Chapter 3 - Testbank

Chapter 03 Testbank
Student: ___________________________________________________________________________
1. The relationship between cost and activity is called:
A. cost prediction.
B. cost behaviour.
C. cost analysis.
D. cost approximation.
2. Forecasting a cost at a particular level of activity is called:

A. cost estimation.
B. cost prediction.
C. cost behaviour.
D. cost functions.
3. A cost that has both a fixed and variable component is called a:

A. step-fixed cost.
B. step-variable cost.
C. semivariable cost.
D. discretionary cost.
4. A cost that remains unchanged in total as the activity level (or cost driver) changes is called a:
A. fixed cost.
B. variable cost.
C. step-fixed cost.
D. step-variable cost.
5. A cost that changes in total in direct proportion to a change in the cost driver is a:
A. variable cost.
B. fixed cost.
6.
A manufacturer plans to increase production within the relevant range of activity. What behaviour can the company expect for each of
the following?
Fixed cost per unit
Variable cost per unit
A.
No change
Increase
B.
Increase
No change
C.
Decrease
Increase
D.
Decrease
No change
7. Variable cost per unit:

A. increases in direct proportion to changes in the cost driver.
B. decreases in direct proportion to changes in the cost driver.
C. remains unchanged as the level of the cost driver changes.
D. increases, but not in direct proportion to changes in the cost driver.
8. Fixed costs per unit:

A. is unrelated to activity levels.
B. change as activity varies.
C. remain unchanged as activity level changes.
D. None of the given answers
9. Costs that remain fixed over wide ranges of activity but jump to a different amount outside that range are called:
A. step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
10. The fixed costs per unit are $10 when a company makes 10 000 units. What are the per unit fixed costs when 12 500
units are produced?
A. $6.00
B. $12.00
C. $10.00
D. $ 8.00
11. The variable costs per unit are $4 when a company makes 10 000 units. What are the per unit variable costs when
8000 units are produced?
A. $6.00
B. $4.00
C. $4.50
D. $5.00
12. Total costs are $140 000 when 10 000 units are made. Of this amount, variable costs are $4 per unit. What are the
total costs when 8000 units are produced?
A. $140 000
B. $136 000
C. $132 000
D. $124 000
13. Total costs are $80 000 when 8000 units are made. Of this amount, variable costs are $48 000. What are the total
costs when 10 000 units are produced?
A. $ 92 000
B. $ 98 000
C. $100 000
D. $108 000
14. Which per unit cost does the slope of the total cost line represent?
A. Fixed
B. Variable
C. Semivariable
D. Step-variable
15. The level of activity within which fixed costs remain unchanged is called the:
A. extreme range.
B. relevant range.
C. activity range.
D. relevant range AND activity range.
16. The relevant range is that range of activity where:

A. management may not find it important to concern itself.
B. management does not expect the firm to operate.
C. fixed costs remain unchanged.
D. the expected costs exceed the benefits from the activity.
17. Within the relevant range of activity, costs:

A. can be estimated with reasonable accuracy.
B. exhibit decreasing marginal cost patterns.
C. exhibit increasing marginal cost patterns.
18.
As a firm begins to operate outside the relevant range, the accuracy of cost estimates for fixed and variable costs:
Fixed
Variable
A.
Increase
Increase
B.
Increase
Decrease
C.
Decrease
Decrease
D. Do not change
19. Which of the following describes a cost-estimation method that involves a careful examination of the ledger accounts?
A. Least squares regression
B. Visual fit
C. Account classification
D. Multiple regression
20. Which of the following describes a method of cost estimation in which a cost line is drawn through a scatter diagram to
help the analyst visualise the relationship between cost and activity?
B. Highlow
C. Visual fit
21. Within the relevant range, a curvilinear cost function can be graphed as a:
A. straight line.
B. set of straight lines.
C. solid line.
D. curved line.
22. The method of cost estimation that fits a cost line between two data points is:
A. least squares regression.
B. highlow.
C. account classification.
D. multiple regression.
23. The method of cost estimation that minimises the sum of the squared deviations between the cost line and the data
points is:
B. visual fit.
24. In regression analysis, the variable that is being predicted is:

A. the independent variable.
B. the dependent variable.
C. the explanatory variable.
D. the dependent variable AND the explanatory variable.
25. Technical Engineering presently leases a copying machine on a monthly basis. The lease agreement requires a fixed
fee each month in addition to a charge per copy. Technical Engineering made 2400 copies and paid a total of $162 in rent
in September and in October they paid $195 for 3500 copies. Determine Technical Engineering's variable cost per copy.
A. $0.06
B. $0.04
C. $0.03
D. $0.01
in September and in October they paid $195 for 3500 copies. Determine Technical's monthly fixed fee.
A. $138
B. $ 90
C. $ 66
D. $ 55
fee each month in addition to a charge per copy. Technical made 2400 copies and paid a total of $162 in rent in
September and in October they paid $195 for 3500 copies. Determine the total amount that would be paid for 1800
copies.
A. $120
B. $138
C. $144
D. $163
28. Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000
units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at
$13.00 per unit. Determine the cost formula that expresses the behaviour of Yang's total costs:
A.
Y $60 000 + $5X
B.
Y $20 000 + $13X
C.
Y $45 000 + $4X
D.
Y $40 000 + $9X
$13.00 per unit. Determine their total cost if Yang produces 10 000 units.
A. $130 000
B. $125 000
C. $110 000
D. $100 000
30.
The Longreach Toy Factory has determined machine hours to be the cost driver of the company's electricity costs. During the first six
months of the year, the company incurred the following electricity costs:
Using the highlow method, estimate the variable cost per machine hour.
A. $8.38
B. $7.44
C. $5.50
31.
Using the highlow method, determine the cost formula that expresses the cost behaviour of the company's electricity costs.
A.
Y = $3735 + $6.20X
B.
Y = $1664 + $8.38X
C.
Y = $4760 + $5.00X
D.
Y = $4400 + $5.50X
32. A regression model in which more than one independent variable is used to predict the dependent variable is called a:
A. simple regression model.
B. multiple regression model.
C. dependent model.
D. B and C
33. Which of the following are problems frequently encountered in data collection?
A. Outliers
B. Missing data
C. Mismatched time periods
D. All of the given answers
34. Which of the following statements is true concerning cost estimation methods?
A. Cost behaviour is always assumed to depend on more than one cost driver.
B. Cost behaviour patterns are curvilinear.
C. Costs and benefits of using sophisticated and costly cost-estimation methods must be evaluated.
D. Cost behaviour is always assumed to depend on more than one cost driver AND costs and benefits of using
sophisticated and costly cost-estimation methods must be evaluated.
35. If a very short time period, such as a week, is used for a regression study, rather than a longer period such as a
month:
A. coping with inflation becomes more difficult.
B. accounting measurement errors are more likely.
C. time and motion studies will be required to supplement the cost and volume data.
D. coping with inflation becomes more difficult AND time and motion studies will be required to supplement the cost and
volume data.
36. In assessing the costs and benefits of using a particular cost driver, which of the following must be taken into account?
i. The availability of cost data.
ii. The time frame for analysing the cost behaviour.
iii. Whether it is a fixed or variable cost.
A. i
B. ii
C. i and ii
D. i and iii
37. In activity-based costing analysis, the manufacturing manager's salary is classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
38. In activity-based costing analysis, direct materials are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
39. In activity-based costing analysis, set-up costs are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
40. In activity-based costing analysis, package design is classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
41. In which approach to costs estimation, is task analysis used?

A. Account classification
B. Engineering method
C. Highlow method
D. Managerial judgement
42. In which approach to cost estimation, is least squares used?

A. Engineering method
B. Highlow method
C. Regression analysis
43. Which of the following statements are assumptions underlying cost estimation?
A. Cost behaviour depends on one or a few activities.
B. All costs are production driven.
C. There is a strong correlation between the cost and the cost driver.
D. Cost behaviour depends on one or a few activities AND there is a strong correlation between the cost and the cost
driver.
44. Which of the following are valid reasons for a firm not using objective techniques?
i. Data may not be available.
ii. Cost estimates are sufficiently accurate for the firm's purposes.
iii. Accountants may be ignorant of appropriate techniques.
iv. The firm gives low priority to cost estimation.
A. i and ii
B. i, ii and iii
C. ii, iii and iv
D. i, ii and iv
45. Which of the following are important in estimating the cost of machine maintenance?
A. The relevant range
B. The time period selected
C. The cost driver selected
46. When using regression analysis to determine estimated costs, what criteria are necessary to evaluate a particular
regression line?
A. Closeness to pre-analysis guess
B. Goodness of fit
C. Coefficient of determination
D. Goodness of fit AND coefficient of determination
47.
In the regression formula Y = a + bX, b is:
A. the slope of the line.

B. the cost driver.
C. the intercept on the vertical axis.
D. the dependent variable.
48. Which of the following statements is most complete and correct?

A. Activity-based costing uses non-volume-based cost drivers only.
B. Activity-based costing uses volume-based cost drivers.
C. Activity-based costing recognises that both volume-based and non-volume-based cost drivers may be appropriate.
D. None of the given answers.
49. For a fixed cost, as volume increases:

A. the cost behaviour depends on the type of fixed cost involved.
B. total fixed costs remain constant and fixed costs per unit increase.
C. both total fixed costs and fixed costs per unit remain constant.
D. total fixed costs remain constant and fixed costs per unit decrease.
50. Consider the following equation:

Total cost = fixed costs + (cost driver rate cost driver quantity)
If a cost can be estimated using this equation, it is probably a:
A. fixed cost.
B. variable cost.
C. mixed or semivariable cost.
D. non-linear cost.
51.
Lawson Lumber uses the highlow method to estimate electricity cost, which varies in relation to machine hours. Based on the following
data, how would the cost function be stated if X' is the number of machine hours?
A.
$525 + $0.35 X
B.
$300 + $0.50 X
C.
$500 + $0.50 X
D.
$470 + $0.35 X
52. For a manufacturer of kitchens, which of the following would you expect to be a fixed cost?
A. Hourly labour cost of employee installing kitchens
B. Material for kitchen benchtops
C. Adhesive for benchtops
D. Rent of factory premises
53. For a manufacturer of kitchens, which of the following would you expect to be a direct cost?
A. Hourly labour cost of employees installing kitchens
C. Hourly labour cost of employees installing kitchens AND material for kitchen benchtops
54. Which of the following increases as volume of activity decreases?

A. Fixed cost per unit
B. Variable cost per unit
C. Total fixed cost
D. Total variable cost
55. Which of the following is not an example of a cost driver for a delivery truck?
A. Location of customers
B. Depreciation
C. Litres of fuel used
D. Number of customers
56. Which of the following is an example of an engineered cost?

A. Direct materials
B. Advertising
C. Insurance
D. Factory supervisor's salary
57. Which term describes a cost resulting from the existence of the organisational structure and premises used by the
firm?
A. Discretionary
B. Fixed
C. Committed
D. Engineered
58. Which of the following would always be a mixed (semivariable) cost for a firm?
A. Raw materials because it includes direct and indirect materials
B. Direct labour
C. Manufacturing overhead
D. Raw materials AND manufacturing overhead
59. An example of a discretionary cost for a firm that manufactures furniture is:
A. direct material.
B. advertising.
C. labour.
D. glue and nails.
60. Eldervale Winery is a producer of premium wine. Which of the following is an example of a unit level cost?
A. The cost of the labels on each bottle of wine
B. The cost of designing the labels on a wine bottle
C. Advertising costs
D. Costs of delivering wine to customers
61.
Which of the following statements about the coefficient of determination (R2) is correct?
A.
R2 is a measure of economic plausibility.
B.
The higher the R2, the more confident we are when using a regression model to predict costs.
C.
R2 is a measure of data accuracy.
D.
R2 is a useful measure only for simple regressions.
62.
The results of the regression analysis to estimate delivery costs are as follows:
Which of the following statements represent a valid conclusion based on the above regression analysis output?
A. 54.4% of transportation cost can be explained by the number of cargos.

B. The F-statistic is considered significant; therefore, the relationship in the regression is unlikely to happen by chance.
C. The p-value associated with the intercept suggests that the delivery costs are entirely variable.
D. Given the t-statistic, number of cargos is a poor cost driver of delivery cost.
63.
Which of the following is an appropriate cost equation based on the above regression output?
A.
Delivery costs = $366.39 + $0.58 X1, where X1 is the number of cargos.
B.
C.
D.
64.
The following is an extract of a cost report for Big Whale Car Wash for the six months from June to November. Management considers
the activities in these six months as within the relevant range for the purpose of cost estimation.
The car washing labour cost is a:
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. Semi-variable cost.
65.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
66.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
67. Time and motion studies' refers to:

A. the process in which managers use their judgment to estimate the time it takes to carry out each individual work task, in
order to estimate cost.
B. the process in which employees complete timesheets each day; the timesheets then form the basis for cost estimation.
C. the process in which employees are observed when they undertake work tasks; these observations are then used to
estimate cost.
D. the process in which the cost of work tasks are compared over time and across different divisions.
68. When a manager notices an outlier during the cost estimation process, the appropriate response is to:
A. no response is required, unless multiple outliers are observed.
B. attempt to identify the reasons for the outlier.
C. divide the outlier by the standard deviation, before including the outlier in the regression model
D. re-collect all the data, as an outlier indicates that the data has been corrupted.
69. An activity or factor that causes costs to be incurred is known as a

A. cost prediction.
B. cost estimation.
C. cost driver.
D. cost behaviour.
70. The main reason for analysing cost behaviour is to

A. provide estimates of cost behaviour.
B. provide estimates for cost predictions.
C. provide a timeframe for analysing cost behaviour.
D. provide estimates of cost behaviour for cost predictions.
71. When estimating cost behaviours, the appropriateness of the drivers can be tested by measuring the strength of the
relationship between
A. past costs and their selected cost driver.
B. past costs and future costs.
C. past costs and predicted costs.
D. predicted costs and their selected driver.
72. To test the significance of a result using the regression equation as a whole and to assess that the result is not due to
random factors, management would consider the result of the
A. F-statistic.
B.
adjusted R2.
C. p-value.
D. co-efficient.
73.
Truweight Ltd has introduced a new line of weight machines for the catering industry which has required additional steps in the
production line. During the first two months of production the labour time for the weight machines was as follows:
The learning curve percentage is
A. 10 per cent.
B. 90 per cent.
C. 100 per cent.
D. 110 per cent.
74.
The average labour time per unit for February was
A. 1800 hours.
B. 100 hours.
C. 90 hours.
D. 80 hours.
75. Define the term relevant range' and explain its importance to understanding cost behaviour.
76. Compare and contrast the following types of costs:

i. Variable and step-variable
ii. Fixed and step-fixed
77. Distinguish between least squares regression (simple) and multiple regression as cost estimation methods.
78. Describe how the learning effect will affect cost prediction.
79.
The results of the regression analysis to estimate the operation costs of the polishing machine ('polishing cost per month') are as
follows:
Interpret the above regression output, and construct a regression equation to describe the relationship between polishing costs per
month and number of batches. Explain how confident you are with the cost equation in estimating future polishing costs.
80. Explain why many businesses are finding that more and more of their costs no longer vary directly with the volume of
production.
81. Units produced 12 000 15 000

Direct materials $36 000 $45 000
Based on the above data, the direct material costs for producing 7000 units are $21 000.
True False

Based on the above data, at the production level of 10 000 units, the fixed costs per unit are $5 per unit and if the firm
produced 8000 units the fixed cost per unit would remain constant at $5.
True False
83. Relevant range is only important when determining fixed costs.

True False
84. Research and development costs are an example of discretionary costs.

True False
85. If the cost of a complaints department is driven by the number of calls taken, the calls are said to be the dependent
variable.
True False
86. Economic plausibility is one of the criteria used to evaluate a particular regression line.
True False
87. Regardless of the approach taken to cost estimation, data collection will affect how good' the estimation is.
True False
88. Regression analysis is a superior statistical method to the highlow method because it utilises all data when
determining the line of best fit.
True False
89. A scatter diagram is most useful in providing insight into whether there is a relationship between a cost and a level of
activity.
True False
90. Assume the costs of a service department are driven by the number of service orders and the equation for calculating
the costs of a service department is y = $5000 + $3x. The cost of the department if there were 6000 orders would be $25
000.
True False
91. The relationship between a cost and the level of activity is known as the cost behaviour.
True False
92. Direct labour hours would be described as a volume-based cost driver for a clothing manufacturer.
True False
93. Activity based costing is a traditional approach to costing that has focused on analysing cost behaviour.
True False
Chapter 03 Testbank Key
1. The relationship between cost and activity is called:

A. cost prediction.
B. cost behaviour.
C. cost analysis.
D. cost approximation.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.01 Explain the relationships between cost estimation, cost behaviour and cost prediction
2. Forecasting a cost at a particular level of activity is called:

A. cost estimation.
B. cost prediction.
C. cost behaviour.
D. cost functions.
AACSB: Reflective
Difficulty: Easy
3. A cost that has both a fixed and variable component is called a:

A. step-fixed cost.
B. step-variable cost.
D. discretionary cost.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.05 Define and analyse the behaviour of the following types of costs: variable, fixed, step-fixed, semivariable (or mixed) and
curvilinear
4. A cost that remains unchanged in total as the activity level (or cost driver) changes is called a:
A. fixed cost.
B. variable cost.
C. step-fixed cost.
AACSB: Reflective
Difficulty: Easy
curvilinear
5. A cost that changes in total in direct proportion to a change in the cost driver is a:
A. variable cost.
B. fixed cost.
AACSB: Reflective
Difficulty: Easy
curvilinear
6.
A manufacturer plans to increase production within the relevant range of activity. What behaviour can the company expect for each of
the following?
Fixed cost per unit
Variable cost per unit
A.
No change
Increase
B.
Increase
No change
C.
Decrease
Increase
D.
Decrease
No change
AACSB: Analytical
Difficulty: Medium
curvilinear
7. Variable cost per unit:

A. increases in direct proportion to changes in the cost driver.
B. decreases in direct proportion to changes in the cost driver.
C. remains unchanged as the level of the cost driver changes.
D. increases, but not in direct proportion to changes in the cost driver.
AACSB: Reflective
Difficulty: Easy
curvilinear
8. Fixed costs per unit:

A. is unrelated to activity levels.
B. change as activity varies.
C. remain unchanged as activity level changes.
AACSB: Reflective
Difficulty: Easy
curvilinear
9. Costs that remain fixed over wide ranges of activity but jump to a different amount outside that range are called:
A. step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
AACSB: Reflective
Difficulty: Easy
curvilinear
10. The fixed costs per unit are $10 when a company makes 10 000 units. What are the per unit fixed costs when 12 500
units are produced?
A. $6.00
B. $12.00
C. $10.00
D. $ 8.00
AACSB: Analytical
Difficulty: Medium
curvilinear
11. The variable costs per unit are $4 when a company makes 10 000 units. What are the per unit variable costs when
8000 units are produced?
A. $6.00
B. $4.00
C. $4.50
D. $5.00
AACSB: Analytical
Difficulty: Medium
curvilinear
12. Total costs are $140 000 when 10 000 units are made. Of this amount, variable costs are $4 per unit. What are the
total costs when 8000 units are produced?
A. $140 000
B. $136 000
C. $132 000
D. $124 000
AACSB: Analytical
Difficulty: Medium
curvilinear
13. Total costs are $80 000 when 8000 units are made. Of this amount, variable costs are $48 000. What are the total
costs when 10 000 units are produced?
A. $ 92 000
B. $ 98 000
C. $100 000
D. $108 000
AACSB: Analytical
Difficulty: Medium
curvilinear
14. Which per unit cost does the slope of the total cost line represent?
A. Fixed
B. Variable
C. Semivariable
D. Step-variable
AACSB: Analytical
Difficulty: Medium
curvilinear
15. The level of activity within which fixed costs remain unchanged is called the:
A. extreme range.
B. relevant range.
C. activity range.
D. relevant range AND activity range.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.06 Explain the importance of the relevant range when using a cost behaviour pattern for cost prediction
16. The relevant range is that range of activity where:

A. management may not find it important to concern itself.
B. management does not expect the firm to operate.
C. fixed costs remain unchanged.
D. the expected costs exceed the benefits from the activity.
AACSB: Reflective
Difficulty: Easy
17. Within the relevant range of activity, costs:

A. can be estimated with reasonable accuracy.
B. exhibit decreasing marginal cost patterns.
C. exhibit increasing marginal cost patterns.
AACSB: Analytical
Difficulty: Medium
18.
As a firm begins to operate outside the relevant range, the accuracy of cost estimates for fixed and variable costs:
Fixed
Variable
A.
Increase
Increase
B.
Increase
Decrease
C.
Decrease
Decrease
D. Do not change
AACSB: Analytical
Difficulty: Medium
19. Which of the following describes a cost-estimation method that involves a careful examination of the ledger accounts?
B. Visual fit
C. Account classification
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.08 Describe the following approaches to cost estimation: managerial judgment (including account classification), the engineering
method, and quantitative analysis (including highlow, and simple and multiple regression)
20. Which of the following describes a method of cost estimation in which a cost line is drawn through a scatter diagram to
help the analyst visualise the relationship between cost and activity?
B. Highlow
C. Visual fit
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.09 Estimate cost functions using the highlow method and regression analysis
21. Within the relevant range, a curvilinear cost function can be graphed as a:
A. straight line.
B. set of straight lines.
C. solid line.
D. curved line.
AACSB: Reflective
Difficulty: Easy
curvilinear
22. The method of cost estimation that fits a cost line between two data points is:
B. highlow.
D. multiple regression.
AACSB: Reflective
Difficulty: Easy
23. The method of cost estimation that minimises the sum of the squared deviations between the cost line and the data
points is:
B. visual fit.
AACSB: Reflective
Difficulty: Easy
24. In regression analysis, the variable that is being predicted is:

A. the independent variable.
B. the dependent variable.
C. the explanatory variable.
D. the dependent variable AND the explanatory variable.
AACSB: Reflective
Difficulty: Easy
in September and in October they paid $195 for 3500 copies. Determine Technical Engineering's variable cost per copy.
A. $0.06
B. $0.04
C. $0.03
D. $0.01
AACSB: Analytical
Difficulty: Medium
in September and in October they paid $195 for 3500 copies. Determine Technical's monthly fixed fee.
A. $138
B. $ 90
C. $ 66
D. $ 55
AACSB: Analytical
Difficulty: Medium
fee each month in addition to a charge per copy. Technical made 2400 copies and paid a total of $162 in rent in
September and in October they paid $195 for 3500 copies. Determine the total amount that would be paid for 1800
copies.
A. $120
B. $138
C. $144
D. $163
AACSB: Analytical
Difficulty: Hard
$13.00 per unit. Determine the cost formula that expresses the behaviour of Yang's total costs:
A.
Y $60 000 + $5X
B.
Y $20 000 + $13X
C.
Y $45 000 + $4X
D.
Y $40 000 + $9X
AACSB: Analytical
Difficulty: Hard
$13.00 per unit. Determine their total cost if Yang produces 10 000 units.
A. $130 000
B. $125 000
C. $110 000
D. $100 000
AACSB: Analytical
Difficulty: Hard
30.
Using the highlow method, estimate the variable cost per machine hour.
A. $8.38
B. $7.44
C. $5.50
AACSB: Analytical
Difficulty: Medium
31.
Using the highlow method, determine the cost formula that expresses the cost behaviour of the company's electricity costs.
A.
Y = $3735 + $6.20X
B.
Y = $1664 + $8.38X
C.
Y = $4760 + $5.00X
D.
Y = $4400 + $5.50X
AACSB: Analytical
Difficulty: Medium
32. A regression model in which more than one independent variable is used to predict the dependent variable is called a:
A. simple regression model.
B. multiple regression model.
C. dependent model.
D. B and C
AACSB: Reflective
Difficulty: Easy
33. Which of the following are problems frequently encountered in data collection?
A. Outliers
B. Missing data
C. Mismatched time periods
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.10 Explain some of the issues that arise in estimating cost functions in practice, including data collection problems, learning curve
effects, and costbenefit evaluations
34. Which of the following statements is true concerning cost estimation methods?
A. Cost behaviour is always assumed to depend on more than one cost driver.
B. Cost behaviour patterns are curvilinear.
C. Costs and benefits of using sophisticated and costly cost-estimation methods must be evaluated.
D. Cost behaviour is always assumed to depend on more than one cost driver AND costs and benefits of using
sophisticated and costly cost-estimation methods must be evaluated.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.03 Introduce the unit, batch, product and facility level hierarchy of costs and cost drivers
35. If a very short time period, such as a week, is used for a regression study, rather than a longer period such as a
month:
A. coping with inflation becomes more difficult.
B. accounting measurement errors are more likely.
C. time and motion studies will be required to supplement the cost and volume data.
D. coping with inflation becomes more difficult AND time and motion studies will be required to supplement the cost and
volume data.
AACSB: Reflective
Difficulty: Medium
36. In assessing the costs and benefits of using a particular cost driver, which of the following must be taken into account?
i. The availability of cost data.
ii. The time frame for analysing the cost behaviour.
iii. Whether it is a fixed or variable cost.
A. i
B. ii
C. i and ii
D. i and iii
AACSB: Reflective
Difficulty: Medium
37. In activity-based costing analysis, the manufacturing manager's salary is classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Analytical
Difficulty: Medium
38. In activity-based costing analysis, direct materials are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Analytical
Difficulty: Easy
39. In activity-based costing analysis, set-up costs are classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Reflective
Difficulty: Easy
40. In activity-based costing analysis, package design is classified as a:

A. unit cost.
B. batch cost.
C. product cost.
D. facility cost.
AACSB: Reflective
Difficulty: Medium
41. In which approach to costs estimation, is task analysis used?

A. Account classification
B. Engineering method
C. Highlow method
AACSB: Reflective
Difficulty: Easy
42. In which approach to cost estimation, is least squares used?

A. Engineering method
B. Highlow method
C. Regression analysis
AACSB: Reflective
Difficulty: Easy
43. Which of the following statements are assumptions underlying cost estimation?
A. Cost behaviour depends on one or a few activities.
B. All costs are production driven.
C. There is a strong correlation between the cost and the cost driver.
D. Cost behaviour depends on one or a few activities AND there is a strong correlation between the cost and the cost
driver.
AACSB: Reflective
Difficulty: Medium
44. Which of the following are valid reasons for a firm not using objective techniques?
i. Data may not be available.
ii. Cost estimates are sufficiently accurate for the firm's purposes.
iii. Accountants may be ignorant of appropriate techniques.
iv. The firm gives low priority to cost estimation.
A. i and ii
B. i, ii and iii
C. ii, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Medium
45. Which of the following are important in estimating the cost of machine maintenance?
A. The relevant range
B. The time period selected
C. The cost driver selected
AACSB: Reflective
Difficulty: Medium
46. When using regression analysis to determine estimated costs, what criteria are necessary to evaluate a particular
regression line?
A. Closeness to pre-analysis guess
B. Goodness of fit
C. Coefficient of determination
D. Goodness of fit AND coefficient of determination
AACSB: Reflective
Difficulty: Medium
47.
In the regression formula Y = a + bX, b is:
A. the slope of the line.

B. the cost driver.
C. the intercept on the vertical axis.
D. the dependent variable.
AACSB: Reflective
Difficulty: Easy
48. Which of the following statements is most complete and correct?

A. Activity-based costing uses non-volume-based cost drivers only.
B. Activity-based costing uses volume-based cost drivers.
C. Activity-based costing recognises that both volume-based and non-volume-based cost drivers may be appropriate.
D. None of the given answers.
AACSB: Reflective
Difficulty: Easy
49. For a fixed cost, as volume increases:

A. the cost behaviour depends on the type of fixed cost involved.
B. total fixed costs remain constant and fixed costs per unit increase.
C. both total fixed costs and fixed costs per unit remain constant.
D. total fixed costs remain constant and fixed costs per unit decrease.
AACSB: Reflective
Difficulty: Medium
curvilinear
50. Consider the following equation:

Total cost = fixed costs + (cost driver rate cost driver quantity)
If a cost can be estimated using this equation, it is probably a:
A. fixed cost.
B. variable cost.
C. mixed or semivariable cost.
D. non-linear cost.
AACSB: Reflective
Difficulty: Medium
curvilinear
51.
Lawson Lumber uses the highlow method to estimate electricity cost, which varies in relation to machine hours. Based on the following
data, how would the cost function be stated if X' is the number of machine hours?
A.
$525 + $0.35 X
B.
$300 + $0.50 X
C.
$500 + $0.50 X
D.
$470 + $0.35 X
AACSB: Analytical
Difficulty: Medium
52. For a manufacturer of kitchens, which of the following would you expect to be a fixed cost?
A. Hourly labour cost of employee installing kitchens
C. Adhesive for benchtops
AACSB: Reflective
Difficulty: Medium
curvilinear
53. For a manufacturer of kitchens, which of the following would you expect to be a direct cost?
A. Hourly labour cost of employees installing kitchens
C. Hourly labour cost of employees installing kitchens AND material for kitchen benchtops
AACSB: Reflective
Difficulty: Medium
curvilinear
54. Which of the following increases as volume of activity decreases?

A. Fixed cost per unit
B. Variable cost per unit
C. Total fixed cost
D. Total variable cost
AACSB: Reflective
Difficulty: Medium
curvilinear
55. Which of the following is not an example of a cost driver for a delivery truck?
A. Location of customers
B. Depreciation
C. Litres of fuel used
D. Number of customers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 3.02 Explain the concept of cost drivers, including volume-based and non-volume-based cost drivers
56. Which of the following is an example of an engineered cost?

A. Direct materials
B. Advertising
C. Insurance
D. Factory supervisor's salary
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.07 Define and provide examples of engineered, committed and discretionary costs
57. Which term describes a cost resulting from the existence of the organisational structure and premises used by the
firm?
A. Discretionary
B. Fixed
C. Committed
D. Engineered
AACSB: Reflective
Difficulty: Easy
58. Which of the following would always be a mixed (semivariable) cost for a firm?
A. Raw materials because it includes direct and indirect materials
B. Direct labour
C. Manufacturing overhead
D. Raw materials AND manufacturing overhead
AACSB: Reflective
Difficulty: Medium
curvilinear
59. An example of a discretionary cost for a firm that manufactures furniture is:
A. direct material.
B. advertising.
C. labour.
D. glue and nails.
AACSB: Reflective
Difficulty: Medium
60. Eldervale Winery is a producer of premium wine. Which of the following is an example of a unit level cost?
A. The cost of the labels on each bottle of wine
B. The cost of designing the labels on a wine bottle
C. Advertising costs
D. Costs of delivering wine to customers
AACSB: Reflective
Difficulty: Easy
61.
Which of the following statements about the coefficient of determination (R2) is correct?
A.
R2 is a measure of economic plausibility.
B.
The higher the R2, the more confident we are when using a regression model to predict costs.
C.
R2 is a measure of data accuracy.
D.
R2 is a useful measure only for simple regressions.
AACSB: Reflective
Difficulty: Easy
62.
Which of the following statements represent a valid conclusion based on the above regression analysis output?
A. 54.4% of transportation cost can be explained by the number of cargos.

B. The F-statistic is considered significant; therefore, the relationship in the regression is unlikely to happen by chance.
C. The p-value associated with the intercept suggests that the delivery costs are entirely variable.
D. Given the t-statistic, number of cargos is a poor cost driver of delivery cost.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 3.11 After studying the appendix, use Microsoft Excel to estimate and evaluate a regression equation
63.
Which of the following is an appropriate cost equation based on the above regression output?
A.
B.
C.
D.
AACSB: Reflective
Difficulty: Medium
64.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. Semi-variable cost.
AACSB: Analytical
Difficulty: Medium
curvilinear
65.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
AACSB: Analytical
Difficulty: Medium
curvilinear
66.
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semi-variable.
AACSB: Analytical
Difficulty: Medium
curvilinear
67. Time and motion studies' refers to:

A. the process in which managers use their judgment to estimate the time it takes to carry out each individual work task, in
order to estimate cost.
B. the process in which employees complete timesheets each day; the timesheets then form the basis for cost estimation.
C. the process in which employees are observed when they undertake work tasks; these observations are then used to
estimate cost.
D. the process in which the cost of work tasks are compared over time and across different divisions.
AACSB: Reflective
Difficulty: Medium
68. When a manager notices an outlier during the cost estimation process, the appropriate response is to:
A. no response is required, unless multiple outliers are observed.
B. attempt to identify the reasons for the outlier.
C. divide the outlier by the standard deviation, before including the outlier in the regression model
D. re-collect all the data, as an outlier indicates that the data has been corrupted.
AACSB: Reflective
Difficulty: Medium
69. An activity or factor that causes costs to be incurred is known as a

A. cost prediction.
B. cost estimation.
C. cost driver.
D. cost behaviour.
AACSB: Reflective
Difficulty: Easy
70. The main reason for analysing cost behaviour is to

A. provide estimates of cost behaviour.
B. provide estimates for cost predictions.
C. provide a timeframe for analysing cost behaviour.
D. provide estimates of cost behaviour for cost predictions.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 3.04 Describe the different roles that cost driver analysis can play in management accounting
71. When estimating cost behaviours, the appropriateness of the drivers can be tested by measuring the strength of the
relationship between
A. past costs and their selected cost driver.
B. past costs and future costs.
C. past costs and predicted costs.
D. predicted costs and their selected driver.
AACSB: Reflective
Difficulty: Medium
72. To test the significance of a result using the regression equation as a whole and to assess that the result is not due to
random factors, management would consider the result of the
A. F-statistic.
B.
adjusted R2.
C. p-value.
D. co-efficient.
AACSB: Reflective
Difficulty: Medium
73.
The learning curve percentage is
A. 10 per cent.
B. 90 per cent.
C. 100 per cent.
D. 110 per cent.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cost behaviour
74.
The average labour time per unit for February was
A. 1800 hours.
B. 100 hours.
C. 90 hours.
D. 80 hours.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cost behaviour
75. Define the term relevant range' and explain its importance to understanding cost behaviour.
The relevant range is the range of activity within which management expects the organisation to operate. This can be
based on experience and/or sales projections.
The reason that this term is important is because management need not concern itself or waste precious time with
extremely high or low levels of activity that are unlikely to occur. Statistical measures such as regression also limit the
scope to an organisation's relevant range.
AACSB: Communication
Difficulty: Medium
76. Compare and contrast the following types of costs:

i. Variable and step-variable
ii. Fixed and step-fixed
i. A variable cost changes in total in direct proportion to the change in activity level or cost drivers (direct material). A stepvariable cost is nearly variable, but it increases in small steps, instead of continuously (e.g. additional direct labour).
ii. A fixed cost remains unchanged as the activity level varies in total (e.g. rent). A step-fixed cost remains fixed over a
sizeable range of activity, but steps up for activities outside that range (e.g. the salaries of hiring additional employees).
Difficulty: Easy
curvilinear
77. Distinguish between least squares regression (simple) and multiple regression as cost estimation methods.
In the least squares regression (LSR) method, the cost line is positioned to minimise the sum of the squared deviations between the
cost line and the data points. The cost line fit to the data using LSR is called a regression line. The statistical equation for this line is
represented by the formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the total cost (dependent
variable). The intercept of the line on the vertical axis is denoted as a and the slope of the line is denoted as b. The fixed cost
component a and b is an estimate of the variable cost per unit of activity.
The multiple regression line has all the same properties as the simple LSR line, but more than one independent variable is taken into
consideration. The equation is similar and looks like this: Y = a + b1X1 +b2X2. The use of more explanatory variables can explain more of
the cost behaviour than simple regression.
Difficulty: Easy
78. Describe how the learning effect will affect cost prediction.
In many production processes, production efficiency increases with experience. For example, as cumulative production
output increases, the average labour time required per unit declines. Therefore, as a manufacturer gains experience with a
product, estimates of the cost of direct labour should be adjusted downwards to consider this learning effect.
Difficulty: Medium
79.
The results of the regression analysis to estimate the operation costs of the polishing machine ('polishing cost per month') are as
follows:
Interpret the above regression output, and construct a regression equation to describe the relationship between polishing costs per
month and number of batches. Explain how confident you are with the cost equation in estimating future polishing costs.
The cost equation is:

Polishing costs = $298.764+ $7.226X1, where X1 is the number of batches.
When interpreting the regression output, the student should discuss the following points:
The F-statistic is significant (0.024) so the relationships depicted by the model did not happen by chance.
The p-value for number of batches is less than the benchmark 0.05 so the number of batches is a good cost driver.
However, adjusted R square is not high, suggesting that only 70% of variations can be explained by this cost model. The
sample size is also very small, with only 6 observations. (Note: small sample size means we should focus on adjusted R
square not the regular' R square.). So overall, one should not be too confident with this model.
AACSB: Reflective
Difficulty: Hard
80. Explain why many businesses are finding that more and more of their costs no longer vary directly with the volume of
production.
One reason is that, as organisations become more automated, they tend to rely more on equipment and less on direct
labour when producing their products. Unlike labour costs, equipment costs, such as depreciation, maintenance and
insurance, do not vary with the volume of production. In the electronics industry, for example, small electronic components
were once placed onto circuit boards, wired and soldered by hand. Now, pick-and-place robots and auto-insertion
machines place electronic components on circuit boards with incredible speed and precision. Wash-and-dry machines
eliminate contaminants and wave solder machines solder the connections. A large part of the manufacturing process is
computerised, and much of the labour force is now regarded as indirect labour, being involved in computer programming
and maintenance rather than direct production activities. Many service organisations have also replaced most of their
clerical and data processing functions through IT developments. Depreciation, maintenance and upgrades for the
computerised equipment and the IT infrastructure are regarded as committed fixed costs, as are the costs of the labour
force.
In addition, in many industries, unions negotiate enterprise agreements that result in a relatively stable workforce.
Management is less able to adjust the numbers of employees when activity levels change. In recent times many
organisations have adapted their practices to increase the responsiveness of their direct labour costs to changes in the
level of activity.
Thus, changes in the commercial environment can have a major impact on cost behaviour. It is vital that management
accountants who work in these modern environments are fully aware of the impact of these changes on cost estimation.
More recent costing systems, such as activity-based costing, use both production volume and non-volume cost drivers.
Difficulty: Medium

Based on the above data, the direct material costs for producing 7000 units are $21 000.
TRUE
AACSB: Analytical
Difficulty: Easy
curvilinear

Based on the above data, at the production level of 10 000 units, the fixed costs per unit are $5 per unit and if the firm
produced 8000 units the fixed cost per unit would remain constant at $5.
FALSE
AACSB: Analytical
Difficulty: Easy
curvilinear
83. Relevant range is only important when determining fixed costs.

FALSE
AACSB: Reflective
Difficulty: Easy
84. Research and development costs are an example of discretionary costs.

TRUE
AACSB: Reflective
Difficulty: Easy
85. If the cost of a complaints department is driven by the number of calls taken, the calls are said to be the dependent
variable.
FALSE
AACSB: Reflective
Difficulty: Easy
86. Economic plausibility is one of the criteria used to evaluate a particular regression line.
TRUE
AACSB: Reflective
Difficulty: Easy
87. Regardless of the approach taken to cost estimation, data collection will affect how good' the estimation is.
TRUE
AACSB: Reflective
Difficulty: Easy
88. Regression analysis is a superior statistical method to the highlow method because it utilises all data when
determining the line of best fit.
TRUE
AACSB: Reflective
Difficulty: Easy
89. A scatter diagram is most useful in providing insight into whether there is a relationship between a cost and a level of
activity.
TRUE
AACSB: Reflective
Difficulty: Easy
90. Assume the costs of a service department are driven by the number of service orders and the equation for calculating
the costs of a service department is y = $5000 + $3x. The cost of the department if there were 6000 orders would be $25
000.
FALSE
AACSB: Analytical
Difficulty: Easy
91. The relationship between a cost and the level of activity is known as the cost behaviour.
TRUE
AACSB: Reflective
Difficulty: Easy
92. Direct labour hours would be described as a volume-based cost driver for a clothing manufacturer.
TRUE
AACSB: Reflective
Difficulty: Easy
93. Activity based costing is a traditional approach to costing that has focused on analysing cost behaviour.
FALSE
AACSB: Reflective
Difficulty: Easy
Chapter 03 Testbank Summary

Category
# of Q
uestion
s
AACSB: Analytic
AACSB: Analytical
24
AACSB: Reflective
62
Difficulty: Easy
46
Difficulty: Hard
Difficulty: Medium
43
Learning Objective: 3.05 Define and analyse the behaviour of the following types of costs: variable, fixed, step-fixed, semiv
ariable (or mixed) and curvilinear
25
Learning Objective: 3.06 Explain the importance of the relevant range when using a cost behaviour pattern for cost predicti
on
Learning Objective: 3.08 Describe the following approaches to cost estimation: managerial judgment (including account cla
ssification), the engineering method, and quantitative analysis (including highlow, and simple and multiple regression)
23
Learning Objective: 3.10 Explain some of the issues that arise in estimating cost functions in practice, including data collect
ion problems, learning curve effects, and costbenefit evaluations
Learning Objective: 3.12 After studying the appendix, describe the impact of learning curve effects on the estimation of cost
behaviour

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Chapter 03 Testbank

2. Forecasting a cost at a particular level of activity is called:

3. A cost that has both a fixed and variable component is called a:

Fixed cost per unit

Variable cost per unit

7. Variable cost per unit:

8. Fixed costs per unit:

16. The relevant range is that range of activity where:

17. Within the relevant range of activity, costs:

24. In regression analysis, the variable that is being predicted is:

37. In activity-based costing analysis, the manufacturing manager's salary is classified as a:

38. In activity-based costing analysis, direct materials are classified as a:

39. In activity-based costing analysis, set-up costs are classified as a:

40. In activity-based costing analysis, package design is classified as a:

41. In which approach to costs estimation, is task analysis used?

42. In which approach to cost estimation, is least squares used?

A. the slope of the line.

48. Which of the following statements is most complete and correct?

49. For a fixed cost, as volume increases:

50. Consider the following equation:

54. Which of the following increases as volume of activity decreases?

56. Which of the following is an example of an engineered cost?

A. 54.4% of transportation cost can be explained by the number of cargos.

The car washing labour cost is a:

The car washing labour cost is a:

The car washing labour cost is a:

67. Time and motion studies' refers to:

69. An activity or factor that causes costs to be incurred is known as a

70. The main reason for analysing cost behaviour is to

The learning curve percentage is

The average labour time per unit for February was

76. Compare and contrast the following types of costs:

81. Units produced 12 000 15 000

82. Units produced 12 000 15 000

83. Relevant range is only important when determining fixed costs.

84. Research and development costs are an example of discretionary costs.

Chapter 03 Testbank Key

1. The relationship between cost and activity is called:

2. Forecasting a cost at a particular level of activity is called:

3. A cost that has both a fixed and variable component is called a:

Fixed cost per unit

Variable cost per unit

7. Variable cost per unit:

8. Fixed costs per unit:

16. The relevant range is that range of activity where:

17. Within the relevant range of activity, costs:

24. In regression analysis, the variable that is being predicted is:

37. In activity-based costing analysis, the manufacturing manager's salary is classified as a:

38. In activity-based costing analysis, direct materials are classified as a:

39. In activity-based costing analysis, set-up costs are classified as a:

40. In activity-based costing analysis, package design is classified as a:

41. In which approach to costs estimation, is task analysis used?

42. In which approach to cost estimation, is least squares used?

A. the slope of the line.

48. Which of the following statements is most complete and correct?

49. For a fixed cost, as volume increases:

50. Consider the following equation:

54. Which of the following increases as volume of activity decreases?

56. Which of the following is an example of an engineered cost?

A. 54.4% of transportation cost can be explained by the number of cargos.

The car washing labour cost is a:

The car washing labour cost is a:

The car washing labour cost is a: