Deck 10: Quantitative Analyses of Cost Functions

Question 1

A mixed cost has a fixed element.

Answer 1

True

Question 2

Which of the following statements regarding a linear cost function is true?

A) When there are only fixed costs, total material costs increase as the number of units produced increases.
B) The slope coefficient of a mixed cost line intersects the vertical axis at zero.
C) The relationship between the cost driver and the fixed cost is represented by the cost-benefit relationship.
D) It is easier to identify a single measure of benefit in a more heterogeneous cost pool.
E) A linear cost function for manufacturing overhead can be graphed when the reported benefit received can be paired with the corresponding dollar value of the cost pool.

Answer 2

E

Question 3

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

A) Y = ax + bx
B) Y = a + bx
C) Y = b
D) Y = a
E) Y = bx

Answer 3

E

Question 4

A linear cost function is a function in which the graph of total costs versus a single cost driver forms a straight line, within the relevant range.

Question 5

Which of the following describes the intercept in a linear cost function?

A) the component of fixed costs that, within the relevant range, does not vary with changes in the level of the cost driver
B) the component of fixed costs that, within the relevant range, does vary with changes in the level of the cost driver
C) the component of variable costs that, within the relevant range, does not vary with changes in the level of the cost driver
D) the component of variable costs that, within the relevant range, does vary with changes in the level of the cost driver
E) the sum of the components of both fixed and variable costs that, within the relevant range, do not vary with changes in the level of the cost driver

Question 6

There is poor correlation if the predicted values do not match actual cost observation.

Question 7

A single cost pool that includes many different costs is a heterogeneous cost pool.

Question 8

Correctly identifying the cost driver and separating fixed from variable costs are important inputs for many management decisions.

Question 9

The cost function y = 1,000 + 5X

A) has a slope coefficient of 1,000.
B) has an intercept of 5.
C) is a straight line.
D) represents a fixed cost.
E) is missing the slope coefficient.

Question 10

Use the information below to answer the following question(s).
Raymaster is a small computer software company which uses the account analysis method and has hired you to perform some management advisory services. The company sold 2,500 high quality payroll programs last year.

What is the variable cost per unit sold?

A) $180,000
B) $320
C) $312
D) $240
E) $72

Question 11

For April, the month just ended, the cost components to make tapes were $2 per tape plus fixed costs of $10,000. One thousand tapes were produced. For May the cost to make tapes will be $2.20 per tape plus fixed costs of $10,000. Fifteen hundred tapes are expected to be produced. What are the estimates for the intercept and slope coefficient for May, respectively?

A) $2.00 and $10,000.00
B) $2.20 and $10,000.00
C) $10,000.00 and $2.00
D) $10,000.00 and $2.20
E) $22,000 and $10,000

Question 12

The coefficient of determination (r²) measures the percentage of variation in Y explained by X (the predictor variable).

Question 13

Brandt Cheque Encoders employs 30 individuals. Ten employees are paid $10 per hour for 173 hours a month and the rest are salaried employees paid $6,000 a month. How would total costs of personnel be classified?

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

Question 14

A cost-benefit relationship, relative to cost drivers and resulting costs, may develop because of physical relationships, contractual relationships, or implicit relationships.

Question 15

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

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 behaviour at all ranges of production.
D) Correlation refers to the relationship between fixed and variable costs.
E) The graph of total costs does not form a straight line within the relevant range because of variable costs.

Question 16

There is a homogeneous relationship between the individual cost items in the dependent variable pool and the cost driver when each activity whose costs are included in the dependent variable has the same cost driver.

Question 17

Use the information below to answer the following question(s).
Raymaster is a small computer software company which uses the account analysis method and has hired you to perform some management advisory services. The company sold 2,500 high quality payroll programs last year.

What is the total budgeted cost per unit sold?

A) $240.00
B) $288.00
C) $358.40
D) $362.40
E) $462.40

Question 18

When estimating cost functions, it is assumed that variations in total cost of a cost object cannot be explained by variations in a single cost driver.

Question 19

A nonlinear cost function adequately describes the changes in the levels of the cost driver due to changes in the behaviour of various costs.

Question 20

The selection of the best measure of benefit will depend upon the corresponding change in the cost pool.

Question 21

Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples.

Question 22

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 labour is $10 per hour.
b. Direct materials cost $9.20 per cubic yard.
c. Utilities have a minimum charge of $1,000, plus a charge of $0.05 per kilowatt-hour.
d. Machine operating costs include $200,000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation.

Question 23

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

A) the industrial engineering method
B) the conference method
C) the high-low method
D) the quantitative analysis method
E) the account analysis method

Question 24

List and briefly describe the five steps in estimating a cost function under quantitative analysis.

Question 25

A nonlinear cost function

A) has two constants and a single slope.
B) does not effectively describe the behaviour of costs all of the time.
C) never describes the behaviour of costs in relation to the cost driver.
D) always describes the behaviour of costs in relation to the cost drivers.
E) means the relevant range cannot be determined for that cost.

Question 26

Use the information below to answer the following question(s).
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 2012 operations.

What are two of the assumptions against which data should be evaluated when used to develop a linear cost function? Briefly explain the three ways that a linear cost function may behave?

Question 27

Answer the following question(s) using the information below.
Penny's TV and Appliance Store is a small company that has the following information pertaining to 2012 operations.

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

A) $896,000
B) $678,000
C) $1,259,000
D) $269,000
E) $542,000

Question 28

Use the information below to answer the following question(s).
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 2012 operations.

What was the variable cost per unit sold for 2012?

Question 29

Answer the following question(s) using the information below.
Penny's TV and Appliance Store is a small company that has the following information pertaining to 2012 operations.

What was the variable cost per unit sold for 2012?

A) $18
B) $235
C) $339
D) $200
E) $218

Question 30

Answer the following question(s) using the information below.
Penny's TV and Appliance Store is a small company that has the following information pertaining to 2012 operations.

What were total fixed costs for 2012?

A) $242,000
B) $436,000
C) $678,000
D) $227,000
E) $278,000

Question 31

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 labour is $10 per hour.
B) Direct materials cost $9.20 per cubic metre.
C) Utilities have a minimum charge of $1,000, plus a charge of $0.05 per kilowatt-hour.
D) Machine operating costs include $200,000 of machine amortization per year, plus $75 of utility costs for each day the machinery is in operation.

Question 32

Use the information below to answer the following question(s).
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 2012 operations.

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

Question 33

Time-series data analysis includes

A) using a variety of time periods to measure the predictor variable.
B) using the highest and lowest observation.
C) observing different entities during the same time period.
D) comparing information in different cost pools.
E) analyzing cost drivers at different levels of production.

Question 34

Use the information below to answer the following question(s).
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 2012 operations.

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

Question 35

Compute the estimated costs for each of the following equations, assuming the following costs for July: In addition, state whether each is for a variable, fixed, or mixed cost.

A) Total estimated costs = intercept
B) Total estimated costs = constant
C) Total estimated costs = constant + (slope × cost driver)
D) Total estimated costs = slope coefficient × cost driver

Question 36

Compute the estimated costs for each of the following equations assuming the following costs for July: In addition, state whether each is for a variable, fixed, or mixed cost.

A) Total estimated costs = intercept
B) Total estimated costs = constant
C) Total estimated costs = constant + (slope × cost driver)
D) Total estimated costs = slope coefficient × cost driver
In addition, state whether each is for a variable, fixed, or mixed cost.

Question 37

Use the information below to answer the following question(s).
Raymaster is a small computer software company which uses the account analysis method and has hired you to perform some management advisory services. The company sold 2,500 high quality payroll programs last year.

What is the predicted indirect manufacturing labour cost if 160 machine-hours are budgeted and 170 are actually worked, assuming the estimated cost function is y = $81.04 + 5.32x?

A) $985.44
B) $932.24
C) $904.40
D) $851.20
E) $81.04

Question 38

Use the information below to answer the following question(s).
Raymaster is a small computer software company which uses the account analysis method and has hired you to perform some management advisory services. The company sold 2,500 high quality payroll programs last year.

What would be their estimated cost per unit if Raymaster expects to sell 2,000 units next year?

A) $300
B) $312
C) $370
D) $498
E) $500

Question 39

Write a cost estimating equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct manufacturing labour is $20 per hour.
B) Direct materials cost $8.00 per cubic metre.
C) Utilities have a minimum charge of $2,000 plus a charge of $0.05 per kilowatt hour.
D) Factory supplies average $10 per day plus $1.00 for each machine-hour per day.
E) Total manufacturing amortization includes $5,000 for straight-line plant amortization plus machinery amortization of $100 for each day operated.

Question 40

Use the information below to answer the following question(s).
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 2012 operations.

What were total fixed costs for 2012?

Question 41

Use the information below to answer the following question(s).
The Skip Corporation has assembled the following data pertaining to certain costs which cannot be easily identified as either fixed or variable. Skip Corporation has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

The cost function would be stated as

A) Y = $13,386 + $0.46X.
B) Y = $10,680 + $0.38X.
C) Y = $5,056 + $2.16X.
D) Y = $1,800 + $2.16X.
E) Y = $1,800 + $2.60X.

Question 42

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

Using the high-low method determine the slope coefficient per labour hour at Bradco Restoration?

A) $5.25
B) $4.00
C) $2.00
D) $0.50
E) $0.25

Question 43

All of the following are approaches to cost estimation EXCEPT

A) the account analysis method.
B) the conference method.
C) the flexible cost analysis method.
D) the industrial engineering method.
E) quantitative analysis.

Question 44

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

What is Monroe Company's slope coefficient per machine hour?

A) $26.91
B) $18.00
C) $16.67
D) $10.00
E) $8.00

Question 45

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

What is the high-low estimate of the labour costs at Bradco Restoration when 8,000 hours are used?

A) $21,500
B) $18,500
C) $17,750
D) $17,250
E) $17,125

Question 46

The collection of information on costs and their drivers, gathered through observations and interviews, from departments within an organization is known as

A) the account analysis method.
B) the conference method.
C) the industrial-engineering method.
D) the quantitative analysis method.
E) the departmental analysis method.

Question 47

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

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

A) outcome variable.
B) predictor variable.
C) difference between the high and low observations of the cost driver.
D) difference between the high and low observations of the outcome variables.
E) the intercept.

Question 48

Use the information below to answer the following question(s).
The Skip Corporation has assembled the following data pertaining to certain costs which cannot be easily identified as either fixed or variable. Skip Corporation has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

The total cost at an operating level of 2,850 hours would be

A) $19,210.
B) $11,763.
C) $14,697.
D) $11,212.
E) $9,210.

Question 49

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

What is the estimate of Monroe's cost function when 200 machine hours are used?

A) $1,840.00
B) $1,997.50
C) $2,280.00
D) $3,333.33
E) $3,680.00

Question 50

The industrial-engineering method is

A) for analyzing relationships between inputs and outputs in physical terms.
B) for significant costs which cannot be easily traced.
C) used only for governmental contracts which are cost plus based.
D) used with qualitative rather than quantitative information.
E) used with both qualitative and quantitative information.

Question 51

Which cost estimation method would be described as a formal method to fit linear cost functions to past data observations?

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

Question 52

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

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

A) cost driver.
B) outcome variables.
C) outliers.
D) mixed costs.
E) total pool cost.

Question 53

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

Using the high-low method determine the constant at Bradco Restoration?

A) $17,500
B) $13,750
C) $2,500
D) $1,250
E) $750

Question 54

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 $.75 per pound.
b. Direct labour cost is $16.75 per hour.
c. Auto rental has a fixed fee of $75.00 per day plus $.50 per mile driven.
d. Machine operating costs include $350 of maintenance per month, and $5.00 of coolant usage costs for each day the machinery is in operation.

Question 55

Which cost estimation method typically uses qualitative analysis rather than quantitative analysis?

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

Question 56

Use the information below to answer the following question(s).
Presented below is the production data for the last six months of the year for the mixed costs incurred by Wagner Company.

Using the high-low method, the cost function would be stated as

A) Y = $2,200 + $2.80X.
B) Y = $17,816 + $0.36X.
C) Y = $536 + $3.06X.
D) Y = $24,450 + $0.33X.
E) Y = $39,250 + $0.33X.

Question 57

Use the information below to answer the following question(s).
Presented below is the production data for the last six months of the year for the mixed costs incurred by Wagner Company.

The total cost at an operating level of 10,000 units would be

A) $31,136.
B) $30,200.
C) $21,416
D) $42,550
E) $46,625

Question 58

The account analysis method classifies cost accounts with respect to the identified cost driver.

Question 59

Use the information below to answer the following question(s).
The Monroe Company uses the high-low method to estimate the cost function. The information for 2002 is provided below.

What is the constant for the estimating cost equation?

A) $2,080
B) $2,960
C) $3,970
D) $4,000
E) $8,000

Question 60

Which of the following statements about the cost estimation methods is False?

A) With the conference method, the accuracy of the cost estimates largely depends on the accuracy and details of the inputs.
B) The methods require more historical data than most quantitative analyses.
C) The methods are not mutually exclusive.
D) There are four methods generally used for cost estimation.
E) Many organizations use a combination of the approaches.

Question 61

Regression analysis differs from high-low analysis in that regression analysis

A) measures the average amount of change in the outcome variable.
B) measures the total amount of change in the outcome variable.
C) ignores the high and low observations of the outcome variable.
D) ignores non-representative data.
E) ignores both the high and low observations of the outcome variable, and non-representative data.

Question 62

Birch Canvas and Tarp manufactures canvas products in a highly automated assembly plant in Edmonton, Alberta. Their automated system is in its first year of operation, and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations the following data were collected:
Required:
a. Compute a cost estimating equation for each predictor variable (machine-hours and kilowatt-hours) using the high-low method.
b. For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power. The overhead costs totalled $95,000. Which driver was the best predictor for July?

Question 63

Wimmer's Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600. In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080.
Required:
a. Using the high-low method, determine the overhead cost equation for the department if hours of freezer use are used as the cost driver?
b. What is the estimated total cost at an operating level of 500 hours?

Question 64

The Wildcat Company has provided the following information for the factory overhead cost pool:
Required:
Using the high-low method and the information provided above,
a. identify the linear cost function equation and
b. estimate the total cost at 36,000 units of output.

Question 65

Munir Hassan, controller, gathered data on overhead costs and direct labour-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 labour-hours as the cost driver.

Question 66

Answer the following question(s) using the information below.
The Taranto Company uses the high-low method to estimate it's cost function. The information for 2012 is provided below:

What is the constant for the estimating cost equation?

A) $125,000
B) $225,000
C) $25,000
D) $0
E) $12,500

Question 67

Pam's Stables used two different predictor variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows: Trainer's hours:
r² = 0.56
Number of horses:
r² = 0.63
What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver?

A) $99,929.09
B) $350,756.50
C) $335,313.32
D) $84,233.50
E) $47,238.12

Question 68

A cost analyst collected the following information for the Machining Department:
Required:
a. Determine the estimating cost function with machine-hours as the cost driver. Use the high-low method.
b. If December's estimated machine-hours total 8,400, what is the estimated cost of the Machining Department?

Question 69

Answer the following question(s) using the information below.
The Taranto Company uses the high-low method to estimate it's cost function. The information for 2012 is provided below:

What is the slope coefficient per machine-hour?

A) $125.00
B) $12.50
C) $10.00
D) $100.00
E) $0.50

Question 70

As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department:
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. If June's estimated machine-hours total 4,200, what are the total estimated costs of the Machining Department?

Question 71

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Windsor, Ontario. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c. For July, the company ran the machines for 3,150 hours and used 4,180,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?

Question 72

The slope of the line of regression is

A) the rate at which the outcome variable varies.
B) the rate at which the predictor variable varies.
C) the level of total fixed costs.
D) the level of total variable costs.
E) equal to the intercept.

Question 73

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 74

Patrick Ross, the president of Ross's Wild Game Company, has asked for information about the cost behaviour of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:
Required:
Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.

Question 75

The managers of the production department have decided to use the production levels of 2009 and 2012 as examples of the highest and lowest years of operating levels. During 2009 the department used 280,000 litres of chemicals and during 2012 it used 240,000 litres. The department's costs for 2009 were $460,000, but only $400,000 in 2012.
Required:
Using the high-low method determine the cost estimating equation for the department if litres of direct material are used as the cost driver?

Question 76

The managers of the production department have decided to use the production levels of 2010 and 2012 as examples of the highest and lowest years of operating levels. Data for those years are as follows:
Required:
Using the high-low method, determine the overhead cost equation for the department if gallons of chemicals are used as the cost driver?

Question 77

Simple linear regression analysis provides the means to evaluate a line of regression which is fitted to a plot of data and represents

A) the way costs change in respect to the predictor variable.
B) the way costs change in respect to the outcome variable.
C) the variability of expense with dollars of operation.
D) the variability of expense with dollars of production.
E) the estimated variability in costs.

Question 78

Answer the following question(s) using the information below.
The Taranto Company uses the high-low method to estimate it's cost function. The information for 2012 is provided below:

What is the estimate of the total cost when 1,100 machine-hours are used?

A) $125,000
B) $135,000
C) $150,000
D) $200,000
E) $136,000

Question 79

The use of a single predictor variable (X) to estimate the outcome variable (y) is known as

A) high-low method.
B) multiple linear regression.
C) simple linear regression.
D) singular regression.
E) least squares regression.

Question 80

Cari's Locker Service ran its freezer in January, a slow month, for 200 hours for a total cost of $60,000. In June, a peak month, the freezer ran for 1,000 hours for a total cost of $92,000.
Required:
Using the high-low method determine the average cost of running the machine one hour in a month were the freezer ran for 800 hours?