Deck 2: Cost Concepts, Behaviour and Estimation

Question 1

Regression analysis usually provides a higher quality cost function than the high-low method.

Answer 1

True

Question 2

A scatter plot provides helpful information about the relationship between a cost and a potential cost driver.

Answer 2

False

Question 3

The high-low method is a specific application of the two-point method of cost estimation.

Answer 3

True

Question 4

Cost functions are most useful for estimating costs over short periods such as one year.

Question 5

Simple regression analysis produces an equation of the form : Y= α + βX + ε

Question 6

Estimates of future costs can be used in budgeting.

Question 7

The high-low method frequently distorts a cost function because it uses too few data points to make an estimate.

Question 8

Preparing a scatter plot is a requirement before applying the two-point method of cost estimation.

Question 9

Reviewing the pattern of a cost over time is a critical step in determining an engineered cost estimate.

Question 10

The method for determining the cost function that does not rely on past costs is regression analysis.

Question 11

Categorising costs by their behavior is one step in estimating relevant costs for a cost object.

Question 12

Changes in cost behavior over time are one source of uncertainty in estimating future costs.

Question 13

Financial statements usually distinguish between fixed and variable costs.

Question 14

In regression analysis, the Adjusted R-square statistic is used to evaluate how well the cost driver explains the behavior in the cost.

Question 15

Regression analysis is classified as simple or multiple depending upon the number of dependent variables to be estimated.

Question 16

The first step in estimating a cost function for relevant costs is to select a cost estimation technique.

Question 17

It would be helpful for managers to have some training in engineering in calculating an engineered cost estimate.

Question 18

If the organisation has only operated for a short time several methods of determining the cost function cannot be used.

Question 19

If fixed costs are graphed against output fixed costs are represented by a straight line.

Question 20

Steel used in the production of automobiles would generally be classified as a direct cost.

Question 21

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Janice's relevant range of activity would best be measured in terms of:

A) The number of staff she employs
B) The number of pets she services
C) The maximum amount of pet food she can buy each month based on the current budget
D) The number of parking spaces available in the parking lot

Question 22

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Assume Janice's Kennel and Pet Spa is currently boarding ten pets. The cost of food to board one more pet is best described as a

A) Fixed cost
B) Marginal cost
C) Sunk cost
D) Mixed cost

Question 23

Discretionary costs reflect

A) The costs that managers incur to purchase new production machines when the old machines need replacing
B) Decisions about the maximum amount that will be spent next period for activities such as travel and marketing
C) Decisions about the amount of variable costs that will be incurred next period
D) The costs that managers incur to pay overtime when production levels are high

Question 24

A learning curve is the rate at which

A) Students learn material for an exam
B) Direct labor employees are provided training by their organisations
C) Labor hours decrease as production increases when a new product is manufactured
D) Profitability decreases because employees have become less efficient.

Question 25

When the cost object is a unit produced, lubricating oil for production machines would be a(n)

A) Direct cost
B) Indirect cost
C) Sunk cost
D) Opportunity cost

Question 26

Fixed costs per unit

A) Vary inversely with changes in volume
B) Change regardless of changes in volume
C) Will not change over the relevant range
D) Increase with an increase in volume

Question 27

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Which of the following is a sunk cost for any cost object related to Janice's Kennel and Pet Spa?

A) Cost of the car Janice is planning to buy for pet transportation
B) Cost of existing computer equipment used to keep company records
C) Cost of annual wages for full-time employees
D) Cost of rent for the next period

Question 28

Mixed costs

A) Consist of fixed and variable costs
B) Are constant in total
C) Consist of the variable portion of all costs
D) Have a constant per-unit value

Question 29

The best source for determining historical costs is usually

A) The Internet
B) Interviews with managers
C) The company's accounting information system
D) Financial statements

Question 30

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Which of the following is the best example of a discretionary cost for Janice's Kennel and Pet Spa?

A) Pet food
B) Facility rent
C) Wages of pet groomers
D) Professional travel for Janice

Question 31

Which of the following statements is true?

A) Past costs are always relevant for decisions and are often useful in estimating future cost behavior
B) Past costs are always relevant for decisions, but are rarely useful in estimating future cost behavior
C) Past costs are never relevant for decisions, nor are they useful in estimating future cost behavior
D) Past costs are never relevant for decisions, but are often useful in estimating future cost behavior

Question 32

When the cost object is a unit produced, straight-line depreciation on manufacturing equipment would be a

A) i
B) ii
C) iii
D) iv

Question 33

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is the total cost of the grooming product line, which of the following is an indirect cost?

A) Front office staff salaries
B) Labor cost of employees who groom pets
C) Cost of grooming supplies
D) Depreciation on grooming tables

Question 34

Mixed costs

A) Vary with production in direct proportion to volume
B) Vary with production but not in direct proportion to volume
C) Do not vary with production
D) Include only different types of fixed costs

Question 35

Which statement is false?

A) Information for some costs cannot easily be obtained from the accounting information system.
B) Useful cost information is rarely available from the accounting information system.
C) The accounting system design affects the availability of useful cost information.
D) The nature of cost information affects its usefulness for decision making.

Question 36

Which of the follow is not an assumption when estimating a cost function over the relevant range of activity?

A) Mixed costs will change in total
B) Mixed costs will change per unit
C) Variable costs will be constant in total
D) Fixed costs will be constant in total.

Question 37

Janice's Kennel and Pet Spa is located in Sydney. The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records. The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is cost per day of boarding, which of the following is a direct cost?

A) Pet food
B) Front office staff salaries
C) Grooming supplies
D) Depreciation on shelving and equipment used in the grooming and retail area

Question 38

The relevant range is defined as

A) The period of time over which costs do not change
B) The volume of production over which the cost assumptions hold
C) The volume of production over which step-wise fixed costs increase
D) The time period in which the level of production does not change

Question 39

In most accounting information systems, costs are often recorded and coded so they can be summarised based on different

A) Cost drivers
B) Cost objects
C) Volumes of activity
D) Independent variables

Question 40

Past cost information, although accurate in predicting future costs, may be I Unavailable
II Irrelevant
III Outdated

A) I and II only
B) II and III only
C) II only
D) I, II, and III

Question 41

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Using the high-low method, what is the variable maintenance cost per direct labor hour?

A) $1.00
B) $0.10
C) $0.20
D) $1.50

Question 42

Assuming that a cost is mixed and linear, and that past cost behavior is expected to continue into the future, which of the following is mostly likely the best technique for estimating future costs?

A) Engineered estimate of cost
B) Two-point method
C) Scatter plot
D) Regression analysis

Question 43

Reviewing cost behavior patterns over time from the accounting records and using that review to predict future costs best describes

A) Regression analysis
B) Scatter plots
C) Analysis at the account level
D) Two-point methods

Question 44

The trend line from a scatter plot can be used to identify data points for

A) The two-point method
B) Analysis at the account level
C) Engineered estimate of cost
D) Regression analysis

Question 45

A scatter plot is especially useful when managers wish to

A) Compute a cost function
B) Update a past cost function for future changes
C) Study the relationship between a cost and a potential cost driver
D) Analyse cost behavior when only one period of data is available

Question 46

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25. The company managers wish to estimate the overhead cost function. What is the variable overhead cost per machine hour?

A) $1.00
B) $2.00
C) $6.00
D) $8.00

Question 47

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available:

A) $500
B) $300
C) $200
D) $100

Question 48

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available:

A) $0.15
B) $1.00
C) $4.00
D) $5.00

Question 49

After estimating a past cost function, managers I May need to update it for future changes.
II Have all of the information they need to predict future costs
III May or may not use it to estimate future costs.

A) I only
B) II only
C) II and III only
D) I and III only

Question 50

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available:

A) $500 + $1.00 per direct labor hour
B) $300 + $1.50 per direct labor hour
C) $100 + $0.20 per direct labor hour
D) $200 + $0.10 per direct labor hour

Question 51

Which of the following techniques for cost estimation relies on visual analysis?

A) Scatter plots
B) Analysis at the account level
C) High-low method
D) Engineered estimate of cost

Question 52

Managers analyse production activities and assign costs based on the estimated amount of resources used when they use this method.

A) A scatter plot
B) The high-low method
C) Regression analysis
D) Engineered estimate of cost

Question 53

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available:

A) $1,185
B) $850
C) $475
D) $565

Question 54

The major disadvantage of the high-low method is that

A) It uses the two most extreme data points in determining a cost function
B) It is difficult to calculate
C) It is difficult to understand
D) It involves more judgmental factors than do other methods

Question 55

Managers go through a series of questions to decide whether to use past costs to estimate future costs. Which of the following questions is least likely to be one of them?

A) Is the cost relevant to the decision?
B) Is the cost highly discretionary?
C) Is the cost an engineered estimate?
D) Is the cost expected to change?

Question 56

The high-low method is a specific application of this method of cost estimation

A) Two-point
B) Scatter plot
C) Engineered estimate of cost
D) Analysis at the account level

Question 57

Estimating a cost function using past cost data to help determine future costs is useful if

A) Past costs are irrelevant and highly discretionary
B) Past costs are irrelevant and not discretionary
C) Past costs are relevant and highly discretionary
D) Past costs are relevant and not discretionary

Question 58

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available:

A) $5,785
B) $5,585
C) $5,685
D) $5,985

Question 59

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25. The company managers wish to estimate the overhead cost function. What is the fixed overhead cost?

A) $15,750
B) $36,750
C) $21,000
D) $18,000

Question 60

Which of the following is the most valid criticism of the high-low method?

A) It never produces accurate results
B) It is mathematically too complex for most managers to comprehend
C) It is a specialised case of the two-point method
D) Data points might be outside the normal range of activity

Question 61

Which of the following is not an assumption of linear regression analysis

A) The error terms have a constant variance
B) The error terms are independent
C) A linear relationship exists between the dependent and independent variables
D) There is a cause and effect relationship between the dependent and independent variables

Question 62

Which of the following cost estimation techniques makes assumptions about the data being analysed? I Analysis at the account level
II Two-point method
III Regression analysis

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 63

Which of the following is an alternative name for a cost driver in a regression analysis?

A) Dependent variable
B) Independent variable
C) Beta
D) Error term

Question 64

Which of the following are forms of regression analysis?

A) Quantitative and qualitative
B) Fixed and variable
C) Simple and multiple
D) Financial and managerial

Question 65

Simple regression minimises the distance from each data point to

A) A trend line
B) The y-intercept
C) The error term
D) The x-axis

Question 66

Simple regression analysis output produces a variety of statistics. Which of the following statistics best summarises how well the cost driver explains the behavior of the cost?

A) T-statistics for alpha and beta coefficients
B) T-statistic and p-value for the alpha coefficient
C) P-values for alpha and beta coefficients
D) Adjusted R-square

Question 67

This method of estimating future costs can be used when only one period of data is available.

A) Scatter plot
B) High-low method
C) Analysis at the account level
D) Regression analysis

Question 68

Past cost information might be too unreliable for future cost estimation because

A) An organisation has been operating too long in a stable environment
B) The costs are primarily mixed
C) A company has added a new product line
D) Managers expect no changes in the cost function

Question 69

Regression analysis works best when the relationship between costs and cost drivers is

A) Positive and linear
B) Linear and direct
C) Positive and indirect
D) Positive, linear, and indirect

Question 70

Which cost estimation technique is useful in all situations?

A) Analysis at the account level
B) Regression analysis
C) Two-point method
D) No one method is useful in all situations

Question 71

When estimating future costs, information quality is higher when

A) Costs must be allocated
B) The accounting system can trace relevant costs to a cost object
C) The regression Adjusted R-square is near zero
D) Most costs are fixed, rather than variable

Question 72

Which of the following is an alternative name for the cost being predicted in a regression analysis?

A) Dependent variable
B) Independent variable
C) Beta
D) Slope

Question 73

In a regression equation, fixed costs are represented by the

A) Slope
B) Intercept
C) Error term
D) Adjusted R-square coefficient

Question 74

Simple regression analysis output produces a variety of statistics. Which of the following statistics provides information for variable costs?

A) Adjusted R-square
B) P-values for alpha and beta coefficients
C) T-statistic and p-value for the beta coefficient
D) T-statistics for alpha and beta coefficients

Question 75

Simple regression analysis output produces a variety of information and statistics. Which of the following statistics provides information for fixed costs?

A) T-statistic and p-value for the alpha coefficient
B) T-statistics for alpha and beta coefficients
C) Adjusted R-square
D) P-values for alpha and beta coefficients

Question 76

Which graph shows data that are more suitable for regression analysis?

A) Graph A
B) Graph B
C) Neither Graph A nor Graph B
D) Cannot be determined

Question 77

In a regression equation, variable costs per unit are represented by the

A) Slope
B) Intercept
C) Adjusted R-square coefficient
D) t-statistic

Question 78

An organisation's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labor hours and the other based upon machine hours. The results were: Total overhead = $150,000 + $4 x direct labor hours
Adjusted R-square = 0.65
Total overhead = $130,000 + $5 x machine hours
Adjusted R-square = 0.77
For the next period the accountant anticipates using 28,000 direct labor hours and 26,000 machine hours. Based upon this information, what is the best estimate for overhead for the next period?

A) $262,000
B) $260,000
C) $254,000
D) $270,000

Question 79

A manager might use this method to create a graph of cost behavior without any statistical techniques

A) Engineered estimate of cost
B) High-low method
C) Scatter plot
D) Regression analysis

Question 80

Simple regression analysis differs from multiple regression analysis based on the number of

A) Cost drivers used
B) Costs predicted
C) Data points incorporated
D) Personnel analysing the data