# CHAPTER 10: DETERMINING HOW COSTS BEHAVE

TRUE/FALSE

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 Difficulty: 1 Objective: 1

2. All cost functions are linear.

Answer: False Difficulty: 1 Objective: 1
All cost functions are not linear, but for cost-behavior estimation we assume some are
within a relevant range.
.
3. y = a + bX represents the general form of the linear cost function.

Answer: True Difficulty: 1 Objective: 2

4. A linear cost function can only represent fixed cost behavior.

Answer: False Difficulty: 1 Objective: 2
A linear cost function can represent fixed, mixed, or variable cost behavior.

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

Answer: False Difficulty: 1 Objective: 2
In a graphical display of a cost function, the constant or the y-intercept represents the
amount of fixed costs.

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

Answer: False Difficulty: 2 Objective: 2
The longer the time horizon, the more likely that a cost will be variable.

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

Answer: True Difficulty: 2 Objective: 2

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

Answer: False Difficulty: 1 Objective: 2
A linear function can be graphed if the slope coefficient and the intercept are known.

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

Answer: True Difficulty: 1 Objective: 2

Chapter 10 Page 1

10. It can be inferred that when there is a high correlation between two variables, one is the
cause of the other.

Answer: False Difficulty: 2 Objective: 2
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.

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

Answer: True Difficulty: 2 Objective: 2

12. 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 Difficulty: 1 Objective: 3
The conference method of cost estimation is based on opinions from various
departments and is quick and of low cost to apply.

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

Answer: True Difficulty: 1 Objective: 3

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

Answer: False Difficulty: 1 Objective: 3
Quantitative analysis methods use a formal mathematical method to identify cause-and-
effect relationships among past data observations.

15. 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 Difficulty: 2 Objective: 4

16. An example of time-series data is to compile maintenance costs of twelve different
manufacturing plants incurred during 20x3.

Answer: False Difficulty: 1 Objective: 4
An example of cross-sectional data is to compile maintenance costs of twelve different
manufacturing plants incurred during 20x3.

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

Answer: True Difficulty: 2 Objective: 4

Chapter 10 Page 2

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

Answer: False Difficulty: 1 Objective: 4
The most common forms of quantitative analysis are the high-low method and
regression analysis.

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

Answer: False Difficulty: 1 Objective: 4
The high-low method relies on only two observations to estimate a linear cost function.

20. 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 Difficulty: 2 Objective: 4
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.

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

Answer: False Difficulty: 2 Objective: 4
A positive slope of a regression line indicates that costs are higher for higher values of
the cost driver.

22. The high-low method is more accurate than the regression method of estimating a cost
function.

Answer: False Difficulty: 1 Objective: 4
The regression method is more accurate than the high-low method since it uses all
available data to estimate a cost function.

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

Answer: True Difficulty: 3 Objective: 4

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

Answer: True Difficulty: 2 Objective: 5

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

Answer: True Difficulty: 2 Objective: 5

Chapter 10 Page 3

30 or higher indicates a goodness of fit. X = 80 minutes 38.90 = 90. Answer: True Difficulty: 1 Objective: 7 37. then the second unit will take only 90 minutes to manufacture. 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. Answer: True Difficulty: 1 Objective: 8 40.36. Misinterpretation of data can arise when fixed costs are reported on a per unit basis.30 indicates a goodness of fit. The coefficient of determination (r2) measures the percentage of variation in Y explained by X (the independent variable). Generally a coefficient of determination (r2) that is less than 0. Inflation is a fact. and therefore its influence should not be removed from the data. Data collection problems can arise when data is recorded manually rather than electronically. 42. (100 + X)/2 = 90. Answer: True Difficulty: 2 Objective: 8 41. Answer: True Difficulty: 2 Objective: 7 39. then the second unit will take only 90 minutes to manufacture. 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. Answer: False Difficulty: 2 Objective: 8 Inflation can distort data that are compared over time so purely inflationary effects should be removed. Answer: False Difficulty: 3 Objective: 7 100 x . Answer: True Difficulty: 1 Objective: A 43. Answer: False Difficulty: 2 Objective: A 2 Generally a coefficient of determination (r ) that is 0. It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance. Chapter 10 Page 5 .

80 + 400X b. A fixed cost within a relevant range Answer: b Difficulty: 2 Objective: 2 48. c.00 + 400X Answer: b Difficulty: 2 Objective: 2 Chapter 10 Page 6 . For January.000X d. Which of the following statements related to assumptions about estimating linear cost functions is FALSE? a. Eight employees are paid \$12 per hour and the rest are salaried employees paid \$3. Which of the following does NOT represent a cause-and-effect relationship? a. \$. y = 1.MULTIPLE CHOICE 44. y = 2. The assembly desk and tools cost \$400.65 for the wooden frame.80 for assembly. How would total costs of personnel be classified? a.000 frames are expected to be produced in the coming year. the correlation may be due to random chance. y = 400 +1. Mixed c. A company is charged 40 cents for each brochure printed and mailed. A cost object is anything for which a separate measurement of costs is desired.80X c. b. they both may be affected by a third variable. 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. 1. y = 1.000 a month. A high correlation between two variables ensures that a cause-and-effect relationship exists.20 + 1. Answer: c Difficulty: 3 Objective: 2 47.35 for the glass. b. c. Material costs increase as the number of units produced increases. Dougherty Company employs 20 individuals. d. A variable cost within a relevant range d. and \$0. A linear function approximates cost behavior within the relevant range of the cost driver. d. What cost function best represents these costs? a. all of the above are true. A high correlation between two variables s and t indicates that a. Variations in a single cost driver explain variations in total costs. the cost components of a picture frame include \$0. d. s may cause t. or t may cause s. Utility costs increase at the same time that insurance costs increase. c. Answer: d Difficulty: 2 Objective: 2 46. Answer: d Difficulty: 2 Objective: 1 45. b. Variable b.

using quantitative methods that can be very time consuming and costly. The cost function y = 8. c. y=a Answer: c Difficulty: 2 Objective: 2 53. b. is a straight line. b. d. will intersect the y-axis at 4. d. based on analysis and opinions gathered from various departments. Answer: d Difficulty: 2 Objective: 2 50. y = a + bX c. has an intercept of 5. b. c. d. b. using qualitative rather than quantitative analysis.000. mixed cost behaviors. b. by analyzing the relationship between inputs and outputs in physical terms. c. Which of the following is an equation of a variable cost function? a. The conference method estimates cost functions a. is a curved line. all of the above cost behaviors. represents a mixed cost. Answer: d Difficulty: 2 Objective: 3 54. variable cost behaviors. has a slope coefficient of 1. The industrial engineering method estimates cost functions a. y=b b. y = bX d. A linear cost function can represent a. represents a fixed cost.000 + 5X a. based on analysis and opinions gathered from various departments. c. d. fixed cost behaviors. Answer: c Difficulty: 2 Objective: 2 51.000. d. The cost function y = 1. Answer: a Difficulty: 2 Objective: 2 52. using time-and-motion studies. c.000 + 4X a. quickly while incurring little cost. has a slope coefficient of 8. Answer: b Difficulty: 2 Objective: 3 Chapter 10 Page 7 . by mathematically analyzing the relationship between inputs and outputs in physical terms.49.

fixed. Answer: b Difficulty: 1 Objective: 3 58. The account analysis method b. in a manner that cannot be usefully combined with any other cost estimation methods. The account analysis method estimates cost functions a. or mixed based on qualitative analysis. by classifying cost accounts as variable. The quantitative analysis method Answer: d Difficulty: 1 Objective: 3 Chapter 10 Page 8 . c. Answer: a Difficulty: 2 Objective: 3 56. which depend on the experience and judgment of the analyst for accuracy. based on analysis and opinions gathered from various departments. The conference method c. The industrial engineering method d. Which cost estimation method analyzes accounts in the subsidiary ledger as variable. b. Quantitative analysis methods estimate cost functions a. The quantitative analysis method Answer: a Difficulty: 1 Objective: 3 59. d. which is therefore seldom used. The account analysis method b. b. the industrial engineering method. d.55. Gathering cost information through observations and interviews from departments within an organization is known as a. c. Which cost estimation method uses a formal mathematical method to develop cost functions based on past data? a. b. d. using significant amounts of historical data. The conference method c. the conference method. the account analysis method. using time-and-motion studies. using the pooling of knowledge from each value chain function. the quantitative analysis method. or mixed using qualitative methods? a. at a high cost. c. Answer: c Difficulty: 2 Objective: 3 57. fixed. The industrial engineering method d.

\$12. Which cost estimation method may utilize time-and-motion studies to analyze the relationship between inputs and outputs in physical terms? a. The industrial engineering method b. If number of new hires is considered the cost driver. \$12. \$51.000 b. Total personnel department costs are \$160. The quantitative analysis method Answer: b Difficulty: 2 Objective: 3 Chapter 10 Page 9 . The quantitative analysis method Answer: c Difficulty: 1 Objective: 3 THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 61 THROUGH 63.000 Answer: a Difficulty: 2 Objective: 3 [30 / (30 + 270 + 100)] x \$160. \$20. Recently.000 = \$12. The conference method c. what amount of personnel costs will be allocated to Department A? a.60. opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs. what amount of personnel costs will be allocated to Department A? a. \$51. Department A B C Number of employees 30 270 100 The number of new hires 8 12 5 61.200 d.000 62. \$5.000 = \$51.200 d. Which cost estimation method is being used by Jordan Company? a. \$20.000 b.333 c. \$5. the cost of the personnel department has always been charged to production departments based upon number of employees.000. At the Jordan Company. The industrial engineering method d.000 Answer: c Difficulty: 2 Objective: 3 [8 / (8 + 12 + 5)] x \$160.200 63. The account analysis method d. The conference method c. The account analysis method b.333 c. If number of employees is considered the cost driver.

000 c. \$678.000 64.000 Cost of goods sold 400.000 Store manager's salary per year 70. \$18 b. Sales (2.000 d.000 66. \$227.000 = \$242.000 televisions) \$ 900. \$242.000 + \$157. The following information pertains to 20x3 operations. \$339 d.000 b.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 64 THROUGH 67.000 Operating costs per year 157.000 = \$218 per unit 65.000 units next year? a.000 Commissions (4% of sales) 36.000) 67.000 + \$36.000) / 2. \$799. What are the estimated total costs if Penny’s expects to sell 3. \$1. What were total fixed costs for 20x3? a. The industrial engineering method b. \$896. \$436.000 c.000 b. The quantitative analysis method Answer: c Difficulty: 2 Objective: 3 Chapter 10 Page 10 . What was the variable cost per unit sold for 20x3? a.000 Advertising and promotion per year 15. \$200 Answer: b Difficulty: 2 Objective: 3 (\$400.000 d. \$678. Penny’s TV and Appliance Store is a small company that has hired you to perform some management advisory services. Which cost estimation method is being used by Penny’s TV and Appliance Store? a.017. The conference method c. \$218 c.000 + \$15. The account analysis method d.000 = \$242.000 Answer: a Difficulty: 3 Objective: 3 \$896.000 + 218 (3.000 Answer: c Difficulty: 2 Objective: 3 \$70.

DCBA Answer: b Difficulty: 2 Objective: 4 72. d. 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. Answer: d Difficulty: 2 Objective: 4 Chapter 10 Page 11 . C D AB c. b. includes all of the above. 1 cost pool b. Answer: d Difficulty: 2 Objective: 4 70. should have an economically plausible relationship with the dependent variable. independent variable. is also referred to as the cost driver.68. D C AB b. c. may also be called the cost-allocation base if referring to an indirect cost. b. include all of the above. 3 cost pools d. 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. ADCB d. d. dependent variable. The cost to be predicted is referred to as the a. 4 cost pools Answer: c Difficulty: 2 Objective: 4 71. All individual cost items included in the dependent variable should a. Answer: b Difficulty: 2 Objective: 4 69. have the same cost driver. b. 2 cost pools c. c. have a cause-and-effect relationship with the independent variable. c. regression. The independent variable a. have an economically plausible relationship with the independent variable. d. cost driver.

b. all of the above. Collecting data on the dependent variable and the cost driver may include a. using the highest and lowest observation. of the residual term. of the slope coefficient. b. observing different entities during the same time period. c. Answer: b Difficulty: 2 Objective: 4 76. b. b. collecting data from different entities over the same period of time. b. Answer: b Difficulty: 3 Objective: 4 75. the cost-allocation base has been incorrectly identified. Answer: a Difficulty: 2 Objective: 4 Chapter 10 Page 12 . b. using a variety of time periods to measure the dependent variable. d. a negative relationship. c. A plot of data that results in one extreme observation MOST likely indicates that a. using a variety of time periods to measure the dependent variable. a weak relationship. Answer: a Difficulty: 2 Objective: 4 78. comparing information in different cost pools. d. an unusual event such as a plant shutdown occurred during that month. the two observations used are the high and low observations a. c. collecting data over a long period of time. Answer: d Difficulty: 2 Objective: 4 74. interviews with managers. c. of the dependent variables. observing different entities during the same time period. d. more than one cost pool should be used. d. comparing information in different cost pools.73. individual cost items do not have the same cost driver. b. a strong relationship. using the highest and lowest observation. a positive relationship. c. of the cost driver. c. d. A plot of data that results in bunched points with little slope generally indicates a. When using the high-low method. Answer: c Difficulty: 2 Objective: 4 77. Time-series data analysis includes a. Cross-sectional data analysis includes a.

Answer: c Difficulty: 3 Objective: 4 81. d. uses the constant to measure goodness of fit. is more accurate than the regression method. b. dependent variable. is simple to compute. DCBA Answer: d Difficulty: 2 Objective: 4 82. b. difference between the high and low observations of the dependent variables. the denominator of the equation that determines the slope is the a. Answer: d Difficulty: 3 Objective: 4 Chapter 10 Page 13 . 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. c. uses the residual term to measure goodness of fit. Answer: c Difficulty: 2 Objective: 4 80. is mathematical so it does not require an understanding of operations. measures the change in a dependent variable associated with one or more independent variables. ADCB d. b. d. calculates the slope coefficient using only two observed values within the relevant range. Regression analysis a. c. The high-low method a. c. independent variable. difference between the high and low observations of the cost driver.79. d. D C AB b. easily handles estimating the relationship between the dependent variable and two or more independent variables. When using the high-low method. C D AB c.

simple regression uses only one dependent variable and multiple regression uses more than one dependent variable. The slope of the line of regression is a.\$6.000 b. Simple regression differs from multiple regression in that a. Answer: a Difficulty: 2 Objective: 4 THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 85 THROUGH 87.000 Lowest observation of cost driver 240 \$ 6. the rate at which the dependent variable varies.000 Answer: a Difficulty: 2 Objective: 4 EITHER: Constant = \$10.000 d.05 c. \$6. whereas simple regression only uses simple data.800)/(400 . c.000 . the level of total fixed costs. Answer: c Difficulty: 2 Objective: 4 84. \$28. simple regression is limited to the use of only the dependent variables and multiple regression can use both dependent and independent variables. The Hunter Company uses the high-low method to estimate the cost function.(\$20.240) = \$20 86.800 85.00 x 400 hours) = \$2. \$10.800 . b.00 d. What is the slope coefficient per machine-hour? a.000 Chapter 10 Page 14 . \$25. d. The information for 20x3 is provided below: Machine-hours Labor Costs Highest observation of cost driver 400 \$10. the rate at which the independent variable varies.(\$20. \$8. the level of total variable costs.800 c.83. c. b.000 . \$20. What is the constant for the estimating cost equation? a. \$2. multiple regression uses all available data to estimate the cost function.00 x 240 hours) = \$2.33 b. simple regression uses only one independent variable and multiple regression uses more than one independent variable. \$00.00 Answer: c Difficulty: 2 Objective: 4 Slope = (\$10. d.000 OR: Constant = \$6.

40 d.500) = \$17. \$41. \$4. \$2.000 c. What is the slope coefficient per labor-hour? a. and labor-hours are 7.500 and wages \$47.42 Answer: c Difficulty: 2 Objective: 4 Slope = (\$47. \$17.87.000 c. labor-hours are 12. What is the estimate of the total cost when 300 machine-hours are used? a.500) = \$2.35.000 + (\$2.000 d. 88.000 OR: Constant = \$35.500) = \$17.40 x 12.76 c.000 at the high point of the relevant range.000 at the low point of the relevant range.500 – 7.(\$2.000 Answer: d Difficulty: 3 Objective: 4 y = \$2.000 b. \$5.000 b.167 d. \$17.000 .000)/(12.750 Answer: a Difficulty: 2 Objective: 4 Constant = \$47.000 c. \$0. \$2.000 labor-hours are used? a.000 .000 THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 88 THROUGH 90. \$12. \$6. \$8. What is the constant? a.500 and wages \$35.000 d. \$21.40 x 10.000 b. \$4. \$3. For Carroll Company.40 x 7.000 Answer: b Difficulty: 3 Objective: 4 y = \$17. \$41.67 b.000 90.000 . \$27.000 Chapter 10 Page 15 . What is the estimate of total labor costs at Carroll Company when 10.40 per labor-hour 89.000 + (\$20 x 300) = \$8.(\$2.000) = \$41.

28 x 8.875 + \$5.000 5.191 + \$0.250) = \$4. y = \$4. 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.500 36.400 7.875 d. \$37.430 + \$4. What is the estimated total cost at an operating level of 8.23X d.900 5. \$36.900 + \$0.28X Answer: d Difficulty: 3 Objective: 4 (\$44. y = \$2.500 91.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 91 AND 92. The Barnett Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable.19X b.000) Chapter 10 Page 16 . What is the cost function? a.25X c.000 hours? a.\$24.125 Answer: b Difficulty: 3 Objective: 4 \$36.900) / (9.750 45. y = \$43. \$46. Cost Hours \$24.670 = \$2.160 9.750 – 5.430 + (\$4.500 44.670 c. y = \$41.740 b. \$43.160 .000 9.250 24.28 for the highest and lowest values of the cost driver 92.

Presented below are the production data for the first six months of the year for the mixed costs incurred by Gallup Company.500) a = \$440 94.600 Gallup Company uses the high-low method to analyze mixed costs.040.144X c.12X b.840 .840 = a + \$1.500 – 3. y = \$7.227.00 Answer: b Difficulty: 3 Objective: 4 y = \$440 + \$1. \$4.024 3. Month Cost Units January \$4.12 (5. 93.000) = \$6.200) = \$1.224X d.336 6.283.12 (7.500 May 5. How would the cost function be stated? a.480 5.\$4.800 4.200 March 6.800 June 7.100 February 4.12 \$8.040 Chapter 10 Page 17 .850 + \$0.024) / (7. y = \$440 + \$1. y = \$107.000 units? a.20 b.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 93 AND 94.00 c.510. \$8.20 d.562.840 7.30 + \$0. \$6. \$6. y = \$3.300 April 8. What is the estimated total cost at an operating level of 5.132X Answer: a Difficulty: 3 Objective: 4 b = (\$8.890 4.20 + \$1.

000 3.160 . \$25.\$24. evaluating a weak manager as having strong performance.740 95.THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 95 AND 96. Answer: b Difficulty: 3 Objective: 5 Chapter 10 Page 18 .000 March 31.000) = \$10.400) / (3.40X Answer: d Difficulty: 3 Objective: 4 b = (\$44. \$34.64X d.240 c. The Gangwere Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable.672 + \$1. promoting a product that is actually more profitable than budgeted. \$32.900 – 2.52X c.160 = a + \$10.850 hours? a.600 + \$10.40 (2.600 96.40 (3.692 b. \$33. y = \$10. How is the cost function stated? a. d.360 + \$1. b. y = \$26.900 June 42. initiating cost cutting measures when they are unnecessary. An inaccurate cost function with a slope coefficient that is estimated too low may MOST likely result in a.84X b. What is the estimated total cost at an operating level of 2.400 3.112 + \$8.240 97.600 + \$10.000 May 44.016 d.900) a = \$3.400 3. 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. c.500 February 24. y = \$3.160 3.736 Answer: b Difficulty: 3 Objective: 4 y = \$3. Month Cost Hours January \$40. predicting total costs that are too high.400 2.40 \$44.850) = \$33.450 April 36. y = \$21.280 2.

predicting total costs that are too low. c. d. new cost-cutting initiatives are beneficial. production has decreased. management should cut costs. insurance premiums have decreased. evaluating a weak manager as providing strong performance. c. determine the level of activity. Answer: c Difficulty: 2 Objective: 5 103. b. match the actual cost observations. If machine maintenance is scheduled at a time when production is at a low level then a. Answer: a Difficulty: 3 Objective: 5 Chapter 10 Page 19 . d. d. low production is the cost driver of high repair costs. promoting a product that is actually less profitable than budgeted. A cost function with a lower constant than a year ago could indicate all EXCEPT a. Answer: b Difficulty: 3 Objective: 5 102. Answer: a Difficulty: 3 Objective: 5 99. c. the sales commission percentage has decreased. An inaccurate cost function with a constant that is estimated too high may MOST likely result in a. machine maintenance cannot be accurately predicted. rental costs have decreased. b. c. Answer: b Difficulty: 3 Objective: 5 101. rely on the independent variable.98. b. last year’s cost function was inaccurate. c. d. c. A steeply sloped regression line indicates a. an understanding of operations is needed to determine an appropriate cost driver. b. A cost function with a lower slope coefficient than a year ago could indicate that a. match the cost driver. Answer: c Difficulty: 3 Objective: 5 100. b. d. total variable costs have decreased. a new operations manager is being effective. a greater proportion of fixed costs than variable costs. replicating processes that are truly cost saving. an economically plausible relationship exists. d. b. low production should be avoided since it is the cause of machine maintenance. Goodness-of-fit measures how well the predicted values in a cost estimating equation a. a strong relationship between the cost driver and costs.

is fixed over the short run. is often approximated with a continuous variable-cost function. example includes adding additional warehouse space.104. d. c. the weaker the relationship between the cost driver and costs. A step variable-cost function a. the more cost pools. Over the short run. d.000 printing machine to double production. Answer: a Difficulty: 2 Objective: 5 106. b. c. is fixed over the long run. Examples of nonlinear cost functions include all EXCEPT a. remains the same over a narrow range of activity. conference. industrial engineering. Answer: d Difficulty: 2 Objective: 6 108. c. there are a great number and variety of cost drivers and cost pools. c. b. b. Answer: d Difficulty: 3 Objective: 6 107. d. Answer: b Difficulty: 2 Objective: 6 Chapter 10 Page 20 . b. incurring greater total utility costs for each machine-hour of operation. the steeper the slope of the cost function. When using activity-based costing all of the following are true EXCEPT that a. mixed cost functions. is often approximated with a continuous variable-cost function. d. b. c.000 parts purchased. example includes setup costs. The smaller the residual term a. the stronger the relationship between the cost driver and costs. Answer: a Difficulty: 2 Objective: 6 109. d. A step fixed-cost function a. but not over the long run. the gentler the slope of the cost function. a nonlinear cost function would MOST likely result from all EXCEPT a. the greater the chance of estimation error. remains the same over a wide range of activity. purchasing another \$250. step fixed-cost functions. hiring a third production supervisor. and regression analysis can be used to estimate slope coefficients. step variable-cost functions. c. b. quantity discounts for each additional 10. Answer: a Difficulty: 2 Objective: 5 105. learning curves. d. but not over the short run. all cost drivers should be output unit-level cost drivers.

80 minutes. b. An experience curve a. that is linear. only measures the decline in labor-hours per unit as units produced increases. X = 120 minutes 113. 60 minutes. d. c. d. (200 + X)/2 = 160. 160 minutes. 60 minutes. when using costs to price products. c. into all of the above. Answer: b Difficulty: 3 Objective: 7 200 x . 80 minutes. c. into performance evaluations. Answer: a Difficulty: 2 Objective: 7 200 x .80 = 160. measures the increase in cost per unit as productivity increases. b. b. is a narrower application of the learning curve. 120 minutes. where unit costs increase as productivity increases. b. d. d. Learning curve effects can be incorporated a.80 = 160 minutes 114.110. Using an 80% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take a. c. A learning curve is a function a. that measures the decline in labor-hours per unit due to workers becoming better at a job. Using an 80% incremental unit-time learning model indicates that the second setup on the new machine is expected to take a. Answer: d Difficulty: 2 Objective: 7 Chapter 10 Page 21 . To complete the first setup on a new machine took an employee 200 minutes. Answer: a Difficulty: 2 Objective: 6 111. measures the decline in cost per unit as production decreases for various value- chain functions such as marketing as production increases. To complete the first setup on a new machine took an employee 200 minutes. b. into production schedules. c. 120 minutes. that increases at a greater rate as workers become more familiar with their tasks. Answer: b Difficulty: 2 Objective: 6 112. 160 minutes. d.

b. Answer: b Difficulty: 2 Objective: 8 119. examine how efficiency increases as more units are produced. examine the change in variable costs when quantity discounts are available. numerous cost driver observations. cost driver observations spanning a wide range. Answer: b Difficulty: 2 Objective: 7 116. The learning-curve models presented in the text a. d. Answer: d Difficulty: 1 Objective: 8 117. Managers that design data collection reports that regularly and routinely obtain required data are helping to ensure that a. d. Extreme values of observations may be the result of a. the relationship between the cost driver and the cost remains stable over time. c. Answer: d Difficulty: 2 Objective: 8 Chapter 10 Page 22 . The ideal database contains a. d. reliably measured observations. fixed and variable costs are not separately identified and both are allocated to products on a per unit basis. b. d. c. Data collection problems arise when a. c. examine how setup costs decline as more workers are added. d. data are recorded electronically rather than manually. a misplaced decimal point in the recorded data. c. examine how quality increases over time. purely inflationary price effects are removed. classifying a cost incorrectly. b. Answer: c Difficulty: 3 Objective: 8 118. b. all of the above. c. a temporary plant shutdown.115. inflationary effects are removed. all data are recorded. b. accrual-basis costs are used rather than cash-basis costs. all of the above. extreme values are not used to calculate cost functions.

Y = \$4.120.500. extreme observations are adjusted or removed.890 + \$11. time periods differ for measuring items included in the dependent variable and the cost driver(s). the unexplained variation was given as 26.15X c.500) = 0. For a certain estimating equation. All of the following are cost analysis problems EXCEPT a. 0.7832 Number of observations 22 X coefficient(s) 11. homogeneous relationships between individual cost items in the dependent variable pool and cost drivers may not be present. 0.560 2 r 0. c. The coefficient of determination is important in explaining variances in estimating equations.1876 What is the linear cost function? a.34 b.66 Answer: b Difficulty: 2 Objective: A 2 r = 1 .505/46. fixed costs are allocated as if they are variable costs.505. d. What is the coefficient of determination for the equation? a. Y = \$20. Y = \$21. 0. The Bhaskara Corporation used regression analysis to predict the annual cost of indirect materials. The total variation was given as 46.100 + \$4.75 Standard error of coefficient(s) 2. b.57 d. Answer: b Difficulty: 3 Objective: 8 121.(26.43 c. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant \$21.560 + \$5.43 122.890 Standard error of Y estimate \$4. 0. none of the above Answer: a Difficulty: 2 Objective: A Chapter 10 Page 23 .75X b.60X d.

756.313.764. \$350.61 Independent Variable 20.11 r2 = 0.764.90 2.50 c.100 124.94 7.98 247.32 d.844. Pam’s Stables used two different independent variables (trainer's hours and number of horses) in two different equations to evaluate the cost of training horses.50 1.756.50 Answer: b Difficulty: 3 Objective: A y = \$4.63 What is the estimated total cost for the coming year if 16.14 3.32 198.444.123.56 Number of horses: Variable Coefficient Standard Error t-Value Constant 4.100 b.09 b.929. \$142.50 based on highest r2.09 4. Craig’s Cola was to manufacture 1. Variable Coefficient Standard Error t-Value Constant 100 71.74 2.000 Answer: a Difficulty: 2 Objective: A y = \$100 + (\$200 x 1.18 r2 = 0. The most recent results of the two regressions are as follows: Trainer's hours: Variable Coefficient Standard Error t-Value Constant 913.200 d. which uses # of horses as the cost driver Chapter 10 Page 24 .073. The accountant provided the following analysis of total manufacturing costs. based on the best cost driver? a. \$335.000) = \$200.82 What is the estimated cost of producing the 1.000 cases of cola? a.94 1.50 r2 = 0.98(400) = \$350.000 cases of cola next week.50 + \$864.44 Independent Variable 864. \$13. \$100.071 c. \$99. \$200.000 trainer hours are incurred and the stable has 400 horses to be trained.39 Independent variable 200 91.12 4. \$9.

000 \$10.000 \$60.000 b. Direct manufacturing labor is \$10 per hour. d. Number of employees 300/600 250/600 50/600 \$60. number of employees. The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees.000 \$50. Recently. Utilities have a minimum charge of \$1. plus \$75 of utility costs for each day the machinery is in operation. Miller Company is using the conference method for cost estimation.000 of machine depreciation per year. the number of new hires. c. b.000. Use y for estimated costs and X for activity of the cost driver.EXERCISES AND PROBLEMS 125.000 \$24. 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. opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. b. Which cost estimation method is being used by Miller Company? Answer: Department Department Department Cost Driver A B C a. y = \$9.05 per kilowatt- hour.20 per cubic yard.000 c. Write a linear cost function equation for each of the following conditions. Direct materials cost \$9.05X d.000 + \$0. c. y = \$1. y = \$200. 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. plus a charge of \$0. Total personnel department costs are \$120. Difficulty: 2 Objective: 3 Chapter 10 Page 25 . Answer: a.000 + \$75X Difficulty: 1 Objective: 1 126. y = \$10X b. a. Machine operating costs include \$200.20X c.000. The number of new hires 15/50 25/50 10/50 \$36.

the freezer ran for 720 hours for a total cost of \$82.120. a peak month.000 gallons \$100.\$57. 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. Required: a.000)/(140.000 .000) = \$10.120 Difficulty: 2 Objective: 4 Chapter 10 Page 26 .75DM Difficulty: 1 Objective: 4 128.75(120.000 gallons \$115. a slow month. In July.000 20x4 120.120 + \$68(500) = \$67. Slope (variable costs) = (\$82. What is the estimated total cost at an operating level of 500 hours? Answer: a.\$100.360) = \$68 Constant (fixed cost) = \$82. Wimmer’s Storage ran its freezer in February.120 Estimating equation = \$33. for 360 hours for a total cost of \$57.000 . What is the cost estimating equation for the department if hours of freezer use are used as the cost driver? b.127.75 Constant (fixed cost) = \$100.080 .080 . Data for those years is as follows: Year Chemicals used Overhead Costs 20x2 140.(720 x \$68) = \$33.600.000) = \$0.000 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. Total costs of 500 hours = \$33.\$0.600) / (720 .000 Estimating equation = \$10.120 + \$68DLH b.000 + \$0.000 .080.

30.129.800)/(42.3.(\$4. Answer: a.000 Supervisors' salaries 312.000 Total \$2.600 Using the high-low method and the information provided above. Slope coefficient = (\$49.750)/(4.200 total cost Difficulty: 2 Objective: 4 130.865. Output level of 36.000 units = \$496. Variable cost = (\$2.6875 x 4.600 49.500 49.40(42.000 528.800 Required: a.800 45.800 + \$56.\$45.000 February 4.500 March 3.527.800 \$2.000 Equipment depreciation 151.6875X b. The Wildcat Company has provided the following information: Units of Output 30.000 Units Direct materials \$ 180.188.800 + \$56. Max Thompson collected the following information concerning the operations of the Machining Department: Observation Machine-hours Total Operating Costs January 4. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.600 . As part of his job as cost analyst.40X b.000 \$45.500 . b.512.937.000 .865.000 1.188. June's estimated costs = \$27.000 312.400 Utilities 384.50 + \$4.000)= \$56.40 Fixed cost = \$2.400 48.600 . estimate the total cost at 36.200 Maintenance 81.000 units of output. identify the linear cost function equation and b.50 Estimating equation = \$27.200 151.600) = \$27.937.6875 per machine- hour Constant = \$49.200.\$56.40(36.000 Workers' wages 1.625 Difficulty: 2 Objective: 4 Chapter 10 Page 27 .937. If June's estimated machine-hours total 4.800 Cost function is y = \$496.200) = \$47.000) = = \$2.50 + \$4.865. what are the total estimated costs of the Machining Department? Answer: a.000 Units 42. a.000 \$ 252.080.6875(4.500 .\$2.800) = \$4.000) = \$496.600 110.600 .750 April 4.000 May 4.

045 per kilowatt-hour Constant = \$138.000) = \$117.000 136.000) = \$(65.800 4. the following data were collected: Observation Machine-hours Kilowatt-hours Total Overhead Costs January 3. b.600 + \$24(3.(\$24 x 3. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. July's estimated costs: with machine-hours = \$45.800 March 3. Machine-hours: Slope coefficient = (\$139.100) = \$24.120. Which cost driver was the best predictor for July? Answer: a.000 120.200 April 3.(\$0.045(4. For July.000 February 3. Difficulty: 3 Objective: 4 Chapter 10 Page 28 .250 4. The overhead costs totaled \$114.900 4.000 \$138.\$120. 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.400) Kilowatt-hour estimating equation = -\$65.000 139.000 .000 Required: a.131.400 + \$0.000) = \$114.000 kilowatt-hours of power.000 June 3. Kilowatt-hours: Slope coefficient = (\$138.600 + \$24X b.3.520.000 136.600 Machine-hour estimating equation = \$45.900) = \$45.800 May 3. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.520.000)/(3.4. Kansas.290. For the first six months of operations.520.300 4.000.340.500.000)/(4.200 .045 x 4.600 with kilowatt-hours = -\$65.200 .400 + \$0.000. Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe.200. the company ran the machines for 3.000 .650 4.045KWH c.000. c.120.00 per machine-hour Constant = \$139.100 4.000 126.000 hours and used 4.000) = \$0.600 The best estimator for July was the kilowatt-hour cost driver.\$120.000 .900 .

250 April 1.350 Estimated cost equation: y = \$18. Specifically.000) a = \$18.950 May 2.60 (1.000/2. the president of Ross’s Wild Game Company.000 19.950 Low: April 1.350 + \$1.700 \$20.500 June 3.000 Variable cost per MH: \$4.950 Difference 2. The following data are the only records available.950 Required: Using the high-low method.500 21.60(1.132.000) Difficulty: 2 Objective: 4 Chapter 10 Page 29 . Patrick Ross.500 March 2. determine the overhead cost equation.000 19.950 = a + \$1.500 23.500 \$ 4.60 per MH Fixed cost: \$19. has asked for information about the cost behavior of manufacturing overhead costs. Month Machine-hours Overhead Costs February 1. he wants to know how much overhead cost is fixed and how much is variable. Use machine- hours as your cost driver.500 \$23. Answer: High: June 3.500 = \$1.800 22.

2 8 units = 3. Y = p Xq = 5 x 16-0. What is the learning-curve percentage. c. Required: a.65 = 29. 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 -0.5 Learning percentage = 4. Y = p Xq = 5 x 8-.768 hours Overhead charge = 32.133.9 = 4.65 hours or 1 unit = 5 2 units = 5 x 0.56 16 units = 2.9 = 3.9 = 4.3219 = 2. The manufacturing overhead charge per hour is \$20. Harry’s Picture manufactures various picture frames.1520.8 = 2. Job Hours Cumulative Cumulative Average 1 5 5 5 2 4 9 4.2 hours c.2 x 0.65 hours Time to build 8 units: 8 x 3.1520 = 3.048 x 16 = 32. assuming the cumulative average method? b.048 hours d. d.3219. Each new employee takes 5 hours to make the first picture frame and 4 hours to make the second.90 b.05 8 units = 4.56 x .768 x \$20 = \$655. How much manufacturing overhead would be charged to the 16 picture frames using the average-time approach? Answer: a.8 = 2. Total time = 2.05 x 0.36 Difficulty: 3 Objective: 6 Chapter 10 Page 30 .048 hours or 1 unit = 5 2 units = 5 x 0.5 4 units = 4.8 = 3.5 x 0.8 = 4 4 units = 4 x 0.5/5 = 0. 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.

683 = 314.3 x 0.9 = 24. Required: a.9 = 21.9 = 19. Each time Mayberry Nursery hires a new employee.87 16 units = 21.1520.683 or 1 unit = 30 2 units = 30 x 0. 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 -0.9 = 27 4 units = 27 x 0.3 8 units = 24. Y = p Xq = 30 x 16-. 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.1520 = 19.87 x 0. it must wait for some period of time before the employee can meet production standards.134.90 b. Answer: a.9 hours Difficulty: 2 Objective: 6 Chapter 10 Page 31 . Assume all jobs to be equal in size. What is the learning-curve percentage. Job Hours Cumulative Cumulative Average 1 30 30 30 2 24 54 27 Learning percentage = 27/30 = 0.683 hours 16 x 19.

902X d.800. the equation passes the goodness of fit test because it is substantially above 0.80X b.75. the threshold of acceptance. Difficulty: 2 Objective: A Chapter 10 Page 32 . It measures how well the predicted values match the actual observations. The coefficient of determination is the r2of 0. The closer to 1.902 Standard error of coefficient(s) 0.8924. Prepare the linear cost function.0966 Required: a.74 r2 = 0. Therefore. What is the coefficient of determination? Comment on the goodness of fit. The constant or intercept is the total fixed cost of \$5.92 + \$563.80 205. Answer: a.902. 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. Difficulty: 1 Objective: A 136.800 + \$1. Newton Company used least squares regression analysis to obtain the following output: Payroll Department Cost Explained by Number of Employees Constant \$5.02 2. This represents a very high goodness of fit.0. y = \$35.135.800 Standard error of Y estimate 630 r2 0.75 Required: a.30. What is the goodness of fit? What does it tell about the estimating equation? Answer: a. Goodness of fit is 0. The summary results of the report appear as follows: Variable Coefficient Standard Error t-Value Constant 35.92 16. the better the cost driver explains the cost. What is the variable cost per employee? c. The variable cost per employee is the X coefficient of \$1. b. the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees. In this case. What is the total fixed cost? b. y = \$5.40 2. d. What is the cost estimation equation according to the report? b. c.8924 Number of observations 20 X coefficient(s) 1.24 Independent variable 563.

60 2. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours.73 Required: a. What are the estimating equations for each cost driver? b. The most recent results of the two regressions are as follows: Machine-hours: Variable Coefficient Standard Error t-Value Constant 748. therefore. for the independent variable.80 indicates that a relationship exists between the independent and dependent variables.60X b.04 3. thereby making it less attractive than number of packages as a cost predictor.20 2. Machine-hours y = \$748. The t-values of the constant terms (g) for both drivers is greater than 2.00 2.33 Number of packages: Variable Coefficient Standard Error t-Value Constant 242. For machine-hours. Difficulty: 2 Objective: A Chapter 10 Page 33 .90 75. the t-value of 2.00.30 + \$52. indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables.20 1.50) is below 2.90 35.00.24 Independent Variable 5. the t-value (1. Also. number of packages. Given the above findings.80 r2 = 0.30 341. it appears that number of packages is the best predictor of costs of the packing department.19 Independent Variable 52. 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.90X Number of packages y = \$242. there is no distinguishing characteristic between the constants.137.90 + \$5.50 r2 = 0. Which cost driver is best and why? Answer: a.

or mixed with respect to the identified cost driver. process engineering.). employee relations. etc. Industrial engineering method 2. Account analysis method 4. to fit linear cost functions to past data observations. Conference method 3. controller. it just gave the producer a budget and told him/her to make a movie within budget. also called the work-measurement method. fixed. gathered data on overhead costs and direct labor-hours over the past 12 months. such as the high-low method or regression.CRITICAL THINKING 138. Quantitative analysis of current or past cost relationships The industrial engineering method. Answer: The four approaches to cost estimation are: 1. The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable. 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. Mr. Quantitative analysis of cost relationships are formal methods. Munir Hassan. Required: What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie making system? Chapter 10 Page 34 . estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. Difficulty: 2 Objective: 3 139. Instead. manufacturing. Moon does not like the former movie-budget concept and desires to establish a formal cost estimation system. 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. He found that the company did not try to estimate the cost of making a movie. Roger Moon has just purchased the film studio of a movie company that specializes in comedies.

and specification analysis. X = cutting time y = \$19. Difficulty: 2 Objective: A Chapter 10 Page 35 . the relationships with many of the cost drivers were probably forced to meet budget. management is considering other possible cost drivers. Therefore. or else poorly kept because they were substantially under budget and control over them was weak. Some costs may be incurred monthly rather than by movie. Answer: One of the first problems will be the timing of matching the cost drivers with the actual movie production process. What other factors should be included in the selection of the estimating equation? Answer: a.000 + \$25X r2 = 0.30 indicates a goodness of fit that is acceptable for most situations. there may be gaps in the historical data because only total costs had to be maintained within the budget.65 2. Generally. b. The following cost estimating equations with their r2 values have been determined for 20x3: 1. Which equation should be selected for the analysis? b.55 Required: a. Under the former budget system. Next will be the problem of determining which costs are fixed and which are variable under the budget system.49 3. There was probably little attention paid to cost categories. Timing problems will also have to be reconciled. Arfaei Company manufactures chairs. an r2 above 0. X = machinery y = \$44. By considering different cost drivers. However. and some type of accrual will have to be made to keep the costs allocated to the proper cost driver. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination. It may be difficult to determine those that are truly variable. Equation 1 for cutting time is slightly better than the other two equations based on r2 values. because the values are so close together. it is anticipated that the estimating process can be improved. Difficulty: 2 Objective: 8 140. all three equations are acceptable when considering only the coefficient of determination. Because the efforts of manufacturing are approximately equal between labor and machinery.500 + \$20X r2 = 0. X = labor y = \$5.139. other factors should be considered. the significance of independent variables.500 + \$5X r2 = 0. Lastly. thereby causing reliable cost data to be scarce. Other factors to be considered are economic plausibility.