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TB ch03
TB ch03
Multiple Choice
b 1. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the
scatter-diagram method
a. includes costs outside the relevant range.
b. considers more than two points.
c. can be used with more types of costs than the high-low method.
d. gives a precise mathematical fit of the points to the line.
d 3. The cost estimation method that gives the most mathematically precise cost prediction equation is
a. the high-low method.
b. the scatter-diagram method.
c. the contribution margin method.
d. regression analysis.
d 7. A non-value-adding cost is
a. usually direct to a product.
b. the same as a discretionary cost.
c. unavoidable.
d. not essential to manufacturing a product.
a 8. Fixed costs that cannot be reduced within a short period of time are
a. committed.
b. variable.
c. avoidable.
d. unnecessary.
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b 9. Which cost is most likely to be committed?
a. Repairs and maintenance.
b. Sum-of-the-years'-digits depreciation on the factory building.
c. Fee for a consultant on the company's long-range planning.
d. Advertising.
a 10. RST's average cost per unit is the same at all levels of volume. Which of the following is true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.
d 15. ABC Company breaks even at $600,000 sales and earns $60,000 at $700,000 sales. Which of the following is
true?
a. Fixed costs are $40,000.
b. Profit at sales of $800,000 would be $160,000.
c. The selling price per unit is $6.
d. Contribution margin is 60% of sales.
b 16. A seasonal business that sets selling prices at 20% above average cost for the preceding month will
a. be better off if it closed down during the off-season.
b. charge higher prices in the off-season than in the busy season.
c. always charge higher prices than its competitors.
d. make a consistent return on sales of 20%.
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a. It cannot use the contribution-margin format of the income statement.
b. Many costs vary with production activities, not with sales.
c. The concepts of fixed and variable costs do not apply.
d. Cost-volume-profit analysis is not appropriate.
d 19. Fixed costs that managers can change on short notice are
a. value-adding costs.
b. variable costs.
c. unavoidable costs.
d. discretionary costs.
c 20. A(n) __________ relationship is one that appears to exist even though there is no causal relationship.
a. Correlation.
b. Outlier.
c. Spurious.
d. Value-added.
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c 25. A committed fixed cost
a. can never be eliminated.
b. can be eliminated in the short-term and in the long-term.
c. can be eliminated in the long-term, but not in the short-term.
d. can be eliminated in the short-term, but not in the long-term.
a 29. Ogden Company had $300,000 overhead cost at 20,000 machine hours, $320,000 overhead cost at 25,000
hours. Variable overhead cost per machine hour is
a. $ 4.00.
b. $12.80.
c. $15.00.
d. some other number.
b 30. Sacramento Company had $400,000 overhead cost at 50,000 machine hours and $460,000 overhead cost at
60,000 hours. Total fixed overhead is
a. $ 60,000
b. $100,000
c. $120,000.
d. $320,000.
c 33. Which cost is most likely to be avoidable in deciding whether to shut down one of the four assembly lines in a
factory?
a. Depreciation on the factory building.
b. Salaries of maintenance workers who service all assembly lines.
c. Power used to operate equipment on the assembly line.
d. Heat and light for the building.
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c 34. DSP Company earned $100,000 on sales of $1,000,000. It earned 130,000 on sales of $1,100,000. Variable
costs as a percentage of sales are
a. 30%.
b. 40%.
c. 70%.
d. 90%.
b 35. DSP Company earned $100,000 on sales of $1,000,000. It earned $130,000 on sales of $1,100,000. Total
fixed costs are
a. $0.
b. $200,000.
c. $420,000.
d. $900,000.
c 36. Predicting costs at activity levels that are outside the relevant range is called
a. association.
b. correlation.
c. extrapolation.
d. none of the above.
b 39. MNO has a break-even point of 200,000 units and earns a $100,000 profit at sales of 250,000 units. Which of
the following is true?
a. Fixed costs are $100,000.
b. Total contribution margin at 200,000 units is $400,000.
c. Profit at sales of 300,000 units is $120,000.
d. Selling price per unit is $2.
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a 40. The closeness of the relationship between the cost and the activity is called
a. correlation.
b. spurious.
c. regression analysis.
d. manufacturing overhead.
c 42. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units. What is the variable cost per
unit?
a. $5.00
b. $6.25
c. $7.50
d. An amount that cannot be determined without more information.
b 43. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units. What is the total fixed cost?
a. $125,000
b. $250,000
c. $400,000
d. An amount that cannot be determined without more information.
a 44. GMH Company had $200,000 overhead cost at 25,000 machine hours and $240,000 overhead cost at 60,000
hours. Variable overhead per machine hour is
a. $4.00.
b. $1.00.
c. $0.83.
d. some other number.
d 45. Elmwood Company had $300,000 overhead cost at 40,000 machine hours, and $360,000 overhead cost at
60,000 hours. Total fixed overhead is
a. $ 36,000
b. $ 40,000
c. $ 60,000.
d. $180,000.
b 46. Crookston Company breaks even at $300,000 sales and earns $40,000 at $400,000 sales. Which of the
following is true?
a. Fixed costs are $120,000.
b. Profit at sales of $500,000 would be $50,000.
c. The selling price per unit is $4.
d. Contribution margin is 10% of sales.
a 47. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units. What is the variable cost per
unit?
a. $15
b. $20
c. $35
d. An amount that cannot be determined without more information.
b 48. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units. What is the total fixed cost?
a. $400,000
b. $600,000
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c. $900,000
d. An amount that cannot be determined without more information.
b 49. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of $450,000. Contribution
margin as a percentage of sales is
a. 30%.
b. 40%.
c. 60%.
d. 70%.
c 50. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of $450,000. Total fixed
costs are
a. $ 0.
b. $ 50,000.
c. $110,000.
d. $180,000.
True-False
T 2. In interpreting regression results, the higher the correlation, the better cost predictions are likely to be.
F 4. Discretionary fixed costs are not necessary to successful operation of the business.
T 5. High-low, scatter diagram, and regression analysis are methods of developing formulas to predict mixed costs.
T 7. In developing a cost-prediction equation using regression analysis, you might not select the one with the
highest correlation.
F 8. A company using activity-based costing need not do regression analysis or scatter diagrams.
F 9. An r-squared of .91 with a regression equation means that predictions will be accurate 91% of the time.
T 10. A multiple regression equation uses more than one driver to predict costs.
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Problems
1. Carlson Company incurred $170,000 in overhead costs making 12,000 units in March. It made 15,000 units and
incurred $188,000 in overhead costs in April.
SOLUTION:
2. The statistician of RST, Inc. has developed the following cost-prediction equation, using observations from
12,000 to 30,000 machine hours.
b. Will maintenance cost at zero machine hours be $236,837? yes no Circle the correct answer.
c. About 68% of the time, maintenance cost should be within what amount of the predicted value?
SOLUTION:
3. Genner Company earned $125,000 on sales of $750,000. It earned $225,000 on sales of $1,000,000.
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SOLUTION:
4. Danner has an average unit cost of $22.50 at a volume of 400,000 units. At 500,000 units the average unit cost is
$20.50.
SOLUTION:
5. Tri-County Company incurred $175,000 in overhead costs making 40,000 units in April. It made 24,000 units and
incurred $147,000 in overhead costs in May.
SOLUTION:
6. Bilbo Company incurred $374,000 in overhead costs making 11,000 units in November. It made 7,500 units and
incurred $325,000 in overhead costs in December.
SOLUTION:
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7. The statistician of Comstock, Inc. has developed the following prediction equation for costs, using observations
from 25,000 to 60,000 machine hours.
b. Will repair cost at zero machine hours be $146,374? yes no Circle the correct answer.
c. About 68% of the time, repair cost should be within what amount of the predicted value?
SOLUTION:
8. Scooter Company earned $150,000 on sales of $1,000,000. It earned $330,000 on sales of $1,400,000.
SOLUTION:
9. Bennco has an average unit cost of $18.50 at a volume of 100,000 units. At 200,000 units the average unit cost is
$14.25.
SOLUTION:
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10. Parsons Company incurred $475,000 in overhead costs making 40,000 units in August. It made 30,000 units and
incurred $447,000 in overhead costs in September.
SOLUTION:
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