Deck 8: Cost Estimation

Question 1

The independent variable in regression analysis is:

A)The cost to be estimated.
B)The cost driver used to estimate the value of the dependent variable.
C)Hard to define because of its independence.
D)Usually expressed as a range of values.
E)Always a volume-based cost driver.

Answer 1

B

Question 2

Using the high-low method, unit variable cost is calculated to be:

A)$1.31.
B)$1.59.
C)$1.36.
D)$1.14.
E)$1.20.

Answer 2

E

Question 3

Which of the four types of cost drivers-activity-based, volume-based, structural and executional-are often best related to linear cost estimation methods?

A)Activity-based only.
B)Activity-based and volume-based.
C)Structural and volume-based.
D)Executional and volume-based.
E)Structural and executional.

Answer 3

B

Question 4

Regression analysis is better than the high-low method of cost estimation because regression analysis:

A)Is mathematical.
B)Can provide greater precision and reliability.
C)Fits data into a mathematical equation.
D)Takes less time.
E)Is a statistical method.

Question 5

Technology and complexity issues often lead management to simplify and to:

A)Use linear estimation methods.
B)Use volume-based costing and nonlinear estimation methods.
C)Use volume-based costing methods.
D)Use nonlinear estimation methods.
E)Use activity-based costing and volume-based costing methods.

Question 6

Which one the following is a variable that takes on values of 1, 2, 3, … for each period in sequence?

A)Dummy variable.
B)Price change index.
C)Trend variable.
D)Dependent variable.
E)Independent variable.

Question 7

Selection and employment of the correct estimation method is:

A)Easy once the data is gathered.
B)Relatively easy because only two effective methods exist.
C)Dependent on the precision/cost tradeoff for the estimation objectives.
D)Primarily subjective in nature.
E)Difficult because so many effective methods are available.

Question 8

An R-squared value that approaches one (1.0) would indicate:

A)An average degree of explanatory power.
B)A low degree of explanatory power.
C)A high degree of explanatory power.
D)The presence of outliers.
E)The absence of outliers.

Question 9

The objective of the fourth step in cost estimation, graphing the data, is intended to:

A)Identify unusual patterns.
B)Show data in two dimensions.
C)Enhance the cost estimation process.
D)Allow for subjectivity in cost estimation.

Question 10

When there are two or more cost drivers, regression is termed:

A)Simple.
B)Binary.
C)Multiple.
D)Curvilinear.
E)Synergistic.

Question 11

A data point that is outside the normal distribution of data is called an "outlier," which is often removed from the data before analysis because it:

A)Leads to inaccurate calculations.
B)Can distort the results of the data analysis.
C)Has an upward bias on the statistical measures in regression.
D)Will always add bias to the results of a high-low analysis.

Question 12

Extending the length of a time period in cost estimation will result in:

A)Fewer recording lags or cut-off errors.
B)Confounding data.
C)Increasing the explanatory power of the data.
D)Better results because more data is being used.
E)More recording lags or cut-off errors.

Question 13

Which of the following five steps (out of six) of cost estimation is out of order?

A)Step 1: Define the cost object to be estimated.
B)Step 2: Determine the cost driver(s).
C)Step 3: Collect relevant data on the cost of the cost object and the cost driver.
D)Step 4: Evaluate the accuracy of the cost estimate.
E)Step 5: Graph the data.

Question 14

Which one of the following cost estimation methods is the most accurate?

A)Regression analysis.
B)Visual fit.
C)Subjective forecasting.
D)The high-low method.

Question 15

A variable used in regression analysis that represents the presence or absence of a condition, e.g., seasonality, is called a(n):

A)Random variable.
B)Dummy variable.
C)Constant term variable.
D)Correlating variable.
E)Fixed term variable.

Question 16

The learning curve in cost estimation is a good example of:

A)Non-linear cost behavior.
B)Machine-intensive production.
C)Simple regression.
D)A random variable.
E)Efficient labor.

Question 17

High-low and regression cost estimation methods are alike in that they both:

A)Have an intercept term and a slope term.
B)Have an intercept term but not a slope term.
C)Have a slope term but not an intercept term.
D)Use all data points.
E)Use only a few selected data points.

Question 18

In least squares regression analysis, the cost to be estimated is the:

A)Independent variable.
B)Dependent variable.
C)Cost object
D)Outlier.
E)Dummy variable.

Question 19

Data collected on the cost objects and cost drivers for cost estimation must be:

A)Brief and limited.
B)Exhaustive.
C)Concrete.
D)Consistent and accurate.
E)Varied.

Question 20

The identification of cost drivers is perhaps the most important step in developing the cost estimate because:

A)It is the first step in cost estimation.
B)It is the final step in cost estimation.
C)There may be a number of relevant drivers, some not immediately obvious.
D)The other steps are easier to execute.
E)It requires much more time than the other steps.

Question 21

Using the high-low method, unit variable overhead cost is calculated to be:

A)$1.40
B)$1.50
C)$1.60
D)$1.70
E)$1.80

Question 22

At an output level of 500 lenses, per unit total cost is projected to be:

A)$45.85.
B)$56.67.
C)$39.45.
D)$50.40.
E)$48.56.

Question 23

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures: $\begin{array}{lrr} & \text { Highest } & \text { Lowest } \\\text { Cost per month } & \$ 42,000 & \$ 34,000 \\\text { Machine hours } & 46,000 & 30,000\end{array}$ Using the high-low method, the estimated variable cost per machine hour is:

A) $0.70
B) $0.60
C) $0.50
D) $0.90
E) $0.10

Question 24

Using the high-low method, total monthly fixed cost is calculated to be:

A)$484.
B)$364.
C)$752.
D)$259.
E)$898.

Question 25

Using the high-low method, total monthly fixed overhead cost is calculated to be:

A)$5,095.10
B)$5,462.80
C)$5,661.90
D)$5,875.30
E)$5,966.40

Question 26

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures: $\begin{array}{lrr} & \text { Highest } & \text { Lowest } \\\text { Cost per month } & \$ 86,000 & \$ 74,000 \\\text { Machine hours } & 96,000 & 66,000\end{array}$ Using the high-low-point method of analysis, the estimated variable cost per machine hour is:

A) $0.40
B) $0.20
C) $0.90
D) $0.10
E) $0.70

Question 27

Marshall Co. produced a pilot run of fifty units of a recently developed piston used in one of its products. Marshall expected to produce and sell 1,950 units annually. The pilot run required an average of.55 direct labor hours per piston for 50 pistons. Marshall experienced an eighty percent learning curve on the direct labor hours needed to produce new pistons. Past experience indicated that learning tends to cease by the time 800 pistons are produced.
Marshall's manufacturing costs for pistons are presented below.
$\begin{array}{lc}\text { Direct labor } & \$ 14.00 \text { per direct labor hour } \\\text { Variable overhead } & 12.00 \text { per direct labor hour } \\\text { Fixed overhead } & 20.00 \text { per direct labor hour } \\\text { Materials } & 5.00 \text { per unit }\end{array}$ Marshall received a quote of $9 per unit from Kytel Machine Co. for the additional 1,900 needed pistons. Marshall frequently subcontracts this type of work and has always been satisfied with the quality of the units produced by Kytel.
If the pistons are manufactured by Marshall Co., the total direct labor hours for the first 800 pistons (including the pilot run) produced is calculated to be (round to two digits after the decimal point):

A) 167.11.
B) 173.69.
C) 176.95.
D) 180.22.
E) 192.04.

Question 28

At an output level of 425 lenses, per unit variable cost is calculated to be:

A)$34.29.
B)$48.00.
C)$30.00.
D)$35.56.
E)$40.00.

Question 29

Using the high-low method, unit variable overhead cost is calculated to be:

A)$1.35.
B)$1.15
C)$1.40.
D)$1.65.
E)$1.25.

Question 30

Using the high-low method, total monthly fixed overhead cost is calculated to be:

A)$626.
B)$696.
C)$612.
D)$690.
E)$722.

Question 31

Nellibell's Café bakes croissants that are sold to local restaurants and grocery stores in the Columbia, South Carolina area.When 600 croissants are baked, the average cost is $0.70.When 720 croissants are baked, the average cost is $0.65.What is the total cost when 670 croissants are baked?

A)$568.
B)$588.
C)$448.
D)$532.
E)$500.

Question 32

CalcuCo hired Effner & Associates to design a new computer-aided manufacturing facility.The new facility was designed to produce 300 computers per month.The variable costs for each computer are $660 and the fixed costs total $74,700 per month.The average cost per unit, if the facility normally expects to operate at eighty-five percent of capacity, is calculated to be (round to nearest cent):

A)$952.94.
B)$909.00.
C)$936.67.
D)$971.25.
E)$942.47.

Question 33

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures: $\begin{array}{lrr} & \text { Highest } & \text { Lowest } \\\text { Cost per month } & \$ 42,000 & \$ 34,000 \\\text { Machine hours } & 46,000 & 30,000\end{array}$ Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:

A) $447,000.
B) $240,000.
C) $230,000.
D) $384,000.
E) $228,000.

Question 34

Using the high-low method, total monthly fixed overhead cost is calculated to be:

A)$2,626.
B)$2,698.
C)$2,512.
D)$2,907.
E)$2,833.

Question 35

Using the high-low method, unit variable cost is calculated to be(round to the nearest cent):

A)$6.83.
B)$8.67.
C)$6.78.
D)$7.88.
E)$6.48.

Question 36

Using the high-low method, total monthly fixed cost is calculated to be (round to nearest dollar):

A)$757.
B)$687.
C)$756.
D)$733.
E)$717.

Question 37

The percent of the total variance that can be explained by the regression equation is:

A)99.821%.
B)69.670%
C)81.049%
D)99.780%.
E)99.642%.

Question 38

Using the high-low method, unit variable overhead cost is calculated to be:

A)$2.49.
B)$3.40.
C)$2.06.
D)$2.60.
E)$2.00.

Question 39

Marshall Co. produced a pilot run of fifty units of a recently developed piston used in one of its products. Marshall expected to produce and sell 1,950 units annually. The pilot run required an average of .55 direct labor hours per piston for 50 pistons. Marshall experienced an eighty percent learning curve on the direct labor hours needed to produce new pistons. Past experience indicated that learning tends to cease by the time 800 pistons are produced.
Marshall's manufacturing costs for pistons are presented below.
$\begin{array}{lc}\text { Direct labor } & \$ 14.00 \text { per direct labor hour } \\\text { Variable overhead } & 12.00 \text { per direct labor hour } \\\text { Fixed overhead } & 20.00 \text { per direct labor hour } \\\text { Materials } & 5.00 \text { per unit }\end{array}$ Marshall received a quote of $9 per unit from Kytel Machine Co. for the additional 1,900 needed pistons. Marshall frequently subcontracts this type of work and has always been satisfied with the quality of the units produced by Kytel.
If the pistons are manufactured by Marshall Co., the average direct labor hours per unit for the first 800 pistons (including the pilot run) produced is calculated to be (use five decimal places in calculating the average time):

A) 0.20926.
B) 0.21408.
C) 0.22528.
D) 0.23056.
E) 0.24797.

Question 40

Using the high-low method, total maintenance cost for 600 hours is calculated to be (round to the nearest dollar):

A)$5,293.
B)$4,777.
C)$5,528.
D)$4,755.
E)$5,656.

Question 41

The equation was probably found through the use of which of the following mathematical techniques?

A)Linear programming.
B)Multiple regression analysis.
C)Simple regression analysis.
D)Excel tools
E)Nonlinear regression

Question 42

Which of the following is not a correct pairing of estimated costs and its related cost driver?

A)Fuel expense for a delivery truck; miles driven.
B)Heating expense for a building; temperature to be maintained in the building.
C)Product design cost; number of design elements.
D)Sustainability cost in a manufacturing plant; machine-hours.

Question 43

The $2 in the equation is an estimate of:

A)Total fixed costs.
B)Variable overhead costs per direct labor hour.
C)Total overhead costs.
D)Fixed overhead costs per direct labor hour.

Question 44

A company allocates its variable factory overhead based on direct labor hours.During the past three months, the actual direct labor hours and the total factory overhead allocated were as follows: Based upon this information, monthly fixed factory overhead was:

A)$30,000.
B)$50,000.
C)$46,667.
D)$33,333.

Question 45

Jackson, Inc.is preparing a budget for the coming year and requires a breakdown of the cost of electrical power used in its factory into the fixed and variable elements.The following data on the cost of power used and direct labor hours worked are available for the last six months of this year: Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of steam per direct labor hour is:

A)$4.00.
B)$5.42.
C)$5.82.
D)$6.00.

Question 46

The high-low method:

A)Always selects the highest and lowest data points.
B)Chooses the data points that are likely to produce a line that is representative of the data.
C)Chooses the highest and lowest data points for the dependent variable only.
D)Chooses the highest and lowest data points for the independent variable only.

Question 47

Simple regression analysis involves the use of:

A)Option A
B)Option B
C)Option C
D)Option D

Question 48

Multiple regression analysis:

A)Establishes a cause and effect relationship.
B)Does not produce measures of probable error.
C)Measures the change in one variable associated with the change in one other variable only.
D)Measures the change in one variable associated with the change in more than one other variable.

Question 49

For a simple regression analysis model that is used to allocate factory overhead, an internal auditor finds that the intersection of the line of best fit for the overhead allocation with the y-axis is $5,000.The slope of the line is .20.The independent variable, factory wages, amounts to $900,000 for the month.What is the estimated amount of factory overhead to be allocated for the month?

A)$65,000.
B)$180,000.
C)$230,000.
D)$92,500.
E)$185,000.

Question 50

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures: $\begin{array}{lrr} & \text { Highest } & \text { Lowest } \\\text { Cost per month } & \$ 86,000 & \$ 74,000 \\\text { Machine hours } & 96,000 & 66,000\end{array}$ Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:

A) $447,400.
B) $368,800.
C) $532,900.
D) $571,200.
E) $218,700.

Question 51

A company using regression analysis to correlate income to a variety of sales indicators found that the relationship between the number of sales managers in a territory and net income for the territory had a correlation coefficient of -1.Which is the best description of this situation?

A)More sales managers should be hired.
B)Imperfect negative correlation.
C)Perfect inverse correlation.
D)There is no correlation at all.

Question 52

As a preliminary step in the selection of variables to use in a statistical-forecasting model, the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes. The results were as follows: $$\begin{array} { c c } \text { Index } & \text { Coefficient of Correlation } \\\text { A } & .105 \\\text { B } & - .009 \\\text { C } & - .854\end{array}$$ Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?

A) Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship.
B) Include only indexes B and C in the model because they have the only negative coefficients of correlation.
C) Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant, while the coefficients of indexes A and B are likely to be insignificant.
D) Include only index A in the model because it has the only positive coefficient of correlation.

Question 53

A retailer, in business for over 50 years, has developed the following regression model from the past 60 months of operating data: Monthly sales dollars = $50,000 + $4.70A + $30B - $1,000X
Where:
A = number of customers
B = advertising dollars per month
X = 1 if a winter month
X = 0 if other months
An appropriate interpretation of this model is that:

A)The business is seasonal, generating higher sales in winter months than other months.
B)Advertising is not cost effective.
C)Within the relevant range, each additional customer will make a monthly purchase of $4.70 on average.
D)Sales are always expected to be at least $50,000.

Question 54

The variable Y in the equation is an estimate of:

A)Total variable costs.
B)Total factory overhead.
C)Total fixed costs.
D)Total direct labor hours.

Question 55

The relationship is:

A)Parabolic.
B)Curvilinear.
C)Linear.
D)Probabilistic.

Question 56

The use of a relationship of total factory overhead to direct labor hours is said to be valid only within the relevant range, which means:

A)Within a reasonable dollar amount for labor costs.
B)Within the range of observations of the cost driver.
C)Within the range of reasonableness as judged by the department supervisor.
D)Within the budget allowance for overhead.

Question 57

Which of the following is not a step in the cost estimation process?

A)Determine the cost drivers.
B)Determine the outliers.
C)Select and employ the estimation method.
D)Graph the data.

Question 58

Which of the following provides the most accurate cost estimation?

A)Regression analysis with R-squared of 0.12.
B)Regression analysis with F value of 1.2
C)High-low method.
D)Regression analysis with R squared of 0.89.

Question 59

This coefficient of determination explains that:

A)96% of sales variations are due to an error term.
B)The dependent variable is not related to advertising expenditures and per capita income.
C)96% of sales variations are explained by the equation.
D)Only 4% of the sales variations are explained by advertising expenditures and per capital income.

Question 60

Determine which of the following conclusions is valid regarding the coefficient of determination:

A)More analysis is needed.The coefficient of determination leaves much unexplained.
B)The regression line fits the data used in the sample very well.There is a strong indication of the relationship of the two variables with sales.
C)The coefficient of determination is positive because the constant term is positive.
D)The coefficient of determination should always be greater than one.

Question 61

The p-value measures:

A)The probability that the regression equation is reliable.
B)The statistical significance of the dependent variable.
C)The risk that a particular independent variable has only a chance relationship to the dependent variable.
D)The confidence range around the regression prediction.

Question 62

Which of the following is not usually influenced by learning curve analysis?

A)Make-or-buy decisions.
B)Cost-volume-profit analysis.
C)Capital budgeting.
D)Development of standard product costs.
E)Theory of constraints.

Question 63

What is the estimated total cost at an operating level of 900 hours?

A)$5,275.
B)$5,745.
C)$5,115.
D)$5,885.

Question 64

A range around the regression line within which the management accountant can rely that the actual value of the predicted cost will fall is referred to as:

A)A relevant range.
B)A goodness of fit.
C)A confidence interval.
D)A t-value
E)A p-value.

Question 65

Place the six cost estimation steps into the correct order: 1.Determine the cost drivers
2)Graph the data
3)Select and employ the appropriate estimation method
4)Define the cost object for which the related costs are to be estimated
5)Evaluate the accuracy of the cost estimate
6)Collect consistent and accurate data on the cost object and the cost drivers

A)6,4,1,3,5,2.
B)4,1,6,2,3,5.
C)2,1,4,3,6,5.
D)1,3,4,6,5,2.

Question 66

The standard error of the estimate (SE) in a regression analysis is:

A)A measure indicating the amount of a data falling within the relevant range.
B)A measure of explanatory power which is a number between zero and 1.
C)A measure of the accuracy of the regression's estimates.
D)A measure of reliability of each independent variable.

Question 67

Condor Airplane Company has built a new model jet aircraft which it intends to sell to high net worth clients.This aircraft required 25,000 hours to complete.Condor believes an incremental unit-time learning model with an 82% learning curve best reflects the company's production efficiency.Condor just received a contract to make fifteen identical aircraft.What will be the expected unit time for the sixteenth aircraft?

A)20,500.00.
B)16,810.00.
C)13,784.20.
D)11,303.04.

Question 68

The R-squared in a satisfactory regression should be:

A)less than .3
B)greater than .3
C)less than .7
D)greater than .7

Question 69

Georgia Meadows Company uses the high-low method to analyze production costs. The following information relates to the production data for the first six months of the year. $\begin{array}{llll}\text { Month } & \operatorname{Cost}(\mathrm{Y})&\operatorname{Hours}(\mathrm{H})\\\text { January } & \$ 8,542 & 6,530 \\\text { February } & \$ 7,750 & 5,950 \\\text { March } & \$ 9,700 & 7,500 \\\text { April } & \$ 7,435 & 5,700 \\\text { May } & \$ 7,200 & 5,500 \\\text { June } & \$ 9,263 & 6,750\end{array}$ How should the cost function be properly stated using the high-low method?

A) Y = $1,025 + $1.25H.
B) Y = $875 + $1.05H.
C) Y = $325 + $1.25H.
D) Y = $9,263 + $0.162H.

Question 70

Georgia Meadows Company uses the high-low method to analyze production costs. The following information relates to the production data for the first six months of the year. $\begin{array}{llll}\text { Month } & \operatorname{Cost}(\mathrm{Y})&\operatorname{Hours}(\mathrm{H})\\\text { January } & \$ 8,542 & 6,530 \\\text { February } & \$ 7,750 & 5,950 \\\text { March } & \$ 9,700 & 7,500 \\\text { April } & \$ 7,435 & 5,700 \\\text { May } & \$ 7,200 & 5,500 \\\text { June } & \$ 9,263 & 6,750\end{array}$ What is the estimated total cost at an operating level of 8,000 hours?

A) $9,525.
B) $9,835.
C) $10,185.
D) $10,325.

Question 71

Which of these job characteristics would result in the learning curve having less of an effect?

A)Repetitive tasks.
B)Working on an assembly line.
C)Use of robotics and computer-aided manufacturing.
D)Activities where teaching and learning take place.

Question 72

How should the cost function be properly stated?

A)Y = $2,025 + $2.50H.
B)Y = $3,890 + $2.00H.
C)Y = $4,085 + $2.00H.
D)Y = $5,260 + $2.50H.

Question 73

Which of the following is not one of the main issues regarding data collection which can significantly affect precision and reliability when using regression or any other cost estimation method?

A)Data accuracy.
B)Time period choice.
C)Nonlinearity.
D)Relevant range.

Question 74

What is the estimated total cost at an operating level of 150 hours?

A)$4,385.00.
B)$4,785.20.
C)$4,185.65.
D)$4,875.00.

Question 75

How should the cost function be properly stated using the high-low method?

A)Y = $6,025 + $2.00H.
B)Y = $6,520 + $3.00H.
C)Y = $6,085 + $2.00H.
D)Y = $6,250 + $3.00H.

Question 76

Pearson Electric Company uses the high-low method to analyze mixed costs. The following information relates to the production data for the first six months of the year. $\begin{array}{llll}\text { Month } & \operatorname{Cost}(\mathrm{Y})&\operatorname{Hours}(\mathrm{H})\\\text { January } & \$ 7,300 & 260 \\\text { February } & \$ 9,125 & 730 \\\text { March } & \$ 7,540 & 410 \\\text { April } & \$ 7,485 & 330 \\\text { May } & \$ 9,460 & 980 \\\text { June } & \$ 9,030 & 705\end{array}$ What is the estimated total cost at an operating level of 1,180 hours, using the high-low method?

A) $10,060.
B) $10,145.
C) $10,015.
D) $10,805.

Question 77

Bradford Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost: C = $80,000 + $12M
Where:
C = monthly manufacturing overhead cost, and
M = machine hours
The standard error of estimate of the regression is $6,000.The standard time required to manufacture one six-unit case of Bradford's single product is two machine hours.Bradford applies manufacturing overhead to production on the basis of machine hours, and its normal annual production is 50,000 cases.
Bradford's estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases would be:

A)$80,000.
B)$120,000.
C)$140,000.
D)$200,000.
E)Some amount other than those given abovE.$12 x 5,000 x 2 hours = $120,000 (note, variable cost only)

Question 78

Cost estimation includes all of the following steps except:

A)Defining the cost object for which the related costs are to be estimated.
B)Determining the cost drivers.
C)Graphing the data.
D)Selecting and employing the appropriate estimation method.
E)Calculating the multiple regression coefficient

Question 79

If the coefficient of correlation between two variables is nearly zero, how might a graph 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 this condition, a scatter diagram could not be plotted on a graph.

Question 80

Which of the following is required for multiple regression?

A)The use of dummy variables.
B)The use of more than one cost driver.
C)The use of more than one dependent variable.
D)The use of a trend variable.
E)The use of multiple sets of data.