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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 Ã— .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)] Ã— $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)] Ã— $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)] Ã— $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)] Ã— $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 ] Ã— 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) / 5,000 ]Ã— 6,500 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 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 Ã— 400 hours) = $2,000 OR: Constant = $6,800 - ($20.00 Ã— 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 Ã— 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 Ã— 2,000 hours) = $25,000 OR: Constant = $125,000 - ($100.00 Ã— 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 Ã— 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 Ã— 12,500) = $17,000 OR: Constant = $35,000 - ($2.40 Ã— 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 Ã— 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 Ã— 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 Ã— 9.750) a = $2,430 $36,670 = $2,430 + ($4.28 Ã— 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 Ã— 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 Ã— 7,500 a = $440 y = $440 + $1.12 Ã— 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 Ã— 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 Ã— 3,900 a = $3,600 y = $3,600 + $10.40 Ã— 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 Ã— .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 Ã— .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 (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 (s) 11.75 Standard error of (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 Ã— 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 Ã— 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 Ã— $68) = $33,120 Estimating equation = $33,120 + $68DLH b. Total costs of 500 hours = $33,120 + $68 Ã— 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 Ã— 42,000 = $496,800 Cost function is y = $496,800 + $56.40X b. Output level of 36,000 units = $496,800 + $56.40 Ã— 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 Ã— 4,600) = $27,937.50 Estimating equation = $27,937.50 + $4.6875X b. June's estimated costs = $27,937.50 + $4.6875 Ã— 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 Ã— 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 Ã— 4,520,000) = -$65,400 Kilowatt-hour estimating equation = -$65,400 + $0.045KWH c. July's estimated costs: with machine-hours = $45,600 + $24 Ã— 3,000 = $117,600 with kilowatt-hours = -$65,400 + $0.045 Ã— 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 Ã— 1,000 a = $18,350 Estimated cost equation: y = $18,350 + $1.60 Ã— 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 Ã— 8-.1520 = 3.65 hours or 1 unit = 5 2 units = 5 Ã— 0.9 = 4.5 4 units = 4.5 Ã— 0.9 = 4.05 8 units = 4.05 Ã— 0.9 = 3.65 hours Time to build 8 units: 8 Ã— 3.65 = 29.2 hours c. Y = p Xq = 5 Ã— 16-0.3219 = 2.048 hours or 1 unit = 5 2 units = 5 Ã— 0.8 = 4 4 units = 4 Ã— 0.8 = 3.2 8 units = 3.2 Ã— 0.8 = 2.56 16 units = 2.56 Ã— .8 = 2.048 hours d. Total time = 2.048 Ã— 16 = 32.768 hours Overhead charge = 32.768 Ã— $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 Ã— 16-.1520 = 19.683 hours or 1 unit = 30 2 units = 30 Ã— 0.9 = 27 4 units = 27 Ã— 0.9 = 24.3 8 units = 24.3 Ã— 0.9 = 21.87 16 units = 21.87 Ã— 0.9 = 19.683 hours 16 Ã— 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 Ã— 16-.1520 = 23.62 minutes or 1 unit = 40 2 units = 40 Ã— 0.9 = 36 4 units = 36 Ã— 0.9 = 32.4 8 units = 32.4 Ã— 0.9 = 29.16 16 units = 29.16 Ã— 0.9 = 26.244 32 units = 26.244 Ã— 0.9 = 23.62 minutes 32 Ã— 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 (s) $1.902 Standard error of (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 |