

159) 

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

heteroscedasticity  
B) 

homoscedasticity  
C) 

multicollinearity  
D) 

autocorrelation  
Answer:  

C 
Diff: 2 
Terms:  

multiple regression, multicollinearity 
Objective:  

A 
AACSB:  

Reflective thinking

160) 

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 $9.20 per cubic yard.
c.  Utilities have a minimum charge of $1,000, plus a charge of $0.05 per kilowatt-hour.
d.  Machine operating costs include $200,000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation.  
Answer:  

a.  y = $10X
b.  y = $9.20X
c.  y = $1,000 + $0.05X
d.  y = $200,000 + $75X  
Diff: 1 
Terms:  

linear cost function 
Objective:  

1 
AACSB:  

Analytical skills


161) 

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 $.75 per pound.
b.  Direct labor cost is $16.75 per hour.
c.  Auto rental has a fixed fee of $75.00 per day plus $.50 per mile driven.
d.  Machine operating costs include $350 of maintenance per month, and $5.00 of coolant usage costs for   each day the machinery is in operation.  
Answer:  

a.  y = $.75X
b.  y = $16.75X
c.  y = $75 + $0.50X
d.  y = $350 + $5X  
Diff: 1 
Terms:  

linear cost function 
Objective:  

1 
AACSB:  

Analytical skills 
162) 

The cost of the personnel department at the Miller 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 $120,000.
  Department  Department  Department
  Cost Driver  A  B  C
  Number of employees  300  250  50
  The number of new hires  15  25  10

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 Miller Company?  
Answer:  

  Department  Department  Department
  Cost Driver  A  B  C
a.  Number of employees  300/600  250/600  50/600
  $60,000  $50,000  $10,000
b.  The number of new hires  15/50  25/50  10/50
  $36,000  $60,000  $24,000
c.  Miller Company is using the conference method for cost estimation.  
Diff: 2 
Terms:  

conference method, cost estimation 
Objective:  

3 
AACSB:  

Communication


163) 

The managers of the production department have decided to use the production levels of 20X2 and 20X4 as examples of the highest and lowest years of operating levels. Data for those years are as follows: 

  Year  Chemicals used  Overhead Costs
  20X2  140,000 gallons  $115,000
  20X4  120,000 gallons  $100,000

Required: 

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

Slope (variable cost)  = ($115,000 - $100,000) / (140,000 - 120,000) = $0.75 

Constant (fixed cost)  = $100,000 - $0.75(120,000) = $10,000 

Estimating equation  = $10,000 + $0.75DM  
Diff: 1 
Terms:  

cost estimation, slope coefficient, constant 
Objective:  

4 
AACSB:  

Analytical skills 
164) 

Wimmer's Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600. In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080. 

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 500 hours?  
Answer:  

a.  Slope (variable costs)  = ($82,080 - $57,600) / (720 - 360) = $68 

  Constant (fixed cost)  = $82,080 - (720 × $68) = $33,120 

  Estimating equation  = $33,120 + $68DLH 

b.  Total costs of 500 hours  = $33,120 + $68 × 500 = $67,120  
Diff: 2 
Terms:  

cost estimation, cost function, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills


165) 

The Wildcat Company has provided the following information: 

  Units of Output  30,000 Units  42,000 Units
  Direct materials  $ 180,000  $ 252,000
  Workers' wages  1,080,000  1,512,000
  Supervisors' salaries  312,000  312,000
  Equipment depreciation  151,200  151,200
  Maintenance  81,600  110,400
  Utilities  384,000  528,000
  Total  $2,188,800  $2,865,600

Using the high-low method and the information provided above,
a.  identify the linear cost function equation and
b.  estimate the total cost at 36,000 units of output.  
Answer:  

a.  Variable cost = ($2,865,600 - $2,188,800) / (42,000 - 30,000) = $56.40
  Fixed cost = $2,865,600 - $56.40 × 42,000 = $496,800
  Cost function is y = $496,800 + $56.40X 

b.  Output level of 36,000 units  = $496,800 + $56.40 × 36,000 =
  = $2,527,200 total cost  
Diff: 2 
Terms:  

linear cost function 
Objective:  

4 
AACSB:  

Analytical skills 
166) 

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  4,000  $45,000
  February  4,600  49,500
  March  3,800  45,750
  April  4,400  48,000
  May  4,500  49,800

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 total 4,200, what are the total estimated costs of the Machining Department?  
Answer:  

a.  Slope coefficient = ($49,500 - $45,750) / (4,600 - 3,800) = $4.6875 per machine-hour 

  Constant = $49,500 - ($4.6875 × 4,600) = $27,937.50
  Estimating equation = $27,937.50 + $4.6875X 

b.  June's estimated costs = $27,937.50 + $4.6875 × 4,200 = $47,625  
Diff: 2 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills 

167) 

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

  Machine-hours  Kilowatt-hours  Total Overhead Costs
  January  3,800  4,520,000  $138,000
  February  3,650  4,340,000  136,800
  March  3,900  4,500,000  139,200
  April  3,300  4,290,000  136,800
  May  3,250  4,200,000  126,000
  June  3,100  4,120,000  120,000

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 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?  
Answer:  

a.  Machine-hours:
  Slope coefficient  = ($139,200 - $120,000) / (3,900 - 3,100)
  = $24.00 per machine-hour
  Constant = $139,200 - ($24 × 3,900) = $45,600
  Machine-hour estimating equation = $45,600 + $24X 

b.  Kilowatt-hours:
  Slope coefficient  = ($138,000 - $120,000) / (4,520,000 - 4,120,000)
  = $0.045 per kilowatt-hour
  Constant = $138,000 - ($0.045 × 4,520,000) = -$65,400
  Kilowatt-hour estimating equation = -$65,400 + $0.045KWH 

c.  July's estimated costs:
  with machine-hours = $45,600 + $24 × 3,000 = $117,600
  with kilowatt-hours = -$65,400 + $0.045 × 4,000,000 = $114,600
  The best estimator for July was the kilowatt-hour cost driver.  
Diff: 3 
Terms:  

high-low method, cost predictions 
Objective:  

4 
AACSB:  

Analytical skills 

168) 

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

  Month  Machine-hours  Overhead Costs
  February  1,700  $20,500
  March  2,800  22,250
  April  1,000  19,950
  May  2,500  21,500
  June  3,500  23,950

Required: 

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

  High: June  3,500  $23,950
  Low: April  1,000  19,950
  Difference  2,500  $ 4,000

Variable cost per MH: $4,000/2,500 = $1.60 per MH

Fixed cost:  $19,950 = a + $1.60 × 1,000
  a = $18,350 

Estimated cost equation: y = $18,350 + $1.60 × 1,000  
Diff: 2 
Terms:  

high-low method, cost function 
Objective:  

4 
AACSB:  

Analytical skills 

169) 

Harry's Picture manufactures various picture frames. Each new employee takes 5 hours to make the first picture frame and 4 hours to make the second. The manufacturing overhead charge per hour is $20.
 
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 Average
  1  5  5  5
  2  4  9  4.5 

  Learning percentage = 4.5/5 = 0.90 

b.  Y  = p Xq
  = 5 × 8-.1520
  = 3.65 hours 

  or   1 unit  = 5
  2 units  = 5 × 0.9 = 4.5
  4 units  = 4.5 × 0.9 = 4.05
  8 units  = 4.05 × 0.9 = 3.65 hours
  Time to build 8 units: 8 × 3.65 = 29.2 hours 

c.  Y  = p Xq
  = 5 × 16-0.3219
  = 2.048 hours

  or  1 unit  = 5
  2 units  = 5 × 0.8 = 4
  4 units  = 4 × 0.8 = 3.2
  8 units  = 3.2 × 0.8 = 2.56
  16 units  = 2.56 × .8 = 2.048 hours 

d.  Total time = 2.048 × 16 = 32.768 hours
  Overhead charge = 32.768 × $20 = $655.36  
Diff: 3 
Terms:  

learning curve, cumulative ave-time/inc unit-time learning model 
Objective:  

6 
AACSB:  

Analytical skills 

170) 

Each time Mayberry Nursery hires a new employee, it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 30 hours and the second job averages 24 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 Average
  1  30  30  30
  2  24  54   27 

  Learning percentage = 27/30 = 0.90 

b.  Y  = p Xq
  = 30 × 16-.1520
  = 19.683 hours 

  or   1 unit  = 30
  2 units  = 30 × 0.9 = 27
  4 units  = 27 × 0.9 = 24.3
  8 units  = 24.3 × 0.9 = 21.87
  16 units  = 21.87 × 0.9 = 19.683 hours

  16 × 19.683 = 314.9 hours 
Diff: 2 
Terms:  

learning curve, cumulative average-time learning model 
Objective:  

6 
AACSB:  

Analytical skills 

171) 

Joe's Copy Center hires a new employee. Joe knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Joe is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 40 minutes and the second job averages 32 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  40  40  40
  2  32  72    36 

  Learning percentage = 36/40 = 0.90 

b.  Y  = p Xq
  = 40 × 16-.1520
  = 23.62 minutes

  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
  32 units  = 26.244 × 0.9 = 23.62 minutes

  32 × 23.62 = 755.827 minutes = Approximately 12 hours and 36 minutes 
Diff: 2 
Terms:  

learning curve, cumulative average-time learning model 
Objective:  

6 
AACSB:  

Analytical skills


172) 

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

  Variable  Coefficient  Standard Error  t-Value
  Constant  $35.92  $16.02  2.24
  Independent variable  $563.80  $205.40  2.74 

  r2 = 0.75 

Required:
a.  What is the cost estimation equation according to the report?
b.  What is the goodness of fit? What does it tell about the estimating equation?  
Answer:  

a.  y = $35.92 + $563.80X
b.  Goodness of fit is 0.75. It measures how well the predicted values match the actual observations. In this case, the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance.  
Diff: 1 
Terms:  

cost estimation, simple regression 
Objective:  

A 
AACSB:  

Use of Information Technology 
173) 

Newton Company used least squares regression analysis to obtain the following output:
  Payroll Department Cost
  Explained by Number of Employees
  Constant  $5,800
  Standard error of Y estimate  630
  r2  0.8924
  Number of observations  20

  X coefficient(s)  $1.902
  Standard error of coefficient(s)  0.0966

Required:
a.  What is the total fixed cost?
b.  What is the variable cost per employee?
c.  Prepare the linear cost function.
d.  What is the coefficient of determination? Comment on the goodness of fit.  
Answer:  

a.  The constant or intercept is the total fixed cost of $5,800.
b.  The variable cost per employee is the X coefficient of $1.902.
c.  y = $5,800 + $1.902X
d.  The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees.  
Diff: 2 
Terms:  

cost estimation, simple regression, coefficient of determination (r2) 
Objective:  

A 
AACSB:  

Analytical skills 

174) 

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:
  Variable  Coefficient  Standard Error  t-Value
  Constant  $748.30  $341.20  2.19
  Independent Variable  $52.90  $35.20  1.50 

  r2 = 0.33 

Number of packages:
  Variable  Coefficient  Standard Error  t-Value
  Constant  $242.90  $75.04  3.24
  Independent Variable  $5.60  $2.00  2.80 

  r2 = 0.73 

Required: 

a.  What are the estimating equations for each cost driver?
b.  Which cost driver is best and why?  
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 coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables. 

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

  Given the above findings, it appears that number of packages is the best predictor of costs of the packing department.  
Diff: 2 
Terms:  

cost estimation, simple regression, coefficient of determination (r2) 
Objective:  

A 
AACSB:  

Analytical skills 

175) 

What are the two assumptions behind a simple linear cost function? Briefly 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 fixed cost or constant; and
3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fixed cost or constant, and b is the variable cost per unit of the driver or the slope of the straight line.  
Diff: 2 
Terms:  

cost function, linear cost function 
Objective:  

1, 2 
AACSB:  

Reflective thinking

176) 

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, fixed, or mixed with respect to the identified cost driver. 

Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression, to fit linear cost functions to past data observations.  
Diff: 2 
Terms:  

cost estimation, industrial engineering/conference/account analysis method 
Objective:  

3 
AACSB:  

Reflective thinking 

177) 

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

The first 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 identification of extreme observations that should be further investigated. The fifth 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 
Terms:  

cost estimation 
Objective:  

4 
AACSB:  

Reflective thinking

178) 

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

The three criteria a company should use to evaluate a cost driver are economic plausibility, goodness of fit, and significance 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 fit involves the observed differences between predictions of costs based on the cost driver and the actual costs that occurred. 

Significance of the independent variable involves the steepness of the slope of the cost driver relative to the slope of other possible cost drivers. The steeper the slope (given the same goodness of fit) the stronger is the relationship between the cost driver and the related costs.  
Diff: 2 
Terms:  

cost function, cost estimation 
Objective:  

5 
AACSB:  

Reflective thinking

179) 

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 
Terms:  

nonlinear cost function 
Objective:  

6 
AACSB:  

Reflective thinking 

180) 

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 
Terms:  

learning curve, cumulative ave-time/inc unit-time learning model 
Objective:  

7 
AACSB:  

Reflective thinking

181) 

Roger Moon has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. 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 first 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 fixed and which are variable under the budget system. It may be difficult to determine those that are truly variable. 

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

Finally, there may be gaps in the historical data because only total costs had to be maintained within the budget. There was probably little attention paid to cost categories, thereby causing reliable cost data to be scarce.  
Diff: 2 
Terms:  

cost estimation 
Objective:  

8 
AACSB:  

Reflective thinking 

182) 

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 fit that is acceptable for most situations. Therefore, all three equations are acceptable when considering only the coefficient of determination. 

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

b.  Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination.  
Diff: 2 
Terms:  

simple regression, coefficient of determination (r2) 
Objective:  

A 
AACSB:  

Analytical skills
1