Chap 3 - Costs Concepts

Chapter 3 Cost concepts, classification and segregation 46
MULTIPLE CHOICE
Costs classification
1. The term relevant cost applies to all the following decision situations except the
A. Acceptance of a special order. .
B. Determination of a product price.
C. Replacement of equipment.
D. Addition or deletion of a product line. (cma)
1. B
? A situation where the term relevant cost does not apply.
 Relevant costs are those used in making decision. These costs have two
characteristics – differential costs and future costs. The term relevant costs applies
to the acceptance or rejection of a special sales order, replacement or retention of
equipment, addition or deletion of a product line, and even in the determination of a
product price. Among the choices given, however, choice-letter “b” is the best
answer because relevant cost is least applied in the determination of regular selling
price.
2. A decision-making concept, described as “the contribution to income that is foregone

by not using a limited source for its best alternative use,” is called
A. Marginal Cost. C. Potential Cost.
B. Incremental Cost. D. Opportunity Cost. (cma)
2. D
? The term used to describe the contribution to income that is foregone by not using a
limited source for its best alternative use.
 The benefit foregone or sacrificed for not using a limited resource for its best
alternative use is called an opportunity cost, hence, choice-letter “d” is correct.
Choice-letter “a” is incorrect because marginal cost is the increase in cost per unit of
product. Choice-letter “b” is incorrect because incremental cost is the total increase
in cost from an alternative to another. Choice-letter “c” is incorrect because potential
cost may refer to future cost that may arise if an alternative is chosen.
3. In a decision analysis situation, which one of the following costs is not likely to
contain a variable cost component?
A. Labor C. Depreciation
B. Overhead D. Selling. (cma)
3. C
? The cost that is not likely to contain a variable cost component.
 Choice-letter “c” is the correct answer. Depreciation expense, if the problem is silent,
is a fixed cost, and therefore, not variable neither would contain a variable
component. Choice-letter “a”, labor is academically treated as a variable cost.
Choice-letter “b”, overhead, has both the variable and fixed cost components.
Choice-letter “d”, selling expense, also has both the variable and fixed cost
components.
4. The term that refers to costs incurred in the past that are not relevant to a future
decision is
A. Full absorption cost. C. Sunk Cost.
B. Under-allocated indirect cost. D. Incurred marginal cost. (cma)
4. C
? The term that refers to costs incurred in the past that are not relevant to a future
decision.
 Choice-letter “c” is the correct choice. Sunk costs are those already incurred, cannot
be avoided, refer to the past, and are therefore, irrelevant in making decisions.
Choice-letter “a”, full absorption cost refers to the total costs of production without
regard to whether fixed or variable as long as the costs are necessary in the
manufacture of a product. Choice-letter “b” is incorrect because under-allocated
indirect cost relates to the amount of allocation and not to the period of time, either
past or otherwise. Choice-letter “d” is an inferior choice because incurred marginal
cost although a past cost and, therefore, not relevant to future decisions is only an
example of the more generic term sunk cost which aptly describes the phrase to be
completed.
Questions 5 to 7 are based on the following information. Management accountants

are frequently asked to analyze various decision situations including the following:
I. The cost of a special device that is necessary if a special order is
accepted.
II. The cost proposed annually for the plant service for the grounds at
corporate headquarters.
III. Joint production cost incurred, to be considered in a sell-at-split versus a
process-further decision.
IV. The cost of alternative use of plant space to be considered in a make-or-
buy decision.
V. The cost of obsolete inventory acquired several years ago, to be
considered in a keep-versus-disposal decision.
5. The costs described in situations I and IV are

A. Prime costs. C. Relevant costs.
B. Discretionary costs. D. Differential costs. (cma)
5. C
? The costs described in situations I and IV.
 The costs described in situations I and IV are relevant costs, choice-letter “c” is the
best answer. Item I, the cost of a special device that is necessary if a special order is
accepted is an incremental cost of accepting the order and is a relevant cost. Item
IV, the cost of alternative use of plant space to be considered in a make-or-buy
decision, is an opportunity cost and, is relevant in making decision.
6. The costs described in situations III and V are

A. Prime costs. C. Discretionary costs.
B. Sunk costs. D. Relevant costs. (cma)
6. B
? The costs described in situations III and V.
 Item III, joint production cost already incurred, and item V would no longer be avoided
whether the products are sold at split-off point or not. The cost of obsolete inventory
acquired several years ago in relation to the decision whether to keep or dispose the
inventory is already incurred, a sunk cost. In both situations, the costs described are
sunk costs and are irrelevant in decision-making. Hence, choice-letter “b” is correct.
7. The cost described in situation II is a

A. Prime costs. C. Relevant costs.
B. Discretionary costs. D. Differential costs. (cma)
7. B
? The cost described in situation II.
 The cost described in situation II is more accurately a discretionary cost, choice-letter
“d” is correct. Choice-letter “a” is incorrect because prime costs refer to direct
materials and direct labor. Choice-letter “c” is incorrect because relevant costs are
determined when decisions are to be made, and not merely a proposal, which may
be decided to be incurred or not. Choice-letter “d” is also incorrect because
differential cost is a quality of a relevant cost which is determinable only at a time a
decision is to be made.
8. Management accountants are concerned with incremental unit costs. These costs
are similar to the following, except
A. The economic marginal cost. C. The cost to produce an additional unit.
B. The variable cost. D. The manufacturing unit cost. (rpcpa)
8. D
? The cost that is not similar to incremental unit costs.
 The best choice among the given should be choice-letter “d”. A manufacturing unit
cost may include a fixed cost that is not incremental in nature. Choice-letter “a” is
incorrect because marginal cost is the increase in cost per unit of increase in
production and is similar to incremental costs that also indicate an increase. Choice-
letter “b” is incorrect because variable cost normally is an incremental cost. Choice-
letter “c” is also incorrect because the cost to produce an additional unit is the same
as the marginal cost. Technically speaking, incremental costs are the total increase in
costs from one production level to another, from an option to another, or from an
event to another.
9. Opportunity costs are

A. Costs irrevocably incurred by past actions
B. The difference between actual and standard costs
A. Not recorded in the accounting records
B. Partly fixed costs and partly variable costs (rpcpa)
9. C
? The best statement about opportunity costs.
 Opportunity costs are those benefits foregone in favor of the alternative chosen. They
are sacrificed benefits, not incurred but is implied, and not recorded in the accounting
books because they are theoretical. Hence, choice-letter “c” is correct.
Choice-letter “a” is incorrect because costs incurred by past actions are past cost
or sunk costs. Choice-letter “b” is incorrect because the difference between actual
and standard cost is called a cost variance. Choice-letter “d” is incorrect because
costs that are partly fixed and partly variable are called mixed costs.
10. Cost of goods sold is a component of the income statement. In a merchandising

establishment, this refers to purchases adjusted for changes in inventory. In a
manufacturing company, what replaced purchases to arrive at cost of good sold?
A. Finished goods. C. Work in process inventory.
B. Fixed manufacturing overhead. D. Cost of good manufactured. ( rpcpa)
10. D
? The account that replaces purchases to arrive at cost of goods sold in a
manufacturing company.
 Choice-letter “d” is correct. In the computation of cost of goods sold, net purchases is
replaced by the cost of goods manufactured (CGM) in a manufacturing company.
Just like merchandise purchases, CGM is added to finished goods-beginning and
then finished goods-ending is deducted to get the cost of goods sold.
Choice-letter “a” is incorrect because finished goods inventories are added to or
deducted from CGM to arrive at CGS. Choice-letter “b” is incorrect because fixed
manufacturing overhead is directly used in the computation of total factory costs.
Choice-letter “c” is incorrect because work-in-process inventory is used in the
computation of CGM, not in CGS.
11. The salaries you could be earning by working rather than attending college is an
example of
A. Outlay costs. C. Sunk costs.
B. Misplaced costs. D. Opportunity costs (rpcpa)
11. D
? The classification of the salaries you could be earnings by working rather than
attending college.
 The salaries that should have been earned by working rather than attending college
is an example of an opportunity cost. It is a profit, savings, or benefit foregone in
favor of the alternative chosen.
Choice-letter “a” is incorrect because outlay costs may refer to the amount of
fund used to finance an acquisition or operations. Choice-letter “b” is incorrect
because a misplaced costs is an irregular description of costs and has not found
great usage and acceptance in the management accounting literature. Choice-letter
“c” is incorrect because sunk costs are those that are already incurred in the past and
can no longer be changed, and are always irrelevant.
12. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is
A. Relevant because salaries are always relevant.

B. Relevant because this will probably change if the regional service office is built.
C. Irrelevant because it is future cost that will not differ between the alternatives
under consideration.
D. Irrelevant since another imputed costs for the same will be considered. (rpcpa)
12. C
? The treatment of the salary of the Chief Executive Officer (CEO) at the corporate
headquarter in deciding whether to build another regional office or not.
 In deciding on whether to build another regional office or not, the salary of the CEO
does not change and, therefore, is irrelevant although it is a future costs (choice-letter
“c” is correct).
A cost to be relevant in decision-making must differ from one alternative to
another (differential costs) and must deal with the future (future cost). Both conditions
must be met. A cost may be relevant in one decision-making exercise but is irrelevant
in the other.
13. Sunk costs

A. Are substitutes for opportunity costs.
B. Are relevant to long-term decisions but not to short-term decisions.
C. Are relevant to decision making.
D. In themselves are not relevant to decision making. (rpcpa)
13. D
? A correct description of sunk costs.
 Sunk costs are past costs, historical, already incurred, and can no longer be changed
or affected by future decisions. These costs are always irrelevant in making a
decision (choice-letter “d” is correct).
Choice-letter “a” is incorrect because sunk costs are not, and would never be
substitutes for opportunity costs. Sunk costs are recorded in the accounting books
while opportunity costs are not recorded in the accounting books. Choice-letters “b”
and “c” are incorrect because sunk costs are never relevant to decision-making, both
long-term and short-term decisions.
14. When all manufacturing cost used in production are attached to the products,
whether direct, or indirect, variable of fixed, this is called
A. Process costing . C. Variable costing.
B. Absorption costing. D. Job order costing. (rpcpa)
14. B
? A costing system that includes all manufacturing costs used in the production as
product costs, whether direct or indirect, variable or fixed.
 Choice-letter “b”, absorption costing, is the correct answer. Absorption costing
includes all manufacturing costs whether direct or indirect, variable or fixed, in the
determination of product costs. This is the traditional concept of cost determination,
is in accordance with the generally accepted accounting principles, and includes all
manufacturing costs as inventoriable costs because they are all relevant
expenditures in the manufacturing process.
Choice-letter “a”, process costing, is incorrect because it relates to the model of

accumulating production costs by following the departmentalized transfer of units in
the production process. Choice-letter “c”, variable costing, is incorrect because it
assigns only variable production cost as product cost. Choice-letter “d”, job order
costing, is incorrect because it refers to the model of accumulating production per
order made by customers.
High-low method
15. Mine and Yours Company uses a regression equation to analyze the behavior of its
transportation costs (T) as a function of travel time (H). They developed the following
equation using two years’ observation with a related coefficient of determination of .
85:
T = 100,000 + P50H
If 500 hours of travel time were logged in one period, the related point estimate of
total transportation costs would be
A. P110,000 C. P106,250
B. P121,250 D. P125,000 (rpcpa)
15. D
? The related point estimate of transportation costs
 Total costs equal fixed costs plus variable costs. The fixed costs and the variable rate
per hour are given. Therefore,
Fixed costs P100,000
Variable costs (P50 x 500 hours) 25,000
Total costs P125,000
16. These are among the methods of segregating fixed cost and variable costs except
A. Breakeven method. C. Scattergraph method.
B. Simple regression analysis. D. High-low method. (rpcpa)
16 A
? A method which is not used in segregating fixed and variable costs.
 The methods used in separating the fixed and variable costs elements are: practical
method (e.g., historical records), simple average high-low method, weighted average
high-low method, scattergraph method, and least-squares method.
Choice-letter “a” is the correct choice. The breakeven method is not used in
segregating fixed into variable costs but is instead used in analyzing the potential
profitability and areas of sensitivity in controlling profit.
17. Jackson, Inc, is preparing a flexible budget for next year and requires a breakdown of
the cost of steam used in its factory into the fixed and variable elements. The
following data on the cost of steam used and direct labor hours worked are available
for the last 6 months of this year.
Direct
Month Cost of Steam Labor Hours
July P 15,850 3,000
August 13,400 2,050
September 16,370 2,900
October 19,800 3,650

November 17,600 2,670
December 18,500 2,650
Total P101,520 16,920
Assuming that Jackson uses the high-low method of analysis. The estimated variable
cost of steam per direct labor hour is.
A. P4.00 C. P5.82
B. P5.42 D. P6.00
17. A
? Using the high-low method, (HLM), the estimated variable cost of steam per direct
labor hour.
 The high-low method relates to range analysis where in a range there is the highest
point and the lowest point. The high-low method identifies the highest observation
and the lowest observation and getting their differences both in units and in amount.
The highest observation is the month of October while the lowest observation is the
month of August. Tabulating the data of the highest and the lowest occurrences, we
have:
Direct labor hours Cost
Highest (October) 3,650 P19,800
Lowest (August) 2,050 13,400
Difference 1,600 P 6,400
VCR =  in Costs /  in Units = P6,400 / 1,600 = P4 / DLH
Under the HLM, the variable cost rate is equal to the change in costs over the
change in units. This high-low method of computing the variable cost per unit rests on
the principle that a change in cost is attributed to variable, since total fixed cost
remains unchanged.
The HLM is used when there is a positive relationship between costs and units.
That is, if total unit increases, total cost also increases and if total unit decreases,
total costs also decreases. Otherwise, HLM is not applicable, and the scattergraph
method and least squares method are to be used in segregating the variable costs
from the fixed costs.
18. In the Timbugan County, Inc., a maintenance cost is partly fixed and partly variable in
nature. At the low level of activity (150 direct labor hours), maintenance costs total
P2,100. At high level of activity (270 direct labor hours), maintenance costs are
P3,000. Using the high-low method, what is the variable maintenance cost per unit
and the total fixed maintenance cost?
Variable Fixed
maintenance cost maintenance cost
A. P 7.50 P 975
B. P 7.50 P2,100
C. P10.00 P 600
D. P10.00 P2,100
18. A
? The variable cost per unit and the total fixed costs using the high-low method.
 Variable cost per unit may be determined by dividing the change in costs over the
change in units. The change in costs is P900 (i.e., P3,000 – P2,100) and the change
in units is 120 (i.e., 270 –150). The variable cost rate is P7.50 (i.e., P900/120).
The fixed cost is the difference between total costs and variable costs, as follows:
@ 270 DLH @ 150 DLH
Total costs P 3,000 P 2,100
- Variable costs (P7.50 x DLH) 2,025 1,125
Fixed costs P 975 P 975
19. Mat Company estimates its material handling costs at two activity levels as follows:
Kilos handled Cost
80,000 P 160,000
60,000 132,000
What is Mat’s estimated cost of handling 75,000 kilos?
A. P 150,000 C. P 157,500
B. P153,000 D. P132,000 (rpcpa)
19. B
? The estimated costs of handling 75,000 kilos.
 The estimated costs of handling 75,000 kilograms is composed of variable costs and
fixed costs. The variable cost is determined by first establishing the variable cost
rate. The variable cost rate is computed as follows:
Variable cost rate = Δ in Costs / Δ in Sales
= (P160,000 – P132,000) / (80,000 – 60,000)
= P28,000 / 20,000 = P1.40/kg
Given the variable cost rate, the fixed cost is calculated as:
80,000 kgs. 60,000 kgs.
Total costs P160,000 P132,000
- Variable costs (80,000 x P1.40) 112,000 84,000 (60,000 x P1.40)
Fixed costs P 48,000 P 48,000
Given the variable cost rate and the fixed costs, the estimated cost of handling
75,000 kilograms shall be:
Variable cost (75,000 kgs. x P1.40) P105,000
Fixed costs 48,000
Total estimated costs at 75,000 kgs. P153,000
20. The total production cost for 20,000 units was P21,000 and the total production cost
for making 50,000 units was P34,000. Once production exceeds 25,000 units,
additional fixed costs of P4,000 were incurred. The full production cost per unit for
making 30,000 units is:
A. P 0.30 C. P 0.84
B. P 0.68 D. P 0.93 (rpcpa)
20. D
? The full production cost per unit for making 30,000 units.
 The full production cost per unit is composed of the unit variable cost and unit fixed
cost. The unit variable cost is determined as follows:
Unit variable cost = (Δ in Costs – Increase in Fixed costs) / Δ in Sales
= [(P34,000 – P21,000) – P4,000] / (50,000 – 20,000)
= P9,000 / 30,000 = P0.30
The total fixed costs should be determined at 50,000 units since the cost of per unit
to be computed is at 30,000 units. At 50,000 units the increase in fixed costs of
P4,000 is already included. Fixed cost is total cost less variable cost. Therefore, the
total fixed cost is P19,000 [i.e., P34,000 – (50,000 x P0.30)]. Finally, the unit cost at
30,000 units shall be:
Unit variable costs (constant) P0.30
Unit fixed costs (P19,000/30,000 units) 0.63
Unit cost (at 30,000 units) P0.93
21. Hungarian Sausage wishes to analyze the fixed and variable components of the
semi-variable cost. The following information is available:
Output Output
Month (Units) Costs Month (Units) Costs
1 1,000 P 12,000 4 800 P11,000
2 700 10,000 5 1,400 18,750
3 1,100 14,000 6 1,200 15,000
Using the high-low method, which one of the following is correct?
A. Variable costs are P15 per unit. C. Fixed costs are P1,250 per month.
B. Variable costs are P10 per unit. D. Fixed costs are P1,000 per month.
21. C
? Using the high-low method, the correct expression of cost rate.
 Using the high-low method, the variable cost rate is computed by first identifying the
highest observation and the lowest observation. And then divide the difference in
cost by the difference in units. Based on the given, the highest observation is the fifth
month and the lowest observation is the second month, with the corresponding
changes in the data tabulated as follows:
Costs Output
Highest P18,750 1,400
Lowest 10,000 700
Difference P 8,750 700
The variable cost rate and the fixed cost shall be:
Variable cost rate = P8,750 / 700 = P12.50
Total fixed costs = [P18,750 - (1,400 x P12.50)] = P1,250
22. The controller of James Company has requested a quick estimate of the
manufacturing supplies needed for the Morton Plant for the month of July when
production is expected to be 470,000 units to meet the ending inventory requirements
and sales of 475,000 units. James Company’s budget analyst has the following
actual data for the last 3 months:
Production Manufacturing
Month in units supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560
Using these data and the high-low method to develop a cost accounting equation, the
estimate of needed manufacturing supplies for July would be
A. P652,500 C. P749,180
B. P681,500 D. P752,060 (rpcpa)
22. D
? The estimated cost of manufacturing supplies for July using the high-low method.
 The estimated cost of manufacturing supplies is composed of variable costs and
fixed costs. The variable cost rate is determined by dividing the change in costs over
the change in units. The highest observation is the month of April and the lowest
observation is the month of March. The change in costs is P130,500 (i.e., P853.560 -
P723,060), and the change in units is 90,000 (i.e., 540,000 – 450,000).
The variable cost rate is P1.45 (i.e., P130,500/90,000 units). Given the variable
cost rate, the fixed cost shall be P70,560 [i.e., 853,560 – (540,000 x P1.45)].
Since production in July is expected to reach 470,000 units, then the total
estimated costs shall be:
Variable costs (470,000 x P1.45) P681,500
Fixed costs 70,560
Total estimated costs P752,060
23. For the six months of the year, the highest level of activity for LQP Corporation was
for 18,000 full units of production with maintenance cost at P114,000 and its lowest
level of activity for the same period was at 14,000 full units of production with
maintenance cost at P94,000. What amount of maintenance cost should LPQ expect
in a month in which it was scheduled 16,000 equivalent full units of production?
A. P 24,000 C. P 80,000
B. P104,000 D. P114,000 (rpcpa)
23. B
? The expected amount of maintenance costs at 16,000 units of production.
 The amount of maintenance cost is composed of fixed costs and variable costs. The
problem gives two levels of activities with their corresponding total costs. The
variable cost rate could be determined using the high-low method of costs
segregation. Once the variable cost rate is determined, the total fixed costs is
computed by deducting the variable costs from the total fixed costs.
Using the high-low method (HLM), we have:
Units Total costs Variable costs* Fixed costs**
High 18,000 P114,000 P90,000 P24,000
Low 14,000 94,000 70,000 24,000
Difference 4,000 P20,000
* Var. Costs (18,000 units x P5) = P90,000

* Var. Costs (14,000 units x P5) = 70,000
** Fixed Costs = Total Costs - Variable Costs
The variable cost rate (VCR) is:
VCR = Change in total costs / Change in units
= P20,000 / 4,000 units = P5.00/ unit
Therefore, the total maintenance costs at 16,000 units is:
Variable costs (16,000 units x P5) P 80,000
Fixed costs 24,000
Total costs (at 16,000 units) P104,000
Regression analysis
24. Simple regression analysis provides the means to evaluate a line of regression,
which is fitted to a plot of data and represents
A. The way costs change with respect to the dependent variable.
B. The way costs change with respect to both independent and dependent
variables.
C. The variability expense with pesos of production.
D. The way costs change with respect to the independent variable. (rpcpa)
24. D
? A statement that represents the simple regression line.
 A simple regression line represents the way the dependent variable (“Y”, normally
described in pesos) varies with respect to the changes in the independent variable
(“x”, normally presented in units).
Choice-letters “a” and “b” are incorrect because costs change with respect to
independent variable, not with dependent variable or both. Choice-letter “c” is
incorrect because the variability of expenses is related to units of measurement and
not normally in terms of pesos of production.
25. The slope of the line of regression is

A. The rate at which the independent variable varies.
B. The rate at which the dependent variable varies.
C. The level of the fixed costs.
D. The level of the total variable costs. (rpcpa)
25. A
? A description about the slope of the line of regression.
 The slope is the “b” in the regression line Y = a + bx. Applying this equation to costs,
we have: Total costs = fixed costs + variable costs.
The “b” (or slope) represents the variable cost rate or the rate at which the
independent variable varies (choice-letter “a” is correct)
Choice-letter “b” is incorrect because the rate at which the dependent variable
(Y) vary depends on the value “x”, the independent variable. Choice letter “c” is
incorrect because fixed costs are not the same as the slope or variable cost rate.
Choice-letter “d” is incorrect because the level of the total variable costs (e.g., “bx”) is
the total of slope (e.g., “b”) multiplied by the independent variable (e.g., “x”).
26. Regression analysis

A. Estimates the independent cost variable.
B. Uses probability assumptions to determine total project costs.
C. Estimates the dependent cost variable.
D. Ignores the coefficient of determination. (cma)
26. C
? A correct statement regarding regression analysis.
 Choice-letter “c” is correct because regression analysis determines the estimated
value of “Y”, the dependent variable. Choice-letter “a” is incorrect because it is the
dependent variable that is estimated and not the independent variable “x”. Choice-
letter “b” is incorrect because regression analysis uses statistical procedures and not
probability assumptions. Choice-letter “d” is incorrect because regression analysis,
as a statistical equation, considers the coefficient of determination in establishing the
correlation of variables “x” and “y”.
27. The segregation of fixed costs and variable costs is key to proper cost analysis.
Regression analysis is a technique used for this purpose. Identify the appropriate
statements below on regression analysis:
1. It assumes that a change in value of a dependent variable is related to the
change in the value of an independent variable.
2. A linear relationship between direct cost and production volume can cause a
problem when using accounting data for regression analysis.
3. It attempts to find an equation for the linear relationship among variable.
4. It establishes a cause and affect relationship.
A. All four statements are appropriate. C. Statements 1 and 3 only.

B. Statements 1, 3 and 4 only. D. Statements 2 and 4 only. (rpcpa)
27. C
? Identify the appropriate statements on regression analysis.
 Statements 1 and 3 are correct with respect to regression analysis. Regression
analysis formulates a linear equation with the end-in-view of estimating the value of
“Y”, the dependent variable.
Statement 2 is false because a linear relationship between direct cost and
production volume does not cause a problem but rather complement accounting data
for regression analysis. Statement 4 is also false because a regression line does not
establish a cause and affect relationship but rather a correlation between
independent and dependent variables.
28. Simple regression differs from multiple regression in that

A. Multiple regression uses all available data to estimate the cost function whereas
simple regression only uses simple data.
B. Simple regression uses only one dependent variable and multiple regression
uses more than one dependent variable.
C. Simple regression is limited to the use of only the independent variables and
multiple regression can use both dependent and independent variables.
D. Simple regression uses only one independent variable and multiple regression
use more than one independent variable. (rpcpa)
28. D
? The statement describing the difference between simple regression and multiple
regression.
 Choice-letter “d” is correct. The simple regression line Y = a + bx has one dependent
variable (Y), a point of origin or point of intercept (a), a slope (b), and an independent
variable (x). A multiple regression line Y = a + b 1x1 + b2x2+…+ bnxn, has also a point of
origin, has two or more independent variables (i.e., x 1, x2, x3, etc.), and two or more
slopes (i.e., b1, b2, etc.).
Choice-letter “a” is incorrect because both simple and multiple regression
analyses use all available data to estimate the cost function. Choice-letter “b” is
incorrect because both simple and multiple regression analyses have only one
dependent variable, and both use the dependent and independent variables.
29. For the month just ended, the cost components to make Product FX was 50 per unit
plus fixed costs of P250,000. One thousand units were produced. For the current
month, the cost to make the product will be P55 per unit plus fixed cost of P250,000.
Fifteen hundred units are expected to be produced. The estimates of the underlying,
but unknown intercept and slope coefficient for the current month are
A. P250,000 and P50. C. P50 and P250,000.
B. P55 and P250,000. D. P250,000 and P55. (rpcpa)
29. D
? The unknown intercept and slope coefficient for the current month.
 The intercept or point of origin is the fixed costs; while the slope coefficient is the
variable cost rate. The fixed costs for the current month is P250,000 and the variable
cost rate is P55 per unit. Choice-letter “d” is correct.
30. Simple regression analysis involves the use of

Dependent Independent Dependent Independent
Variables Variables Variables Variables
A. One None C. One Two
B. One One D. None Two (aicpa)
30. B
? The number of each variable included in the simple regression analysis.
 Simple regression analysis estimates the value of Y and is mathematically expressed
as Y = a + bX. In this equation, there is only one dependent variable (i.e., Y) and
also one independent variable (i.e., X).
31. Multiple regression analysis involves the use of

Dependent Independent Dependent Independent
Variables Variables Variables Variables
A. One More than one C. More than one One
B. More than one More than one D. One One
31. A
? The number of each variable included in the multiple regression analysis.
 Multiple regression analysis resembles a curvilinear relationship of variables “x” and
“Y”. It is represented by the equation Y = a + b 1x1 + b2x2 + … + bnxn. In this
equation, there is only one dependent variable “Y” and more than one independent
variables “x”. Choice-letter “a” is the correct answer.
32. Multiple regression analysis

A. Establishes a cause and effect relationship.
B. Is not a sampling technique.
C. Involves the use of independent variable only.
D. Produces measures of probable error.
32. D
? A correct statement regarding multiple regression analysis.
 Choice-letter “d” is the correct choice. Multiple regression analysis, using statistical
principles and procedures, is subject to a standard error of estimate. Hence, it
produces measures of probable error.
Choice-letter “a” is incorrect because statistics does not establish a cause and
effect relationship but rather a correlation of two or more variables. Choice-letter “b”
is incorrect because as a statistical technique, it involves the application of a
sampling technique. Choice-letter “c” is incorrect because multiple regression
analysis involves the use of two or more independent variables.
33. Which of the following may be used to estimate how both the number of shipments
and the weight of materials handled affect inventory warehouse costs?
A. Economic order quantity analysis. C. Correlation analysis.
B. Probability analysis. D. Multiple regression analysis.
33. D
? The technique used to estimate the inventory warehouse costs.
 The inventory warehouse cost is affected by two independent variables, the number
of shipments and the weight of materials handled. Hence, the quantitative technique
to be used should be the multiple regression analysis, choice-letter “d” is correct.
Choice-letter “a” is incorrect because economic order quantity is used in
determining the optimum order size. Choice-letter “b” is incorrect because probability
analysis is used when variables under consideration are subject to uncertainties,
which in this case is not present. Choice-letter “c” is incorrect because correlation
analysis relates to establishing the relationship of the independent and dependent
variables.
34. A non-linear cost function

A. Does not effectively describe the behavior of costs all the time.
B. Never describes the behavior of costs in relation to the cost driver.
C. Has two constants and single slope.
D. Always describes the behavior of costs in relation to the driver.
34. A
? A true statement regarding a non-linear function.
 Choice-letter “a” is correct because a non-linear function does not effectively describe
the behavior of costs at all times but rather depicts the behavior of costs given a
varying levels of production. Choice-letter “b” is incorrect because a non-linear cost
function basically states that all costs are variable in the long-run. Choice-letter “c” is
incorrect because a non-linear cost function has a point of origin, therefore, a
constant factor, and several slopes. Choice-letter “d” is incorrect because a non-
linear cost function does not always describe the behavior of costs in relation to the
driver within a relevant range but rather describes a cost relationship to different cost
drivers applicable in various relevant ranges over the long-pull.
35. Pyramid Company has data relating total production costs to volume for each quarter
during the past five years. During this period, production volume has varied
substantially. The method of production has been relatively unchanged and the cost
behavior has been complex. What is the most appropriate method for estimating
future production cost?
A. Linear programming. C. Time-series or trend regression analysis.
B. Cost-volume-earnings approach. D. Program evaluation review technique.
(rpcpa)
35. C
? The most appropriate method for estimating future production cost.
 Choice-letter “c” is correct. Time-series regression analysis is the most appropriate
method to be used in estimating the behavior of production costs in relation to period
of time such as in terms of quarter in this case.
Choice-letter “a” is incorrect because linear programming applies to the
determination of optimum use of scarce resources. Choice-letter “b” is incorrect
because cost-volume-earnings approach relates to predicting profit given the
changes in volume, sales price, and costs. Choice-letter “d” is incorrect because it
relates to the technique of establishing and monitoring the completion time of a
project.
Questions 36 to 38 are based on the following: In preparing the annual profit plan for
he coming year. Darna Company wants to determine the cost behavior pattern of the
maintenance costs. Darna has decided to use linear regression by employing the
equation Y = a + bx for maintenance costs. The prior year’s data regarding
maintenance hours and cots and the results of the regression analysis are given
below,
Average cost pr hour P 9.00
a 684.65
b 7.2884
Standard error of a 49.515
Standard error of b .12126
Standard error of the estimate 34.469
r² .99724
36. In the standard regression equation Y = a + bx, the letter b is best described as a(n):
A. Independent variable. C. Constant coefficient.
B. Dependent variable. D. Variable coefficient.
36. C
? The description of letter “b” in the regression equation.
 In the regression equation Y = a + bx, variable “b” refers to the constant coefficient of
the variable cost, choice-letter “c” is the correct answer.
Choice-letter “a” is incorrect because independent variable refers to “x”. Choice-
letter “b” is incorrect because dependent variable refers “Y”. Choice-letter “d” is
incorrect because variable coefficient is not used in the equations Y = a + bx
37. The letter “x” in the standard regression equation is best described as a (an)
A. Independent variable. C. Constant coefficient.
B. Dependent variable. D. Coefficient of determination.
37. A
? The description of the variable “x” in the regression equation.
 In the regression equation Y = a + bx, the letter “x” is the independent variable,
choice-letter “a” is correct. Choice-letter “b” is incorrect because the dependent
variable is the “Y”. Choice-letter “c” is incorrect because the constant coefficient is
“b”. Choice-letter “d” is incorrect because the coefficient of determination is “r 2”.
38. Based upon the data described from the regression analysis, 420 maintenance hours
in a month would mean the maintenance costs (rounded to the nearest peso) would
be budgeted at
A. P3,780 C. P3,790
B. P3,600 D. P3,746 (cma)
38. D
? The estimated maintenance costs given a 420 maintenance hours.
 Based on the data given, the regression equation is Y = 684.65 + 7.2884x. If “x” is
420 hours, then the value of Y shall be P3,746 [i.e., Y = 684.65 + 7.2884(420)].
39. Marina Company has developed a regression equation to analyze the behavior of its
maintenance costs (Q) as a function of machine hours (Z). The following equation
was developed by using 30 monthly observations with a related coefficient of
determination of 0.90:
Q = P6,000 + P5.25 Z
If 1,000 machine hours are worked in one month, the related point of estimate of total
maintenance costs would be
A. P11,250 C. P 5,250
B. P10,125 D. P 4,725
39. A
? The related point of estimate of total maintenance costs.
 If there are 1,000 machine hours (Z) in a month, and using the equation Q = P6,000
+ P5.25Z, then the value of Q shall be P11,250 [i.e., Q = P6,000 + (P5.25 x 1,000)].
40. Premised on past experience, Harry Corporation adopted the following budget
formula for estimating its shipment expenses. The company’s shipments average is
12 kilos per shipment.
Shipments costs = P 8,000 + (P0.25 x kgs. Shipped)
Pertinent data for the current month are given below:
Planned Actual
Sales 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales P240,000 P288,000
Total pound shipped 9,400 12,800
Kgs. shipped 4,364 5,591
The actual shipping costs for the month amounted to P10,500. The appropriate
monthly flexible budget allowance for shipping costs for purposes of performance
evaluation would be
A. P9,397.75 C. P10,340
B. P11,075 D. P10,460
40. A
? The appropriate monthly flexible budget allowance for shipping costs.
 The appropriate flexible budget allowance for shipping costs shall be the standard
shipping costs. Standard shipping cost is actual units (e.g., kilograms) multiplied by
the standard rate per unit plus the fixed component thereof.
Variable costs (5,591 kgs. x P0.25) P1,397.75
Fixed costs 8,000.00
Flexible budget allowance P9,397.75
41. Kwing Company uses regression analysis to develop model for predicting overhead
costs. Two different cost drivers (machine hours and direct materials weight) are
under considerations as the independent variable. Relevant data were run on a
computer using one of the standard regression programs, with the following results:
Machine hours Coefficient Direct materials weight Coefficient
Y intercept 2,500 Y Intercept 4,600
B 5.0 B 2.6
r2=.70 r2= .50
Which regression equation should be used?
A. Y = 2,500 + 5.0x. C. Y = 4,600 + 2.6x.
B. Y = 2,500 + 3.5x. D. Y = 4,600 + 1.3x. (aicpa)
41. A
? The regression equation to be used.
 Regression analysis shows the relationships of variable “Y” in relation to variable “x”,
where Y = a + bx. The value of “x” used in estimating the value of “Y“ should
represent the best correlation of the two variables. The coefficient of correlation is
represented by r2 (or rho). Between machine hours and direct materials weight,
machine hours have the higher degree of correlation, and therefore should be the
more reasonable basis in developing the value of “Y”, as follows:
Y = a + bx
Y = 2,500 + 5x
where: a = point of intercept
b = slope
x = independent variable
Y = dependent variable
42. The manager of the assembly department of a company would like to estimate the
fixed and variable components of the department’s cost. To do so, the manager has
collected information on total cost and output for the past 24 months. To estimate the
fixed and variable components of total cost, the manager should use
A. Regression analysis. C. Sensitivity analysis.
B. Game theory. D. Queuing theory. (cia)
42. A
? The method to be used in estimating the fixed and variable components of total
costs.
 Regression analysis shows the relationship of variable “Y” with variable “x”. The
relationship normally contains fixed factor (known as point of intercept, or “a”) and a
variable factor (known as a slope, or “b”). This relationship is expressed as follows:
Y = a + bx
Y = point of intercept + slope(x)
The “a” or the point of intercept is where the regression line starts from the graph
in the positive quadrant. The “b” or the slope is determined by dividing the assigned
difference in the value of “Y” over the assigned difference in the value of “x”. Also,
using the regression analysis, the values of “a” (i.e., fixed costs) and “b” (i.e., variable
rate) may be determined by using the least squares method.
Choice-letter “b” is incorrect because game theory applies to anticipating the
response or reaction of competing companies as price changes, and developing
strategies thereafter. Choice-letter “c” is incorrect because sensitivity analysis relates
to predicting the outcome or possible scenario of events after considering changes in
variables that have an impact on the events. Choice-letter “d” is incorrect because
queuing theory is used in finding the number of optimal service lines to be used by
comparing the benefits that could be derived from the service line with the
corresponding costs thereof.
43. In determining cost behavior in business, the cost function is often expressed as Y =
a + bx. Which one of the following cost estimation methods should not used in
estimating fixed and variable costs for the equation?
A. Graphic method. C. High-and-low point method.
B. Simple regression. D. Multiple regression. (cma)
43. D
? A cost estimation method that should not be used in estimating fixed and variable
costs.
 Multiple regression analysis estimates the value of Y in relation with multiple values
of “x”. This may be mathematically expressed as follows:
Y = a +b1x1 +b2x2 + b3x3 + … + bnxn
The multiple regression equation involves two or more values of “x” and “b”. This
runs counter to the linearity assumption within the relevant range. Multiple regression
analysis extends beyond a relevant range and is applied in long-term analysis where
costs are not classified as fixed and variable but rather all costs are classified as
variable in the long-run. As such, multiple regression analysis cannot be used to
determine the fixed and variable component of costs.
Choice-letter “a” is incorrect because the graphic method refers to scattergraph,
one of the techniques applied in the regression analysis, which could be used in
estimating the fixed and variable elements of costs. Choice-letters “b” and “c” are
incorrect because they are also methods used in segregating costs into their fixed
and variable components.
44. Y = P575,000 + P8.50x represents the behavior of maintenance costs (Y) as a

function of machine hours (x). Thirty (30) monthly observations were used to develop
the foregoing regression equation. The related coefficient of determination was .90.
If 2,500 machines hours were worked in one month, the related point estimate of total
variable maintenance costs would be:
A. P23,000 C. P25,250
B. P21,250 D. P19,125
(rpcpa)
44. B
? The related point estimate of total variable maintenance costs.
 The variable coefficient is P8.50 and the independent variable “x” is 2,500 hours.
The estimated variable maintenance costs is PP21,250 (i.e., P8.50 x 2,500 hrs.).
45. All of the following are assumptions underlying the validity of linear regression output
except
A. The errors are normally distributed and their mean is zero.
B. Certainty.
C. The variance of the errors is constant.
D. The independent variables are not correlated with each other. (cma)
45. B
? A description that is not an assumption underlying the validity of linear regression.
 Using linear regression analysis, several assumptions are used except that certainty
cannot be achieved in predicting the future. One reason is that regression analysis
uses statistical sampling technique that gives allowance for standard deviation and
standard error of estimate. Another is that the real environment where the events
exist are also affected by variables that may not have been considered in setting the
regression equation analysis.
Choice-letters “a”, “c”, and “d” are incorrect because they are several
assumptions underlying the validity of linear regression such as the errors are
normally distributed and their mean is zero, the variance of the errors is constant, and
the independent variables are not correlated with each other.
46. When the relationship between the independent and dependent variable is not
expected to remain constant, an appropriate method of analysis is
A. Cluster analysis. C. Curvilinear regression
B. Simple linear regression. D. Simplex linear programming.
(cia)
46. C
? An appropriate method of analysis to be used when the relationship between the
independent and dependent variables is not expected to remain constant.
 Curvilinear regression analysis does not use a straight line or linear analysis but
rather estimates the value of “Y” in a given range using particular intercept and slope
values, and in another given range in the same curvilinear regression using different
values of slope, etc.
Choice-letter “a” is incorrect because cluster analysis groups variables into their
similar attributes and analyzes the effects of such variables as a group; this method
is not applicable under the circumstance given in the question. Choice-letter “b” is
incorrect because simple linear regression uses a straight line. Choice-letter “d” is
incorrect because simplex linear programming is an algorithm for finding optimal
solutions to optimize revenue or minimize costs.
47. An auditor used regression analysis to evaluate the relationship between utility costs
and machine hours. The following information was developed using a computer
software program:
Intercept 2,050
Regression .825
Correlation coefficient .800
Standard error of the estimate 200
Numbers of observations 36
What is the expected utility cost if the company’s 10 machines will use 2,400 hours
next month?
A. P4,050 C. P3,970
B. P4,030 D. P3,830
(cia)
47. B
? The expected utility costs next month if total machine hours used will be 2,400 hours.
 The estimated utility costs may be determined by the regression equation analysis
where Y = a + bx. If “Y” is the utility costs, “a” is the point of intercept, “b” is the
slope of the regression line, and “x” is the number of machine hours, then:
Y = 2,050 + 0.825x
Y = 2,050 + (0.825) 2,400 hrs. = P4,030
48. A division uses a regression in which monthly advertising expenditures are used to
predict monthly product sales (both in millions of pesos). The results show a
regression coefficient for the independent variable equal to 0.8. This coefficient value
indicates that
A. The average monthly advertising expenditure in the sample is P800,000.
B. When monthly advertising is at its average level, product sales will be P800,000.
C. On average, for every additional peso in advertising, sales increase by P.80.
D. Advertising is not good predictor of sales because the coefficient is so small. (cia)
48. C
? The interpretation for the regression coefficient for the independent variable that is
equal to 0.80.
 The dependent variable is the sales value and the independent variable is the
advertising expense. The coefficient of the advertising expense is 0.80 in
determining the value of sales. Therefore, on average, it indicates that for every
peso spent in advertising, sales increase by P0.80.
Choice-letter “a” is incorrect because the advertising expense is the basis of
estimating sales and not the one to be estimated. Choice-letter “b” is incorrect
because the amount of average advertising is not given and therefore sales could not
be estimated. Choice-letter “d” is incorrect because a regression coefficient of the
independent variable speaks of estimating the value of Y and does not speak of the
relationship between the values of “X” and “Y”, which is the one determined by the
coefficient of correlation (or rho).
49. Rovic Company is in the process of preparing its budget for the next fiscal year. The
company has had problems controlling costs in prior years and has decided to adopt
a flexible budgeting system this year. Many of its costs contain both fixed and
variable cost components. A method that can be used to separate costs into fixed
and variable components is
A. Trend analysis. C. Dynamic programming
B. Monte Carlo simulation. D. Regression analysis.
(cma)
49. D
? A method that can be used to separate costs into fixed and variable components.
 Generally, there are two methods used in separating the fixed and variable
components of costs – the high-low method and the regression equation analysis.
Under the regression line analysis, there are still two popular techniques that are in
use – the scattergraph and the least-squares-method.
Choice-letter “a” is incorrect because trend analysis or time series analysis
anticipates the possible outcome of events based on past performances which does
not necessarily require the segregation of fixed and variable components of costs.
Choice-letter “b” is incorrect because Monte Carlo simulation involves adding random
numbers to otherwise deterministic models to simulate the uncertainty inherent in
real-world situations. Choice-letter “c” is incorrect because dynamic programming is
an approach to solving problems, not a particular algorithm where it divides a large
mathematical model into smaller, more manageable pieces in such a way that once
that smaller problems are solved, the result is the optimal solution to the overall
model. Dynamic programming is used for problems that involve probabilistic

variables and time-staged decisions, that is, decisions affected by previous decisions
A decision tree with probabilities for each branch illustrates a time-staged decision
process that could be evaluated with dynamic programming.
Questions 50 and 51 are based on the following information. The Dencio Company
derived the following cost relationship from a regression analysis of its monthly
manufacturing overhead cost
C = P80,000 + P12 M
If: C = monthly manufacturing overhead cost
M = machine hours
The standard error of the estimate of the regression is P6,000, The standard time
required to manufacture one six-unit case of Dencio’s single product is 4 machine
hours. Dencio applies manufacturing overhead to production on the basis of
machine hours, and its normal annual production is 50,000 cases.
50. Dencio’s estimated variable manufacturing overhead cost for a month in which
scheduled overhead is 5,000 cases will be
A. P 80,000 C. P240,000
B. P320,000 D. P360,000 (cma)
50. C
? The estimated variable manufacturing overhead for 5,000 cases.
 The variable overhead rate is applied at P12 per machine hour. Four (4) machine
hours are needed per case, hence, there are 20,000 estimated total machine hours
to be used (i.e., 5,000 units x 4 machine hours). The total estimated variable
manufacturing overhead is P240,000 (i.e., 20,000 MH x P12).
51. Dencio’s predetermined fixed manufacturing overhead rate would be

A. P1.60 per machine hour. C. P4,00 per machine hour.
B. P1.20 per machine hour. D. P4.80 per machine hour. (cma)
51. D
? The predetermined fixed manufacturing overhead per machine hour.
 Standard fixed manufacturing overhead rate is budgeted fixed overhead divided by
normal capacity. The annual budgeted fixed overhead is P960,000 (i.e., P80,000 x
12 mos.) and the normal capacity in machine hours are 200,000 machine hours (i.e.,
50,000 cases x 4 machine hours). Therefore, the standard fixed manufacturing
overhead is P4.80 per machine hour (i.e., P960,000/200,000 machine hours).
52. To facilitate planning and budgeting, management of a travel service company wants
to develop forecasts of monthly sales for the next 24 months. Based on past data,
management has observed an upward trend in level of sales. There are also
seasonal variations with high sales in June, July, and August, and low sales in
January, February, and March. An appropriate technique for forecasting the
company’s sales is
A. Time series analysis. C. Linear programming
B. Queuing Theory. D. Sensitivity analysis. (cia)
52. A
? An appropriate technique for forecasting the company’s sales.
 Time series analysis predicts the outcome of variable “Y” (e.g., sales) in relation to
time (i.e., the representation of variable “x”). The seasonal variations (e.g., secular
trend) are averaged overtime to use a predictable coefficient over a longer length of
time.
Choice-letter “b” is incorrect because queuing theory is used to determine the
optimal number of service lines to be provided with the least costs of waiting and
servicing waiting lines. Choice-letter “c” is incorrect because linear programming
optimizes the objective functions given the resource constraints. Choice-letter “d” is
incorrect because sensitivity analysis predicts the effects of the changes in one or
more variables included in a decision model.
53. What are the four components of a time series?

A. Trend, cyclical, seasonal, and irregular. C. Alpha, cyclical, seasonal, and repetitive.
B. Alpha, cyclical, seasonal, and irregular. D. Trend, cyclical, seasonal, and repetitive.
(cia)
53. A
? The four components of a time series.
 Time series or trend analysis predicts the future by using adjusted past data. The
past data are adjusted by factors such as secular trend, cyclical fluctuations,
seasonal variations, and irregular or random variations. Secular trend refers to the
long-term change that may affect the past series of events. Cyclical fluctuations refer
to economic cycle (i.e., prosperity, recession, depression, and recovery) and
business life-cycle (i.e., infancy, growth, expansion, and maturity/decline) that are
normally beyond the control of managers but have to be considered in planning
because of there great effects. Seasonal variations refer to short-term changes in
sales patterns due to regular business practices, customs in the place, traditions, and
similar factors affecting buying habits. A seasonal index may be used to reflect
seasonal variations. Irregular or random variations refer to possibilities that are also
to be included in the planning activities, particularly in the time series analysis,
because of their possibility of occurrence. Examples of irregular variations are
natural calamities, strikes, fire, etc.
Choice-letters “b”, “c”, and “d” are incorrect because they include alpha and
repetitive variations which are not part of the four components of time series.
54. The four components of time series data are secular trend, cyclical variation,
seasonally, and random variation. The seasonality in the data can be removed by
A. Multiplying the data by a seasonality factor
B. Ignoring it.
C. Taking the weighted average over four time periods
D. Subtracting a seasonally factor from the data. (cma)
54. C
? The means by which seasonality can be removed in the time series data.
 Seasonal variations reflect the changes in estimated data due to regular factors such
as attitudes, practices, customs, traditions, cultures, etc. that ought to be included in
the time series analysis. This variation may be removed by getting the weighted
average over several business period not only in a particular business period.
Choice-letters “a” and “d” are incorrect because multiplying or subtracting the
data by a seasonality factor means adjusting for, not removing, seasonality factor.
Choice-letter “b” is incorrect seasonal variations cannot be ignored; they are included
in the data and should be considered for a forecasting model to be accurate.
55. An internal auditor for a large automotive parts retailer wishes to perform a risk
analysis and wants to use an appropriate statistical tool to help identify stores that
are at variance with the majority of stores. The most appropriate statistical tool to use
would be
A. Linear time series analysis.
B. Cross-sectional regression analysis.
C. Cross tabulation with chi square analysis of significance.
D. Time series multiple regression analysis to identify changes in individual stores
over time. (cia)
55. B
? The most appropriate statistical tool to identify stores that are at variance with the
majority of stores.
 Choice-letter “b” is correct. Cross sectional regression analysis refers to the method
of using past data in estimating the future performance of an entity by incorporating
other entities’ data. This method is the most appropriate to be used under the
circumstance because it compares attributes of a store’s operating statistics with
other stores at a given time.
Choice-letter “a” is incorrect because it compares data of an entity from one time
to another. Choice-letter “c” is incorrect because cross tabulations have to have a
model for expectations to be useful, of which model is not given in the situation.
Choice-letter “d” is incorrect because multiple regression analysis does not compare
one store with another but compares the performance of an individual store over a
period of time.
56. The moving-average method of forecasting

A. Is a cross-sectional forecasting method.
B. Regresses the variable of interest on a related variable to develop a forecast.
C. Derives final forecasts by adjusting the initial forecasts based on the smoothing
constant.
D. Includes each new observation in the average as it becomes available and
discard the oldest observation. (cia)
56. D
? A true description about moving-average method of forecasting.
 The moving-average method of forecasting determines
the new average coefficient if a new observation becomes available and in the
process discards the oldest observation, hence, choice-letter “d” is correct.
Choice-letter “a” is incorrect because cross-sectional forecasting method

determines the value of a future event by comparing an items with all the items in the
observation and determines its relationship. Choice-letter “b” is incorrect because
moving-average method is not only interested on the relationship of variables but on
the availability of variables as it comes into observation. Choice-letter “c” is incorrect
because smoothing constant is used when there is a material change on the
observed data that may render the averaging irrelevant.
57. As a part of a risk analysis, an auditor wishes to forecast the percentage growth in
next month’s sales for a particular plant using the past 30 months sales results.
Significant changes in the organization affecting sales volumes were made within the
last 9 months. The most effective analysis technique to use would be
A. Unweighted moving average. C. Queuing theory.
B. Exponential smoothing. D. Linear regression analysis. (cia)
57. B
? The most effective analysis technique to use in forecasting the percentage growth in
next month’s sales given a significant change in sales volume in the last 9 months.
 Exponential smoothing considers significant changes in the behavior and
environment of variables affecting a particular outcome, choice-letter “b” is correct.
Choice-letter “a” is incorrect because unweighted moving average does not
consider the changes in variables affecting a particular outcome but simply
anticipates future outcome but considering each variable in their nominal relationship.
Choice-letter ‘c”, queuing theory, is incorrect because it applies to analyzing the
effects of reducing the cost of waiting in a line with the cost of providing added
service line to reduce the cost of delay in a queue. Choice-letter “d” is incorrect
because linear regression analysis applies to a relationship of variables of “x” and “y”
in their most expected behavior considering their several relational observations.
Scattergraph
58. Quality control program employs many tools for problem definition and analysis. A
scatter diagram is one of these tools. The objective of a scatter diagram is to
A. Display a population of items for analysis.
B. Show frequency distribution in graphic form.
C. Divide a universe of data into homogeneous groups.
D. Show the vital trend and separate trivial items. (cia)
58. A
? The objective of a scatter diagram.
 Scatter diagram is used to determine, by visual fit, the relationship of two variables in
a graph. The relationship of the variables may be positive, negative, or there may be
no correlation at all. Choice-letter “a” is correct because in scatter graph the
population is displayed for analysis.
Choice-letter “b” is incorrect because the objective of scatter graph is to show
frequency distribution in graphic form but not to determine the relationship of the
variables in the graph. Choice-letter “c” is incorrect because dividing data into
homogenous groups is not a concern of scatter graph but more on the relationship of
variables in the graph. Choice-letter “d” is incorrect because scatter graph is not
only used to display vital trends but is concerned first with the analysis of data to
determine the existence or non-existence of trends and analyze the degree of
relationship between variables.
59. The management of an airline is interested in the relationship between maintenance

cost and the level of operations of its aircraft. Using regression analysis on cost
activity data collected over 12 months, the relationship below was estimated.
Monthly Maintenance Cost (million of Pesos)
1.30
0.70
0.50
1,000 2,000 3,000 4,000
The estimated increase in the monthly maintenance cost each additional hour of
operation is
A. P150 per hour. C. P450 per hour.
B. P300 per hour. D. P850 per hour.
(cia)
59. A
? The variable rate of maintenance cost per hour.
 Variable cost per hour is determined as follows:
VCRate = Δ in Costs / Δ in hours = (Y1–Y2) / (X1-X2)
If: Y1 = P1,000,000
Y2 = P 850,000
X1 = 2,000 hrs.
X2 = 1,000 hrs.
Then: VCR = (P1,000,000 – P850,000) / (2,000 – 1,000)
VCR = P150,000 / 1,000 = P150/hr.
Least-squares method
Questions 60 through 63 are based on the following information. Below is an
examination of last year’s financial statements of Mackenzie Park Co., which
manufactures and cells trivets. Labor hours and production cost for the last 4 months
of the years, which are representative for the year, were as follows:
Total
Month Labor Hours Production Costs
September 2,500 P 20,000
October 3,500 25,000
November 4,500 30,000
December 3,500 25,000
Totals 14,000 P100,000
Based upon the information given using the least squares method of computation
with letters listed below, select the best answer for each question.
IF: a = Fixed variable cost per month
b = Variable production cost per labor hour
n = Number of months
x = Labor hours per month
y = Total monthly production costs
 = Summation
60. The equation(s) required for applying the least squares method of computation of
fixed and variable production costs can be expressed as
A. xy = a x + b x2 C. Y = a + bx2
Y = na + bx2
B. y = na + b x D. XY = ax + bx2
Y = na + bx (aicpa)
60. D
? The equations required for applying the least squares method.
 In applying the least squares method to segregate the fixed (i.e., “a”) and variable
(i.e., “b”) components in the regression line equation Y = a + bx, the following
equations are to be used:
Y = na + bx
XY = ax + bx²
61. The cost function derived by the simple least squares method
A. Is linear.
B. Must be tested for minima and maxima.
C. Is parabolic.
D. Indicates maximum costs at the function’s point of inflection. (aicpa)
61. A
? A description of the cost function derived by the simple least squares method.
 Choice-letter “a” is correct because the least squares method is based on the simple
regression equation, Y = a + bx, where it depicts a straight line, and is therefore,
linear. Choice-letter “b” is incorrect because minima and maxima testing refers to
standard deviation and does not directly relate to the function of the equation itself.
Choice-letter “c” is incorrect because the least squares method relates to straight line
and not to a parabola. Choice-letter “d” is incorrect because, essentially, the
regression is infinite and therefore has no maximum point of costs.
62. Monthly production cost can be expressed

A. y = ax + b. C. y = b +ax
B. y = a + bx. D. y = a + bx. (aicpa)
62. B
? A mathematical expression of a monthly production cost.
 Monthly production costs equal the sum of fixed costs and variable costs. If “a” is
fixed costs and “bx” as the total variable costs (i.e., unit variable cost x units sold),
then, total costs (i.e., Y), shall be:
Y = a + bx
63. Using the least squares method of computation the fixed monthly production cost of
trivets is approximately
A. P100,000 C. P 7,500
B. P 25,000 D. P 20,000 (aicpa)
63. C
? The fixed monthly production cost of trivets.
 The fixed production cost is assumed to be constant. Using the least squares
method, the values of X, Y, XY, and x² are to be determined as shown below
(X=labor hours, Y-costs):
X Y XY X²
2,500 P 20,000 P 50,000,000 P 6,250,000
3,500 25,000 87,500,000 12,250,000
4,500 30,000 135,000,000 20,250,000
3,500 25,000 87,500,000 12,250,000
= 14,000 P100,000 P360,000,000 P51,000,000
Using the least squares equations, and since n = 4, we have:

Y = na + bx = 100,000 = 4a + b14,0000
XY = ax + bx² = 360,000,000 = 14,000a + b51,000,000
To solve for “b”, let us eliminate “a” by making the coefficient of “a” in the first
equation equal to the negative of the coefficient of “a” in the second equation. To do
it, we have to multiply the first equation by negative 3,500 Ii.e., 14,000/4), and it will
result as follows
[ 100,000 = 4a + b14,0000 ] –3,500
360,000,000 = 14,000a + b51,000,000
- 350,000,000 = -14,000a – b49,000,000
10,000,000 = + b 2,000,000
b = 10,000,000 / 2,000,000
b = 5
By substituting the value of “b” (i.e., variable cost rate) in the first equation, then, the
value of “a” is determined as:
If : 100,000 = 4a + b14,0000
then : 100,000 = 4a + (5)14,000
100,000 = 4a + 70,000
4a = 100,000 – 70,000
a = 7,500 (value of fixed cost)
Correlation
64. If the coefficient of correlation between two variables is zero, how might a scatter
diagram of these variables appear?
A. Random points.
B. A least squares line that slopes up to the right.
C. A least squares line that slopes down to the right.
D. Under these conditions, a scatter diagram could not be plotted on a graph. (aicpa)
64. A
? The appearance of variables on a scatter diagram if the coefficient of correlation
between variables is zero.
 If the coefficient of correlation between two variables is zero, then the plotted
observations on the scatter graph would not show a relevant trend of correlation
between the two variables, hence at random points. Choice-letter “a” is therefore
correct.
Choice-letter “b” is incorrect because the regression line that slopes up to the
right indicates a positive correlation. Choice-letter “c” is incorrect because the
regression line that slopes down to the right depicts a negative correlation. Choice-
letter “d” is incorrect because a scatter diagram could still be plotted on a graph
although random in nature.
65. In regression analysis, the coefficient of determination is a measure of

A. The amount of variation in the dependent variable explained by the independent
variables.
B. The amount of variation in the dependent variable unexplained by the
independent variables.
C. The slope of the regression line.
D. The predicted value of the independent variable. (cia)
65. A
? A description of the coefficient of determination.
 Choice-letter “a’ is correct, coefficient of determination is coefficient of correlation
squared (r²). It measures the proportion of the variance of the dependent variable
explained by the independent variable.
Choice-letter “b” is incorrect because coefficient of determination measures the
amount of variation in the dependent variable as explained, not unexplained, by the
independent variable. Choice-letter “c” is incorrect because the slope of the
regression line is the variable cost rate (i.e., “b”). Choice-letter “d” is incorrect
because the predicted value of the independent variable is not measured by the
coefficient of determination.
66. Using regression analysis, Fairfields Co. graphed the following relationship of its
cheapest product line’s sales with its customers’ income levels:
Sales
(P)
0 Income levels increasing
If there is a strong statistical relationship between the sales and customers’ income
levels, which of the following numbers best represent the correlation coefficient for
this relationship?
A. -9.00 C. +0.93
B. -0.93 D. +9.00 (aicpa)
66. B
? The number that best represents the correlation coefficient as shown on the given
graph.
 The graph shows a strong negative statistical relationship between variables X and
Y, and choice-letter “b” is the best answer. Choice-letter “a” is incorrect because the
coefficient of correlation should be within the range –1.00 to +1.00, and since choice-
letter “a” is greater than –1.00, then it is not a possible answer. Choice-letters “c” and
“d” are not correct answers because the coefficient of correlation must be negative
and not positive.
67. Using the graph below, the coefficient of correlation between direct materials cost and
units produced is nearest
Direct
Materials
0 Units of production
A. -0.75 C. 0.0
B. 0.50 D. 1.00 (cia)
67. D
? The nearest description of the coefficient of correlation between direct materials and
units produced.
 Choice-letter “d” is the best possible answer because the graph depicts a very strong
positive statistical relationship between the units of production and cost of direct
materials used. Choice-letter “a” is incorrect because the graph depicts a direct,
positive relationship and not an inverse, negative relationship. Choice-letter “b” is
incorrect because between 0.50 and 1.00, the better choice is 1.00 with regard to the
trend and relationship of the variables on the graph. Choice-letter “c”, where r = 0,
which means there is nor correlation, is incorrect because there is an apparent
relationship between direct materials costs and units of production.
68. Correlation is a term frequently used in conjunction with regression analysis and is
measured by the value of the coefficient of correlation, “r”. The best explanation of
the value “r” is that it
A. Interprets variances in terms of the independent variable.
B. Ranges in size from negative infinity to positive infinity.
C. Is a measure of the relative relationship between two variables.
D. Is positive only for downward-sloping regression lines. (cma)
68. C
? An explanation of the value of “r”.
 Choice-letter “c” is correct, coefficient of correlation (‘r”) measures the relationship
between two variables. The relationship may be positive, negative, or no correlation
at all. Choice-letter “a” is incorrect because interpretation of the variances in terms of
independent variable is covered within the scope of analysis of variations and
hypothesis testing. Choice-letter “b” is incorrect because the coefficient of variation
ranges from –1.00 to +1.00. Choice-letter “d” is incorrect because a downward-
sloping regression line depicts a negative relationship between two variables.
69. In regression analysis, which of the following correlation coefficients represents the
strongest relationship between the independent and dependent variable?
A. 1.03 C. -.89
B. -.02 D. .75
(cia)
69. C
? The one that represents the strongest relationship between the independent and
dependent variables.
 Choice-letter “c” is the best answer because it represents the strongest relationship
between the independent and dependent variables. Choice-letter “a” is definitely
incorrect because it is beyond the possible range of coefficient of correlation from –
1.00 to +1.00. Choice-letter “b” is incorrect because it shows a very weak, almost nil,
relationship between two variables. Choice-letter “d” is incorrect because .75
represents relationship that is lower than the relationship represented by choice-letter
“c”.
70. The auditor of a bank has developed a multiple regression model that has been used
for a number of years to estimate the amount of interest income from commercial
loans. During the current year, the auditor applies the model and discovers that the r 2
value has decreased dramatically, but the model otherwise seems to be working well.
Which conclusion is justified by the change?
A. Changing to a cross-sectional regression analysis should cause r 2 to increase.
B. Regression analysis is no longer an appropriate technique to estimate interest.
C. Some new factors, not included in the model are causing interest income to
change.
D. A linear regression analysis would increase the model’s reliability. (cia)
70. C
? The implication of the decrease in r2.
 The coefficient of determination (r2) measures the variation in the dependent variable
(i.e., interest income) that is explained by the independent variables. Since the
model explains less of the change in interest income, some other factor must be
causing interest income to change, choice-letter “c” is correct.
Choice-letter “a” is incorrect because cross-sectional regression analysis is
inappropriate. Choice-letter “b” is incorrect because regression analysis is still an
appropriate technique in estimating interest income. Choice-letter “d” is incorrect
because the auditor should search for a more appropriate model in anticipating
variations in interest income that may not be reliably estimated by the simple linear
regression analysis.
71. An auditor asks accounting personnel how they determine the value of the
organization’s real estate holdings. They say that valuations are based on a
regression model that uses 17 different characteristics of the properties (square
footage, proximity to downtown, age, etc.) to predict value. The coefficients of this
model were estimated using a random sample of 20 company properties, for which
the model produced an r2 value of 0.92. Based on this information, which one of the
following should the auditor conclude.
A. The model’s high r2 probably is due in large part to random chance.
B. 92% of the variable that determine value is in the model.
C. The model is very reliable.
D. This sample of properties is probably representative of the overall population of
company holdings. (cia)
71. A
? A true statement about a regression model.
 Choice-letter “a’ is the best answer since regression analysis is a statistical technique
that uses sampling in measuring the pattern and possible outcome of a particular
phenomenon. Had the random of the properties used been different, the model’s r 2
may have been different.
Choice-letter “b” is incorrect because the value of the r 2, 0.92, does not indicate
the number of variables included in the model that are determinative of its value.
Choice-letter “c” is incorrect because the model has too many predictors for a small
sample size, and does not speak well of reliability. Choice-letter “d” is incorrect
because result of a sampling exercise should still be verified by doing an analysis
using a different set of samples before conclusions are to be drawn.
72. A firm regressed overhead on units produced over the past year and found a
coefficient of determination equal to 0.85 with a U-shaped residual error pattern, it is
reasonable to conclude that the relationship between overhead and units produced is
A. Weak. C. Nonlinear
B. Causal. . D. Linear.
72. C
? A description of the relationship between overhead and units produced.
 Choice-letter “c” is correct because the residual error pattern is U-shaped. The
residual error pattern consists of the plots of the estimates of the error term in the
linear regression equation. Choice-letter “a” is incorrect because the relationship
between overhead and units produced is strong, not weak, as evidenced by the 0.85
value of coefficient of determination. Choice-letter “b” is incorrect because
regression line model measures the relationship between two variables but it does
not establish causal relationship. Choice-letter “d” is incorrect because a U-shaped
residual error pattern indicates a nonlinear relationship.
 done 

Chap 3 - Costs Concepts

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Chapter 3 Cost concepts, classification and segregation 46

2. A decision-making concept, described as “the contribution to income that is foregone

Questions 5 to 7 are based on the following information. Management accountants

5. The costs described in situations I and IV are

6. The costs described in situations III and V are

7. The cost described in situation II is a

9. Opportunity costs are

10. Cost of goods sold is a component of the income statement. In a merchandising

A. Relevant because salaries are always relevant.

13. Sunk costs

Choice-letter “a”, process costing, is incorrect because it relates to the model of

October 19,800 3,650

* Var. Costs (18,000 units x P5) = P90,000

25. The slope of the line of regression is

26. Regression analysis

A. All four statements are appropriate. C. Statements 1 and 3 only.

28. Simple regression differs from multiple regression in that

30. Simple regression analysis involves the use of

31. Multiple regression analysis involves the use of

32. Multiple regression analysis

34. A non-linear cost function

44. Y = P575,000 + P8.50x represents the behavior of maintenance costs (Y) as a

model. Dynamic programming is used for problems that involve probabilistic

51. Dencio’s predetermined fixed manufacturing overhead rate would be

B. Queuing Theory. D. Sensitivity analysis. (cia)

53. What are the four components of a time series?

56. The moving-average method of forecasting

Choice-letter “a” is incorrect because cross-sectional forecasting method

59. The management of an airline is interested in the relationship between maintenance

62. Monthly production cost can be expressed

Using the least squares equations, and since n = 4, we have:

65. In regression analysis, the coefficient of determination is a measure of

0 Income levels increasing

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