Cost Estimation: AACSB: Analytic

Chapter 5
Cost Estimation
True/False Questions
T F 1. Cost behavior is the most important characteristic for managerial decision making.
Answer: True Difficulty: Simple Learning Objective: 1

AACSB: Analytic
T F 2. In general, accounting records accumulate cost information according to its behavior (i.e.,
variable and fixed).
Answer: False Difficulty: Simple Learning Objective: 1

AACSB: Analytic
T F 3. In general, cost behavior results are likely to differ between the engineering method and
the account analysis method.

AACSB: Analytic
T F 4. The engineering method of determining cost behavior is particularly useful for totally
new activities or products.

AACSB: Analytic
T F 5. One disadvantage of the engineering method is that it details each step required to
perform an operation.
Answer: False Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
T F 6. Engineering estimates are based on optimal work conditions instead of actual work
conditions.

AACSB: Analytic
90 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

T F 7. One advantage of the engineering method is that it does not require data from prior
periods to estimate cost behavior.
Answer: True Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
T F 8. One advantage of the account analysis method for estimating cost behavior is that it
includes actual work conditions.

AACSB: Analytic
T F 9. The account analysis method is more subjective than other cost estimation methods
because it relies heavily on the personal judgment of accountants.

AACSB: Analytic
T F 10. The most important step in obtaining cost behavior estimates is identifying the
appropriate cost driver.

AACSB: Analytic
T F 11. The account analysis method determines the fixed costs per period before the variable
cost per unit.
Answer: False Difficulty: Complex Learning Objective: 3

AACSB: Analytic
T F 12. In general, the account analysis method focuses on the underlying relationship between
cost and activities from the previous period.

AACSB: Analytic
T F 13. The first step in using a statistical cost estimation method is to establish a logical
relationship between the dependent variable and the independent variable (cost driver).

AACSB: Analytic
Test Bank, Chapter 5 91

T F 14. The relevant range represents those activity levels for which valid cost relationships have
been observed.
Answer: True Difficulty: Complex Learning Objective: 4

AACSB: Analytic
T F 15. The relevant range for activities does not apply to fixed costs.

AACSB: Analytic
T F 16. A scattergraph is useful for identifying irrelevant data.

AACSB: Analytic
T F 17. In general, more observations are required when cost and activity levels are unstable; i.e.,
the company's operations have changed significantly within the relevant range.
Answer: False Difficulty: Complex Learning Objective: 4

AACSB: Analytic
T F 18. The slope of the total cost line on a scattergraph is the variable cost per unit.

AACSB: Analytic
T F 19. The intercept of the total cost line on a scattergraph is the fixed costs per unit.

AACSB: Analytic
T F 20. In general, the intercept cannot be interpreted as an estimate of total fixed costs because it
lies outside the relevant range.

AACSB: Analytic
T F 21. The slope of the total cost line using the high-low method is the difference between the
high and low activity divided by the difference between the high and low cost.

AACSB: Analytic
T F 22. One disadvantage of the high-low method is the highest and lowest points may not be
representative of normal operating activities.

AACSB: Analytic
T F 23. One advantage of the scattergraph method for estimating cost behaviors is it uses all of
the information gathered and available to the accountant.

AACSB: Analytic
T F 24. The total cost being estimated is the independent variable in the regression equation.

AACSB: Analytic
T F 25. One advantage that regression techniques have over other cost estimation methods is it
generates information that can be used to determine how well the estimated cost equation
will predict future costs.

AACSB: Analytic
T F 26. The correlation coefficient should be interpreted as the proportion of the variation in Y
explained by X.

AACSB: Analytic
T F 27. If the correlation coefficient is .952, then it can be said that 95.2% of the changes in total
costs can be explained by changes in the cost driver.

AACSB: Analytic
T F 28. Because outliers are extreme data points, they can be included in the regression analysis
and not significantly affect the results.

AACSB: Analytic
T F 29. The t-statistic can be used to determine how well the cost equation will predict future
costs.

AACSB: Analytic
T F 30. The adjusted r-squared is the correlation coefficient squared and adjusted for the number
of outliers used to make the estimate.

AACSB: Analytic
T F 31. In general, the use of multiple independent variables increases the proportion of the
variation in the dependent variable explained by the cost equation.

AACSB: Analytic
T F 32. One way to control the effects of a nonlinear relation between total costs and volume is
reduce the relevant range.

AACSB: Analytic
T F 33. The linear cost estimate tends to understate the slope of the cost line outside of the
relevant range.
Answer: True Difficulty: Complex Learning Objective: 6

AACSB: Analytic
T F 34. Spurious relations can occur in multiple regressions, but not in simple regressions.

AACSB: Analytic
T F 35. Cost estimates using regression analysis are always more accurate and dependable than
cost estimates using the scattergraph methods.

AACSB: Analytic
T F 36. A basic assumption of most cost estimation methods is cost behavior patterns are linear
within the relevant range.

AACSB: Analytic
T F 37. In general, "garbage-in, garbage-out;" i.e., the quality of the cost equation depends on
collecting appropriate data.

AACSB: Analytic
T F 38. Different cost estimations methods will produce different cost equations, even when
using the same set of data.

AACSB: Analytic

T F 39. The quality of the cost equation can be increased by adjusting the cost information for
inflationary effects.

AACSB: Analytic
Multiple Choice Questions
Part A: Conceptual Questions
40. Which of the following statements is (are) true regarding cost behaviors?
(A) In general, accounting records accumulate cost information according to its behavior.
(B) Cost behaviors are the most important consideration in managerial decision making.
A) only A is true
B) only B is true.
C) Both A and B are true.
D) Neither A nor B is true.
Answer: B Difficulty: Simple Learning Objective: 1

AACSB: Analytic
41. Which cost estimation method does not use the company records as its primary source of
information about the relationship between total costs and activity levels?
A) scattergraph
B) high-low
C) account analysis
D) regression analysis
E) engineering estimates
Answer: E Difficulty: Simple Learning Objective: 2

AACSB: Analytic
42. A manager is trying to estimate the manufacturing costs of a new product. The company makes
several other products that utilize some of the same manufacturing procedures as the new
product. Which cost estimation method would be the best method to determine the total cost of
manufacturing the new product?
A) engineering estimates
B) regression analysis
C) account analysis
D) scattergraph
E) high-low
Answer: A Difficulty: Simple Learning Objective: 2

AACSB: Analytic

43. Engineering cost estimates are based on operating conditions that are considered:
A) perfect.
B) practical.
C) attainable.
D) historical
E) realistic.
Answer: A Difficulty: Moderate Learning Objective: 2

AACSB: Analytic
44. Which of the following costs would most likely be classified as variable assuming the account
analysis method is used to determine cost behaviors?
A) indirect materials.
B) supervisory salaries
C) equipment maintenance
D) annual Christmas party
E) building occupancy costs.

AACSB: Analytic
45. In the cost equation TC = F + VX, X is best described as the:

A) costs that do not vary with changes in the activity level.
B) costs that do vary with changes in the activity level.
C) total cost estimate at a particular activity level.
D) activity level used to estimate the total cost.
Answer: D Difficulty: Simple Learning Objective: 3

AACSB: Analytic
46. In the cost equation TC = F + VX, V is best described as the:

A) costs that do not vary with changes in the activity level.
B) intercept of the cost equation.
C) Slope of the cost equation.
D) Activity level used to estimate the dependent variable.
Answer: C Difficulty: Simple Learning Objective: 3

AACSB: Analytic
47. Determining the fixed and the variable components of a mixed cost can be accomplished by
several methods. The cost of each method varies in direct relation to its degree of accuracy.
Which of the following methods finds the fixed portion of a mixed cost before calculating the
variable portion?
A) Scattergraph.
B) Highlow method.

C) Account analysis.
D) Linear regression.
E) Engineering approach.
Answer: C Difficulty: Moderate Learning Objective: 3

AACSB: Analytic
48. The term "relevant range" as used in cost accounting means the range over which:
A) relevant costs are incurred.
B) costs may fluctuate.
C) cost relationships are valid.
D) cost data is available.

AACSB: Analytic
49. Determining the fixed and the variable components of a mixed cost can be accomplished by
several methods. The cost of each method varies in direct relation to its degree of accuracy.
Which of the following methods finds the variable portion of a mixed cost before calculating the
fixed portion?
A) Scattergraph.
B) High-low method.
C) Account analysis.
D) Linear regression.
E) Engineering approach.
Answer: B Difficulty: Moderate Learning Objective: 4

AACSB: Analytic
50. A disadvantage of the high-low method of cost analysis is that it

A) typically results in totally inaccurate cost formulae.
B) is too time consuming to apply.
C) uses two extreme data points, which may not be representative of normal conditions.
D) relies totally on the judgment of the person performing the cost analysis.

AACSB: Analytic
51. Regression analysis does not assume a

A) linear relationship between the dependent and independent variables(s).
B) normal distribution of the actual values (y) around the predicting equation (y').
C) constant variance for the independent error terms (e) from the predicting equation.
D) logical and causal relationship between the dependent and independent variable(s).

AACSB: Analytic

52. In the standard regression equation of y = a + bx, the letter b is best described as the
A) independent variable.
B) dependent variable.
C) slope of the equation.
D) intercept of the equation.

AACSB: Analytic
53. In the standard regression equation of y = a + bx, the letter a is best described as the

AACSB: Analytic
54. In the standard regression equation of y = a + bx, the letter y is best described as the

AACSB: Analytic
55. The statistic used to determine if the total cost function is significantly different from the fixed
cost function is the
A) t-value of the b-coefficient.
B) coefficient of determination.
C) standard error of the estimate.
D) coefficient of correlation.
E) standard error of the a-coefficient.

AACSB: Analytic
56. The coefficient of correlation means

A) the range of values over which the probability may be estimated based upon the regression
equation results.
B) the proportion of the total variance in the dependent variable explained by the independent
variable.

C) the measure of variability of the actual observations from the predicting (forecasting)
equation line.
D) the relative degree that changes in one variable can be used to estimate changes in another
variable.

AACSB: Analytic
57. The correlation coefficient that indicates the weakest linear association between two variables is
A) -0.73.
B) -0.11.
C) 0.12.
D) 0.35.
E) 0.72.

AACSB: Analytic
58. Given actual amounts of a semivariable cost for various levels of output, the method that will
give the most reliable measure of the fixed and variable components is the
A) high-low method.
B) linear regression method.
C) scattergraph method.
D) account analysis method.

AACSB: Analytic
59. Which of the following statements regarding regression analysis is (are) true?
(A) One way to control the effects of a nonlinear relationship between total costs and activity is
reduce the relevant range.
(B) The linear cost estimate tends to understate the slope of the cost line outside of the relevant
range.
A) only A is true
B) only B is true.
C) Both A and B are true.
D) Neither A nor B is true.

AACSB: Analytic
Part B: Computational Questions

60. Mount Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp
required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost
was $1.50 per direct labor hour?
A) $1,700
B) $3,000
C) $5,600
D) $8,000
E) some other answer _______________.

Response: $8,600 = FC + $1.50(400)(5); FC = $5,600
AACSB: Analytic
61. Given the following information, compute the total number of units for the period.
Direct labor hours 12,000

Direct labor cost $2.70 per hour
Direct materials cost $75 per unit
Total manufacturing cost $132,600
Fixed overhead cost $36,000
Variable overhead cost 50% of total labor cost
A) 360
B) 432
C) 640
D) 840
E) some other answer _______________

Response:
$132,600 = $75(units) + 12,000($2.70) + .50(12,000)($2.70) + $36,000
Units = 640
AACSB: Analytic

62. The Shapely Company uses the high-low method to determine its cost equation. The following
information was gathered for 2008:
Machine Hours Direct Labor Costs

Busiest month (June) 14,000 $200,000
Slowest month (December) 6,000 $120,000
What are the direct labor costs per machine hour?

A) $20.00
B) $16.00
C) $14.29
D) $10.00

Response: VC per M/C Hr. = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00
AACSB: Analytic
63. The Shapely Company uses the high-low method to determine its cost equation. The following
information was gathered for 2008:
Machine Hours Direct Labor Costs

Busiest month (June) 14,000 $200,000
Slowest month (December) 6,000 $120,000
If Shapely expects to use 10,000 machine hours next month, what are the estimated direct labor
costs?
A) $160,000
B) $180,000
C) $175,000
D) $150,000

Response:
VC per unit = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00
FC = $120,000 - $10(6,000) = $60,000
TC = $60,000 + $10 (10,000) = $160,000
AACSB: Analytic

64. Hagler's Toupees has the following machine hours and production costs for the last six months of
last year:
Month Machine Production

Hours Cost
July 15,000 12,075
August 13,500 10,800
September 11,500 9,580
October 15,500 12,080
November 14,800 11,692
December 12,100 9,922
If Hagler expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?
A) $ 8,750.00
B) $11,142.50
C) $22,400.00
D) $31,220.00
E) Some other answer ____________.
Answer: B Difficulty: Complex Learning Objective: 4

Response:
VC per unit = ($12,080 - 9,580)/(15,500 - 11,500) = $.625
FC = $12,080 - $.625(15,500) = $2,392.50
TC = $2,392.50 + $.625(14,000) = $11,142.50
AACSB: Analytic
65. The controller of Joy Co 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. Joy Co's budget analyst has the
following actual data for the last three months.
Month Production Manufacturing

In Units Supplies
March 450,000 $723,060
April 540,000 853,560
May 480,000 766,560
Using the high-low method to develop a cost estimating equation, the estimate of needed
manufacturing supplies for July would be (CMA adapted)
A) $681,500.
B) $688,750.
C) $749,180.
D) $752,060.
E) $759,310.
Answer: D Difficulty: Complex Learning Objective: 4

Response:
VC per unit = ($853,560 - 723,060)/(540,000 - 450,000) = $1.45 per unit

FC = $853,560 - $1.45(540,000) = $70,560
TC = $70,560 + $1.45(470,000) = $752,060
AACSB: Analytic
66. The Chambers Manufacturing Company recorded overhead costs of $14,182 at an activity level
of 4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per machine
hour using the high-low method to estimate the cost equation?
A) $2,78
B) $2.86
C) $3.10
D) $3.38
E) some other answer _________________.

Response: ($14,182 - 8,748)/(4,200 - 2,300) = $2.86
AACSB: Analytic
67. The Wiscow Manufacturing Company recorded overhead costs of $14,182 at an activity level of
4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the total estimated cost for
2,600 machine hours using the high-low method to estimate the cost equation?
A) $9,730
B) $9,606
C) $9,106
D) $8,788

Response:
VC = ($14,182 - 8,748)/(4,200 - 2,300) = $2.86
FC = $14,182 - 2.86(4,200) = $2,170
TC = $2,170 + $2.86(2,600) = $9,606
AACSB: Analytic
68. The cost accountants at the Doering Company regressed total overhead costs and direct labor
hours for the past 30-months and reported the following results:
Slope = $ 41.27
Intercept = $596.36
Correlation coefficient = .934
What is the estimated overhead cost if 225 direct labor hours are expected to be used in the
upcoming period? (rounded to the nearest whole dollar)
A) $10,534
B) $ 9,882
C) $ 9,230

D) $ 8,617

Response: $596.36 + $41.27(225) = $9,882.11
AACSB: Analytic
69. The cost accountants at the Doering Company regressed total overhead costs and direct labor
hours for the past 30-months and reported the following results:
Slope = $ 41.27
Intercept = $596.36
Correlation coefficient = .934
What percentage of the variation in total overhead costs is explained by the change in direct labor
hours?
A) 96.6%
B) 93.4%
C) 87.2%
D) 81.4%

Response: (.934)(.934) = .872
AACSB: Analytic
Use the following to answer questions 70-74 (To answer questions 73 & 74 students will need t-table):
The Armer Company is accumulating data to be used in preparing its annual profit plan for the coming
year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has
suggested that linear regression be employed to derive an equation in the form of y = a + bx for
maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the
regression analysis are as follows: (CMA adapted, May 1981)
Hours of Maintenance
Activity Costs
January 480 $4,200
February 320 3,000
March 400 3,600
April 300 2,820
May 500 4,350
June 310 2,960
July 320 3,030
August 520 4,470
September 490 4,260
October 470 4,050
November 350 3,300
December 340 3,160
Sum 4,800 $43,200

Average 400 3,600
A coefficient 684.65
B coefficient 7.2884
Standard error of the a coefficient 49.515
Standard error of the b coefficient .12126
Standard error of the estimate 34.469
R2 .99724
T-value a 13.827
T-value b 60.105

70. Based upon the data derived from the regression analysis, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at
A) $3,797.
B) $3,780.
C) $3,746.
D) $3,600.
E) $3,461.
F) Some other answer __________.

Response: $684.65 + $7.2884(420) = $3,746
AACSB: Analytic
71. The coefficient of correlation for Armer's regression equation for the maintenance activities is
A) square root of .99724.
B) (.99724)2.
C) .99724.
D) 34.469/49.515.
E) Some other answer __________.

Response: Coefficient of correlation is r, not r-squared.
AACSB: Analytic
72. The percent of the total variance in maintenance costs that can be explained by the hours of
activity is
A) 99.862%.
B) 69.613%.
C) 99.449%.
D) 80.982%.
E) 99.724%.

AACSB: Analytic
73. Armer can be 95% confident that the true value of the marginal maintenance cost will fall within
what range?
A) $6.29 $8.29.
B) $7.01 $7.57.
C) $7.07 $7.51.
D) $7.17 $7.41.
E) $7.04 $7.53.

Response: $7.2884 +/- (2.33)(.12126) (Note: Students must have access to a t-table.)
AACSB: Analytic

74. At 400 hours of activity, Armer management can be approximately two-thirds confident that the
maintenance costs will be in the range of
A) $3,537.62 $3,662.40.
B) $3,551.37 $3,648.51.
C) $3,586.18 $3,613.93.
D) $3,565.54 $3,634.47.
E) $3,574.15 $3,626.02.
Answer: A Difficulty: Complex Learning Objective: 5

Response:
$684.65 + $7.2884(400) = $3,600.01
$3,600.01 +/- (1.81)(34.469) (Note: Students must have access to a t-table.)
AACSB: Analytic
Use the following to answer questions 75-78:
The Business School at Eastern College is accumulating data as a first step in the preparation of next
year's budget development. One cost that is being looked at closely is administrative costs as a function of
student credit hours. Data on administrative costs and credit hours for the most recent academic year is
shown below:
Administrative Credit
Month Costs Hours
July $129,301 250
August 82,613 115
September 228,580 1,392
October 216,394 1,000
November 258,263 1,309
December 184,449 1,112
January 219,137 1,339
February 245,000 1,373
March 209,642 1,064
April 191,925 1,123
May 249,978 1,360
June 170,418 420
July 128,167 315
Total $2,385,700 11,857
Average $198,808 988

The controller's office has analyzed the data and has given you the results from the regression analysis:
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.93346722
R Square 0.87136104
Adjusted R Square 0.85966659
Standard Error 19943.5805
Observations 13
ANOVA
df SS MS F Significance F
Regression 1 29636340628 2.96363E+10 74.5106436 3.14788E-06
Residual 11 4375210454 397746405
Total 12 34011551082
Lower Upper
Coefficients Standard Error t-Stat P-value Lower 95% Upper 95%
95.0% 95.0%
Intercept $96,409.42 12521.26261 7.69965611 9.381E-06 68850.28899 123968.543 68850.289 123968.543
Credit Hours $103.56 11.9974027 8.6319548 3.1479E-06 77.15491912 129.967156 77.1549191 129.967156
75. If the controller uses the high-low method to estimate costs, the cost equation for administrative
salaries is:
A) Cost = $67,313 + $133 x Credit-hours.
B) Cost = $69,468 + $114 x Credit-hours.
C) Cost = $201 x Credit-hours.
D) Cost = $198,808.
E) Some other equation _______________.
Answer: B Difficulty: Complex Learning Objective: 5

Response:
Credit- Administrative
hours Costs
Highest activity (Sept) 1,392 $228,580

Lowest activity (August) 115 $ 82,613
Cost at highest activity – cost at lowest activity
Variable cost = Highest activity – lowest activity
$228,580 – $82,613
= 1,392 – 115 = $114.305 per credit-hour
Fixed costs = Total costs - variable costs

= $228,580 - $114.305 x 1,392
= $69,467
Or,
Fixed costs = $82,613 - $114.305 x 115
= $69,467
AACSB: Analytic

76. Based on the results of the above regression analysis, the estimate of administrative costs in a
month with 1,000 credit hours would be:
A) $198,808.
B) $201,000.
C) $199,969.
D) $96,409.
E) Some other amount.
Answer: C Difficulty: Complex Learning Objective: 5

Response: Administrative costs = $69,467 + $114.305 x 1,000 credit-hours = $183,772
AACSB: Analytic
77. The correlation coefficient for the regression equation for administrative costs is:
A) 0.933.
B) 0.871
C) 0.859.
D) 0.933 .
 Answer: A Difficulty: Simple Learning Objective: 5

AACSB: Analytic
78. The percent of the total variance that can be explained by the regression is:
A) 93.3%.
B) 87.1%
C) 85.9%.
D) 96.6%.

AACSB: Analytic
Part C: Professional Examination Questions
79. 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 be used in estimating fixed and
variable costs for the equation? (CMA adapted, 12/92)
A) Graphic method
B) Simple regression
C) High and low point method
D) Multiple regression
E) Management analysis of data

AACSB: Analytic

80. Costs are allocated to cost objectives in many ways and for many reasons. Which one of the
following is a purpose of cost allocation? (CMA adapted, 12/92)
A) Evaluating revenue center performance
B) Measuring income and assets for external reporting
C) Budgeting cash and controlling expenditures
D) Aiding in variable costing for internal reporting
E) Implementing activity-based costing

AACSB: Analytic
81. Which of the following considers the impact of fixed overhead costs? (CMA adapted, 12/90)
A) Full absorption costing
B) Marginal costing
C) Direct costing
D) Variable costing
E) Prime costing

AACSB: Analytic
82. Which of the following is the difference between variable costs and fixed costs: (CMA adapted,
6/94)
A) variable costs per unit fluctuate and fixed costs per unit remain constant
B) variable costs per unit are fixed over the relevant range and fixed costs per unit are variable
C) total variable costs are variable over the relevant range and fixed in the long term, while fixed
costs never change
D) variable costs per unit change in varying increments, while fixed costs per unit change in
equal units
E) total variable costs can be varied by management, while fixed costs are uncontrollable

AACSB: Analytic
83. Which one of the following is least likely to be an objective of a cost accounting system? (CMA
adapted, 6/94)
A) Product costing
B) Department efficiency
C) Inventory valuation
D) Sales commission determination
E) Income determination

AACSB: Analytic

84. Which of the following may be used to estimate how inventory warehouse costs are affected by
both the number of shipments and the weight of the material handled? (CPA adapted, 11/90)
A) economic order quantity analysis
B) probability analysis
C) correlation analysis
D) multiple regression analysis

AACSB: Analytic
85. A cost driver is defined as: (CMA adapted, 6/93)

A) the largest cost in a manufacturing process
B) a fixed cost that cannot be avoided
C) the significant factor in developing a new product
D) an indirect cost that cannot be traced to a particular cost objective but is essential to the
business
E) a causal factor that increases the total cost of a cost objective

AACSB: Analytic
86. Relevant costs are

A) all fixed costs
B) all variable costs
C) costs that would be incurred within the relevant range of production
D) past costs that are expected to be different in the future
E) anticipated future costs that will differ under various alternatives

AACSB: Analytic
87. The best way to allocate scarce resources to maximize operating income or minimize costs is:
(CMA adapted, 6/90)
A) relevant costing
B) responsibility accounting
C) simple regression analysis
D) linear programming
E) operations management

AACSB: Analytic
88. The terms "direct cost" and "indirect cost" are commonly used in accounting. A particular cost
might be considered a direct cost of a manufacturing department but might be an indirect cost of
the product produced in the manufacturing department. Classifying a cost as either direct or

indirect depends upon: (CMA adapted, 6/92)
A) the behavior of the cost in response to volume changes
B) whether the cost is expensed in the period in which it is incurred
C) the cost object to which the cost is being related
D) whether an expenditure is unavoidable because it cannot be changed regardless of any action
taken
E) the timing of the cash outlay for the cost.

AACSB: Analytic

Essay Questions
89. The Teal Company's total overhead costs at various levels of activity are presented below:
Month Direct Labor Hours Total Overhead Costs

July 7,500 $272,000
August 6,000 234,000
September 9,000 319,000
October 10,500 340,500
Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance.
The breakdown of these costs at the 9,000 direct labor hour level of activity is as follows:
Utilities (V) $137,700

Supervisory Salaries (F) 80,000
Maintenance (M) 101,300
$319,000
Required:
(A) Using the high-low method, determine the cost formula for maintenance.
(B) Express the company's total overhead costs in linear equation form.
Difficulty: Moderate Learning Objective: 4
Answer:
(A)
Utilities per hour = $137,700/9,000 = $15.30 per direct labor hour
Utility cost at the high point = $15.30(10,500) = $160,650
Utility cost at the low point = $15.30(6,000) = $91,800
Maintenance cost at the high point = $340,500 – 80,000 – 160,650 = $99,850

Maintenance cost at the low point = $234,000 – 80,000 – 91,800 = $62,200
Maintenance cost per hour = ($99,850 – 62,200)/(10,500 – 6,000) = $8.36667

Fixed Maintenance costs per month = $99,850 – ($8.36667) × (10,500) = $12,000
Total maintenance costs = $12,000 + $8.36667 per Direct Labor Hour

(B)
Total overhead costs = ($80,000 + $61,350) + [($15.30 + 8.36667) x Direct Labor Hours
= $141,350 + $23.36667 per Direct Labor Hour
AACSB: Analytic

90. The following manufacturing costs were incurred by the RST Company in 2008:
Direct materials $112,500

Direct labor 175,000
Manufacturing overhead 235,000
These costs were incurred to produce 25,000 units of product. Variable manufacturing overhead
was 80% of the direct materials cost.
In 2009, the direct material and variable overhead costs per unit will increase by 15%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to
increase by 7.5%.
Required:
Prepare a cost estimate for an activity level of 20,000 units of product in 2009.
Determine the total product costs per unit for 2008 and 2009.
Difficulty: Simple Learning Objective: 3
Answer:
Variable overhead costs (2008) = .80($112,500) = $90,000
Fixed overhead costs (2008) = $235,000 - $90,000 = $145,000
___2008___ ___2009___
Direct materials $ 112,500 $ 103,500 (1)
Direct labor 175,000 140,000 (2)
Variable overhead costs 90,000 82,800 (3)
Fixed overhead costs 145,000 155,875 (4)
Total $ 522,500 $ 482,175
(1) [($112,500)/25,000)(1.15)](20,000) = $103,500

(2) ($175,000/25,000)(20,000) = $140,000
(3) [($90,000)/25,000)(1.15)](20,000) = $82,800
(4) ($145,000)(1.075) = $155,875
2008 unit cost: $522,500/25,000 = $20.90

2009 unit cost: $482,175/20,000 = $24.11
AACSB: Analytic

91. The Grind Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels. However,
some production managers have indicated that the size of their production lots might also be
having an impact on the amount of their monthly manufacturing overhead costs. In order to
investigate this possibility, the company collected information on its monthly manufacturing
overhead costs, production in units, and average production lot size for 2008.
Production Manufacturing Average Monthly

Month (Units) Overhead Cost Production Lot Size
1 75,000 $ 925,800 20
2 90,000 823,875 18
3 65,000 910,125 25
4 80,000 946,000 19
5 55,000 879,000 24
6 50,000 825,000 25
7 85,000 960,000 22
8 105,000 1,053,500 20
9 102,000 1,020,000 23
10 68,000 905,000 20
11 75,000 938,000 22
12 95,000 995,000 24
Required:
(a) Use the high-low method to estimate next month's manufacturing overhead costs, assuming
the company is planning to produce 90,000 units.
(b) Use the high-low method to estimate next month's manufacturing overhead costs, assuming
the company is planning to run a 22-lot size.
(c) Prepare a scattergraph showing the manufacturing overhead costs plotted against production
in units. What is the cost estimation equation using the scattergraph?
(d) Prepare a scattergraph showing the manufacturing overhead costs plotted against the average
monthly production lot size. What is the cost estimation equation using the scattergraph?
(e) What conclusion(s) could be made for comparing the results from (a) and (b)? What
conclusion(s) could be made for comparing the results from (c) and (d)?
Answer:
(a)
Production (units) Overhead Costs

Highest (month 8) 105,000 $1,053,500
Lowest (month 6) 50,000 825,000
Variable cost per unit = ($1,053,500 – 825,000)/(105,000 – 50,000) = $4.154

Fixed costs = $1,053,500 – ($4.154)(105,000) = $617,330
TC = $617,330 + ($4.154)(90,000) = $991,190

(b)
Production Lot Size Overhead Costs
Highest (month 3) 25 $910,125
Lowest (month 2) 18 876,000
Variable cost per unit = ($910,125 – 876,000)/(25 - 18) = $4,875

Fixed costs = $901,125 – ($4,875)(25) = $788,250
TC = $788,250 + ($4,875)(22) = $895,500
(c) Instructor generated solution
(d) Instructor generated solution
The cost estimates for next month are different by approximately $100,000, or 9.6%. Some
managers will feel very uncomfortable with these results being so far apart. However, the graph
that depicts the relationship between costs and production lot size suggests a lack of a meaningful
relationship between these two variables.
AACSB: Analytic
92. A company ran a regression analysis using direct labor hours as the independent variable and
manufacturing overhead costs as the dependent variable. The results are summarized below:
Intercept $14,600
Slope $ 12.55
Correlation coefficient .931
R-squared .867
The company is planning on operating at a level that would require 12,000 direct labor hours per
month in the upcoming year.
Required:
(a) Use the information from the regression analysis to write the cost estimation equation for the
manufacturing overhead costs.
(b) Compute the estimated manufacturing overhead costs per month for the upcoming year.
Difficulty: Simple Learning Objective: 5
Answer:
(a) Total manufacturing overhead costs = $14,600 + ($12.55 x Direct Labor Hours)
(b) Total manufacturing overhead costs = $14,600 + ($12.55)(12,000) = $165,200
AACSB: Analytic

93. The Grind Company has been having some difficulties estimating their manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels. However,
some production managers have indicated that the size of their production lots might also be
having an impact on the amount of their monthly manufacturing overhead costs. In order to
investigate this possibility, the company collected information on their monthly manufacturing
overhead costs, production in units, and average production lot size for 2008.
Production Manufacturing Average Monthly

Month (Units) Overhead Cost Production Lot Size
1 75,000 $ 925,800 20
2 90,000 867,000 18
3 65,000 910,000 25
4 80,000 946,000 19
5 55,000 879,000 24
6 50,000 825,000 25
7 85,000 960,000 22
8 105,000 1,055,000 20
9 102,000 1,020,000 23
10 68,000 905,000 20
11 75,000 938,000 22
12 95,000 995,000 24
Regression analysis results of the information presented above are as follows:
Ordinary regression:
Equation: $667,320 + ($3.5206 x units)

Multiple regression:
Equation $656,010 + ($3.5449 x units) + ($430.11 x lot size)
Multiple r-square (adjusted) .966
Required:
(a) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 90,000 units.
(b) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 90,000 units with an average lot size of 22.
(c) Comment on which regression seems to be more appropriate under these circumstances. Be
specific.
Answer:
(a) Total manufacturing costs = $667,320 + ($3.5206 x 90,000) = $984,174
(b) Total manufacturing costs = [$656,010 + ($3.5449 x 90,000)] + ($430.11 x 22) = $984,513
(c) The multiple regression does not improve the fit over the simple regression. Therefore,
multiple regression benefits probably do not justify the costs of data collection, analysis, and
interpretation. Since r-squared is high enough, simple regression would provide an accurate
estimate of overhead costs.

AACSB: Analytic
94. The Heidi Company produces a single product and has a relevant range between 20,000 and
80,000 units. Total production costs range from $321,875 to $966,875. Sales volume in 2007
was 32,000, and operating income was $45,125. Heidi's product is highly specialized; therefore,
no units are kept in inventory.
Required:
(a) Prepare a contribution margin income statement for 2007 including separate columns for total
dollars, per unit dollars, and percentages.
(b) Draw a PV (profitability) graph, clearly labeling the breakeven points.
Difficulty: Complex Learning Objective: 3,4
Answer:
[This problem is more difficult than it appears. Students must use the high-low method to
determine the appropriate cost behaviors before they can complete the requirements.]
(a)
Variable cost per unit = ($966,875 – 321,875)/(80,000 – 20,000) = $10.75
Fixed costs = $966,875 – (80,000)(10.75) = $106,875
Total contribution margin = $45,125 + 106,875 = $152,000
Total variable costs = $10.75(32,000) = $344,000
Total sales = $344,000 + 152,000 = $496,000
Selling price per unit = $496,000/32,000 = $15.50
Contribution margin per unit = $152,000/32,000 = $4.75
Contribution margin ratio = $152,000/496,000 = 30.645%
Total Per Unit Percentage

Sales $496,000 $15.50 100.000%
Variable costs 344,000 10.75 69.355
Contribution margin 152,000 $ 4.75 30.645
Fixed costs 106,875
Operating profits $ 45,125
(b)
BE = $106,875/4.75 = 22,500 units
BE = $106,875/.30645 = $348,752 (or 22,500 units x $15.50 = $348,750)
Use the information presented above and in the chapter to draw a PV-graph.
AACSB: Analytic

Cost Estimation: AACSB: Analytic

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Chapter 5

Answer: True Difficulty: Simple Learning Objective: 1

Answer: False Difficulty: Simple Learning Objective: 1

Answer: False Difficulty: Simple Learning Objective: 1

Answer: True Difficulty: Simple Learning Objective: 2

Answer: False Difficulty: Moderate Learning Objective: 2

Answer: True Difficulty: Simple Learning Objective: 2

90 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: True Difficulty: Moderate Learning Objective: 2

Answer: True Difficulty: Simple Learning Objective: 3

Answer: True Difficulty: Moderate Learning Objective: 3

Answer: True Difficulty: Moderate Learning Objective: 3

Answer: False Difficulty: Complex Learning Objective: 3

Answer: True Difficulty: Moderate Learning Objective: 3

Answer: True Difficulty: Moderate Learning Objective: 4

Test Bank, Chapter 5 91

Answer: True Difficulty: Complex Learning Objective: 4

Answer: False Difficulty: Moderate Learning Objective: 4

T F 16. A scattergraph is useful for identifying irrelevant data.

Answer: True Difficulty: Moderate Learning Objective: 4

Answer: False Difficulty: Complex Learning Objective: 4

Answer: True Difficulty: Simple Learning Objective: 4

Answer: False Difficulty: Simple Learning Objective: 4

Answer: False Difficulty: Moderate Learning Objective: 4

Answer: False Difficulty: Moderate Learning Objective: 4

92 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: True Difficulty: Simple Learning Objective: 4

Answer: True Difficulty: Simple Learning Objective: 4

Answer: False Difficulty: Simple Learning Objective: 5

Answer: True Difficulty: Moderate Learning Objective: 5

Answer: False Difficulty: Simple Learning Objective: 5

Answer: False Difficulty: Moderate Learning Objective: 5

Test Bank, Chapter 5 93

Answer: False Difficulty: Simple Learning Objective: 5

Answer: True Difficulty: Simple Learning Objective: 5

Answer: True Difficulty: Simple Learning Objective: 5

Answer: True Difficulty: Moderate Learning Objective: 6

Answer: True Difficulty: Complex Learning Objective: 6

Answer: True Difficulty: Moderate Learning Objective: 6

94 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: True Difficulty: Simple Learning Objective: 7

Answer: True Difficulty: Simple Learning Objective: 7

Answer: True Difficulty: Moderate Learning Objective: 7

Test Bank, Chapter 5 95

Answer: True Difficulty: Moderate Learning Objective: 7

Multiple Choice Questions

Part A: Conceptual Questions

Answer: B Difficulty: Simple Learning Objective: 1

Answer: E Difficulty: Simple Learning Objective: 2

Answer: A Difficulty: Simple Learning Objective: 2

96 Lanen, Anderson, Maher Fundamentals of Cost Accounting, 2e

Answer: A Difficulty: Moderate Learning Objective: 2

Answer: A Difficulty: Moderate Learning Objective: 3

45. In the cost equation TC = F + VX, X is best described as the:

Answer: D Difficulty: Simple Learning Objective: 3

46. In the cost equation TC = F + VX, V is best described as the:

Answer: C Difficulty: Simple Learning Objective: 3

Test Bank, Chapter 5 97

Answer: C Difficulty: Moderate Learning Objective: 3

Answer: C Difficulty: Simple Learning Objective: 4

Answer: B Difficulty: Moderate Learning Objective: 4

50. A disadvantage of the high-low method of cost analysis is that it

Answer: C Difficulty: Simple Learning Objective: 4