Deck 10: Determining How Costs Behave

Question 1

The cost function y = 150 + 10X:

A)has a slope coefficient of 150
B)has an intercept of 150
C)is a nonlinear
D)represents a fixed cost

Answer 1

B

Question 2

A linear cost function can represent:

A)mixed cost behaviors
B)fixed cost behaviors
C)variable cost behaviors
D)All of these answers are correct.

Answer 2

D

Question 3

Bennet Company employs 30 individuals. Eighteen employees are paid $14 per hour and the rest are salaried employees paid $4,000 a month. How would total costs of personnel be classified?

A)variable
B)mixed
C)a variable cost within a relevant range
D)a fixed cost within a relevant range

Answer 3

B

Question 4

When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range.

Question 5

When plotted on a graph, cost functions are usually displayed by having the level of activity (machine hours, etc.)plotted on the horizontal axis (called the x-axis )and the amount of total costs corresponding to (or dependent on)the levels of that activity on the vertical axis (called the y-axis).

Question 6

One assumption frequently made in cost behavior estimation is that changes in total costs can be explained by changes in the level of a single activity.

Question 7

A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost.

Question 8

A high correlation between two variables s and t indicates that:

A)s may cause t, or t may cause s
B)both may be affected by a third variable
C)the correlation may be due to random chance
D)All of these answers are correct.

Question 9

The longer the time horizon, the more likely a cost will be variable.

Question 10

The cost function y = 10,000 + 3X:

A)represents a mixed cost
B)will intersect the y-axis at 3
C)has a slope coefficient of 10,000
D)is a curved line

Question 11

Which of the following does NOT represent a cause-and-effect relationship?

A)Material costs increase as the number of units produced increases.
B)A company is charged 40 cents for each brochure printed and mailed.
C)Utility costs increase at the same time that insurance costs increase.
D)It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts.

Question 12

Which of the following is an equation of a fixed cost function?

A)y = bX + a
B)y = a + bX
C)y = bX
D)y = a

Question 13

McGuinness Company employs 8 individuals. They are all paid $14.50 per hour. How would total costs of personnel be classified?

A)variable
B)mixed
C)a variable cost within a relevant range
D)a fixed cost within a relevant range

Question 14

For February, the cost components of a picture frame include $0.25 for the glass, $.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $400. 1,000 frames are expected to be produced in the coming year. What cost function best represents these costs?

A)y = 1.70 + 400X
B)y = 400 +1.70X
C)y = 2.10 + 1,000X
D)y = .90 + 400X

Question 15

The cost function y = 2,000 + 6X:

A)has a slope coefficient of 2,000
B)has an intercept of 6
C)is a straight line
D)represents a fixed cost

Question 16

All cost functions are linear.

Question 17

The cost function y = 90 + 8X:

A)has a slope coefficient of -8
B)will intersect the y-axis at 8
C)has a slope coefficient of 8
D)is a curved line

Question 18

The cost components of a heater include $35 for the compressor, $12 for the sheet molded compound frame, and $80 per unit for assembly. The factory machines and tools cost is $55,000. The company expects to produce 1,500 heaters in the coming year. What cost function best represents these costs?

A)y = 1,500 + 127X
B)y = 1,500 +55,000X
C)y = 55,000 + 1,500X
D)y = 55,000 +127X

Question 19

Which of the following statements related to assumptions about estimating linear cost functions is FALSE?

A)Variations in a single cost driver explain variations in total costs.
B)A cost object is anything for which a separate measurement of costs is desired.
C)A linear function approximates cost behavior within the relevant range of the cost driver.
D)A high correlation between two variables ensures that a cause-and-effect relationship exists.

Question 20

y = a + bX represents the general form of the linear cost function. which is expressed in Excel as y=mx+b.

Question 21

Outside of the relevant range, variable and fixed cost-behavior patterns remain constant.

Question 22

Which cost estimation method uses a formal mathematical method to develop cost functions based on past data?

A)the account analysis method
B)the conference method
C)the industrial engineering method
D)the quantitative analysis method

Question 23

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

Question 24

Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?

A)the account analysis method
B)the conference method
C)the industrial engineering method
D)the quantitative analysis method

Question 25

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

Question 26

A linear cost function can only represent fixed cost behavior.

Question 27

Answer the following questions using the information below:
At the Todd Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A?

A)$24,000
B)$10,667
C)$102,400
D)$40,000

Question 28

The cause and- effect relationship might arise as a result of which of the following:

A)a physical relationship between the level of activity and costs.
B)a contractual arrangement.
C)knowledge of operations.
D)All of the above.

Question 29

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

Question 30

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

Question 31

Quantitative analysis methods estimate cost functions:

A)which depend on the experience and judgment of the analyst for accuracy
B)based on analysis and opinions gathered from various departments
C)using significant amounts of historical data
D)using the pooling of knowledge from each value chain function

Question 32

Gathering cost information through observations and interviews from departments within an organization is known as the:

A)account analysis method
B)conference method
C)industrial engineering method
D)quantitative analysis method

Question 33

Which cost estimation method may use time-and-motion studies to analyze the relationship between inputs and outputs in physical terms?

A)the account analysis method
B)the conference method
C)the industrial engineering method
D)the quantitative analysis method

Question 34

Write a linear cost function equation for each of the following conditions. Use y for estimated costs and x for activity of the cost driver.
a. Direct materials cost is $1.50 per pound.
b. Direct labor cost is $33.50 per hour.
c. Auto rental has a fixed fee of $150.00 per day plus $1.00 per mile driven.
d. Machine operating costs include $700 of maintenance per month, and $10.00 of coolant usage costs for each day the machinery is in operation.

Question 35

The account analysis method estimates cost functions:

A)by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis
B)using time-and-motion studies
C)at a high cost, which renders it seldom used
D)in a manner that cannot be usefully combined with any other cost estimation methods

Question 36

Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.
a. Direct manufacturing labor is $20 per hour.
b. Direct materials cost $18.40 per cubic yard.
c. Utilities have a minimum charge of $2,000, plus a charge of $0.10 per kilowatt-hour.
d. Machine operating costs include $400,000 of machine depreciation per year, plus $150 of utility costs for each day the machinery is in operation.

Question 37

The conference method estimates cost functions:

A)using quantitative methods that can be very time consuming and costly
B)based on analysis and opinions gathered from various departments
C)using time-and-motion studies
D)by mathematically analyzing the relationship between inputs and outputs in physical terms

Question 38

Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year.

Question 39

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

Question 40

What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?
1)Variations in the level of a single activity (the cost driver)explain the variations in the related total costs; and
"2)Cost behavior is approximated by a linear cost function within the relevant range. This means that total cost versus the level of a single activity that is related to that cost is a straight line within the relevant range.
Once linearity is established, there are three possible types of linearity:"

Question 41

Answer the following questions using the information below:
Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What was the variable cost per unit sold for 2011?

A)$13.50
B)$108
C)$121.50
D)$186.50

Question 42

The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $120,000.
Required:
Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is
a. number of employees.
b. the number of new hires.
c. Which cost estimation method is being used by Miller Company?

Question 43

The industrial engineering method of cost estimation is based on opinions from various departments and is quick and of low cost to apply.

Question 44

The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.

Question 45

Answer the following questions using the information below:
At the Todd Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

Which cost estimation method is being used by Todd Company?

A)the industrial engineering method
B)the conference method
C)the account analysis method
D)the quantitative analysis method

Question 46

Answer the following questions using the information below:
Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What were total fixed costs for 2008?

A)$932,500
B)$325,000
C)$250,000
D)$225,000

Question 47

Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver.

Question 48

Answer the following questions using the information below:
Jerry's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

Which cost estimation method is being used by Jerry's TV and Appliance Store?

A)the industrial engineering method
B)the conference method
C)the account analysis method
D)the quantitative analysis method

Question 49

Answer the following questions using the information below:
Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

Which cost estimation method is being used by Miller's Good Value Appliance Store?

A)the account analysis method
B)the conference method
C)the quantitative analysis method
D)the industrial engineering method

Question 50

Answer the following questions using the information below:
Miller's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What are the estimated total costs if Miller's expects to sell 6,500 units next year?

A)$932,500
B)$1,114,750
C)$1,017,500
D)$665,000

Question 51

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

Question 52

Answer the following questions using the information below:
Jerry's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What were total fixed costs for 2011?

A)$678,000
B)$436,000
C)$242,000
D)$227,000

Question 53

Answer the following questions using the information below:
At the Christopher Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

Which cost estimation method is being used by Christopher Company?

A)the quantitative analysis method
B)the industrial engineering method
C)the conference method
D)the account analysis method

Question 54

Answer the following questions using the information below:
At the Christopher Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

If the number of engineers is considered the cost driver, what amount of library and information center costs will be allocated to Department A?

A)$100,000
B)$25,000
C)$0
D)$112,500

Question 55

The cost to be predicted is referred to as the:

A)independent variable
B)dependent variable
C)cost driver
D)regression

Question 56

The account analysis method estimates cost functions by classifying various cost
accounts as variable, fixed, or mixed with respect to the identified level of activity.

Question 57

Answer the following questions using the information below:
Jerry's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What are the estimated total costs if Penny's expects to sell 3,000 units next year?

A)$1,550,000
B)$1,332,000
C)$1,671,000
D)$1,453,000

Question 58

Answer the following questions using the information below:
At the Christopher Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

If the number of employees is considered the cost driver, what amount of library and information center costs will be allocated to Department A?

A)$100,000
B)$25,000
C)$0
D)$112,500

Question 59

Answer the following questions using the information below:
At the Todd Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A?

A)$24,000
B)$10,667
C)$102,400
D)$40,000

Question 60

Answer the following questions using the information below:
Jerry's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2011 operations.

What was the variable cost per unit sold for 2011?

A)$36
B)$436
C)$678
D)$400

Question 61

Answer the following questions using the information below:
The Delmonico Company uses the high-low method to estimate the cost function. The information for 2011 is provided below:

What is the constant for the estimating cost equation?

A)$4,000
B)$13,600
C)$16,000
D)$20,000

Question 62

How many separate cost pools should be formed given the following information:

A)1 cost pool
B)2 cost pools
C)3 cost pools
D)4 cost pools

Question 63

Place the following steps in order for estimating a cost function using quantitative analysis:

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

Question 64

Collecting data on the dependent variable and the cost driver may include:

A)interviews with managers
B)collecting data over a long period of time
C)collecting data from different entities over the same period of time
D)All of these answers are correct.

Question 65

Answer the following questions using the information below:
The Ranger Company uses the high-low method to estimate it's cost function. The information for 2011 is provided below:

What is the slope coefficient per machine-hour?

A)$250.00
B)$25
C)$20.00
D)$200.00

Question 66

A plot of data that results in one extreme observation most likely indicates that:

A)more than one cost pool should be used
B)an unusual event such as a plant shutdown occurred during that month
C)the cost-allocation base has been incorrectly identified
D)individual cost items do not have the same cost driver

Question 67

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 is limited to the use of only the dependent variables and multiple regression can use both dependent and independent variables
C)simple regression uses only one independent variable and multiple regression uses more than one independent variable
D)simple regression uses only one dependent variable and multiple regression uses more than one dependent variable

Question 68

Cross-sectional data analysis includes:

A)using a variety of time periods to measure the dependent variable
B)using the highest and lowest observation
C)observing different entities during the same time period
D)comparing information in different cost pools

Question 69

Time-series data analysis includes:

A)using a variety of time periods to measure the dependent variable
B)using the highest and lowest observation
C)observing different entities during the same time period
D)comparing information in different cost pools

Question 70

The high-low method:

A)easily handles estimating the relationship between the dependent variable and two or more independent variables
B)is more accurate than the regression method
C)calculates the slope coefficient using only two observed values within the relevant range
D)uses the residual term to measure goodness of fit

Question 71

When using the high-low method, the two observations used are the high and low observations of the:

A)cost driver
B)dependent variables
C)slope coefficient
D)residual term

Question 72

Answer the following questions using the information below:
The Delmonico Company uses the high-low method to estimate the cost function. The information for 2011 is provided below:

What is the estimate of the total cost when 300 machine-hours are used?

A)$4,000
B)$8,000
C)$12,000
D)$16,000

Question 73

All individual cost items included in the dependent variable should have:

A)the same cost driver
B)a cause-and-effect relationship with the independent variable
C)an economically plausible relationship with the independent variable
D)All of these answers are correct.

Question 74

Put the following steps in order for using the high-low method of estimating a cost function:

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

Question 75

Answer the following questions using the information below:
The Delmonico Company uses the high-low method to estimate the cost function. The information for 2011 is provided below:

What is the slope coefficient per machine-hour?

A)$56.66
B)$0.10
C)$40.00
D)$50.00

Question 76

Regression analysis:

A)is simple to compute
B)measures the change in a dependent variable associated with one or more independent variables
C)is mathematical so it does not require an understanding of operations
D)uses the constant to measure goodness of fit

Question 77

The independent variable:

A)is also referred to as the cost driver
B)may also be called the cost-allocation base if referring to an indirect cost
C)should have an economically plausible relationship with the dependent variable
D)All of these answers are correct.

Question 78

When using the high-low method, the denominator of the equation that determines the slope is the:

A)dependent variable
B)independent variable
C)difference between the high and low observations of the cost driver
D)difference between the high and low observations of the dependent variables

Question 79

A plot of data that results in bunched points with little slope generally indicates:

A)a strong relationship
B)a weak relationship
C)a positive relationship
D)a negative relationship

Question 80

The slope of the line of regression is the:

A)rate at which the dependent variable varies
B)rate at which the independent variable varies
C)level of total fixed costs
D)level of total variable costs