Deck 10: Determining How Costs Behave

Question 1

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.

Answer 1

True

Question 2

In a cost function y = 18,000,the slope coefficient is zero.

Answer 2

True

Question 3

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

A) y = (a + b)^X
B) y = a + bX
C) y = bX
D) y = a

Answer 3

D

Question 4

Crimson Services,Inc.,employs 8 individuals.They are all paid $16.50 per hour.How would total costs of personnel be classified?

A) variable cost
B) mixed cost
C) irrelevant cost
D) fixed cost

Question 5

All cost functions are linear.

Question 6

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 7

A finance manager has to select one of the four different suppliers of raw materials.The total cost functions under the four options are given below.Assume the quality of the raw material to be the same,which of the following is preferred by the finance manager?

A) y = 200 + 5X
B) y = 200 + 5.50X
C) y = 200 + 4.50X
D) y = 200 + 4.70X

Question 8

The cost components of a heater include $30 for the compressor,$10 for the sheet molded compound frame,and $75 per unit for assembly.The factory machines and tools cost is $60,000.The company expects to produce 1,000 heaters in the coming year.What cost function best represents these costs?

A) y = 60,000 + 115X
B) y = 1,000 + 60,000X
C) y = 60,000 + 1,000X
D) y = 1,000 + 115X

Question 9

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

Question 10

Which of the following functions represents the least total cost assuming the number of units is equal in each case?

A) y = 180 + 7X
B) y = 90 + 6X
C) y = 90 + 7X
D) y = 180 + 6X

Question 11

y = a + bX,y = a,and y = bX are the three basic types of linear cost functions.

Question 12

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 13

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 14

For February,the cost components of a picture frame include $0.30 for the glass,$0.75 for the wooden frame,and $0.80 for assembly.The assembly desk and tools cost $500.Two hundred fifty frames are expected to be produced in the coming year.What cost function best represents these costs?

A) y = 1.85 + 500X
B) y = 500 + 1.85X
C) y = 3.85 + 600X
D) y = 1.05 + 500X

Question 15

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

Question 16

If the total cost function is y = 5,000 + 7X,calculate the variable cost for 4,000 units.

A) $33,000
B) $28,000
C) $20,000
D) $5,000

Question 17

Bennet Company employs 20 individuals.Eighteen employees are paid $18 per hour and the rest are salaried employees paid $3,000 a month.Which of the following is the total cost function of personnel?

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

Question 18

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

A) It presents variable cost as a slope coefficient.
B) It presents total cost as an intercept.
C) It presents variable cost as an intercept.
D) It presents total cost as slope coefficient.

Question 19

A cost function is a ________.

A) process of calculating present value of projected cash flows
B) process of allocating costs to cost centers or cost objects
C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost
D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship between inputs and outputs

Question 20

All other things being equal,the longer the time horizon the more likely a cost will be fixed.

Question 21

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 marginal costing method
D) the incremental costing method

Question 22

Goodness of fit has meaning only if the relationship between the cost drivers and costs is economically plausible.

Question 23

A linear cost function can only represent fixed cost behavior.

Question 24

Quantitative analysis methods estimate cost functions ________.

A) using the time-and-motion studies
B) based on analysis and opinions gathered from various departments
C) using a formal mathematical method to fit cost functions to past data observations
D) using the pooling of knowledge from each value chain function

Question 25

Schotte Manufacturing Company uses two different independent variables (machine-hours and number of packages)in two different equations to evaluate costs of the packaging department.The most recent results of the two regressions are as follows:
Required:
a.What are the estimating equations for each cost driver?
b.Which cost driver is best and why?

Question 26

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 27

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 $10 per hour.
b.Direct materials cost $15.60 per cubic yard.
c.Utilities have a minimum charge of $5,000,plus a charge of $0.30 per kilowatt-hour.
d.Machine operating costs include $300,000 of machine depreciation per year,plus $100 of utility costs for each day the machinery is in operation.

Question 28

Variable cost per labor-hour is $8.50.Fixed cost is $10,500.Calculate the total cost for 350 labor hours.Machine hours during the period are 50.

A) $10,925
B) $13,475
C) $13,900
D) $3,400

Question 29

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

Question 30

In multiple regression,when two or more independent variables are highly correlated with one another,the situation is known as ________.

A) heteroscedasticity
B) homoscedasticity
C) multicollinearity
D) autocorrelation

Question 31

The standard error of the estimated coefficient indicates how much the estimated value,b,is likely to be affected by random factors.

Question 32

Arfaei Company manufactures chairs.Because the efforts of manufacturing are approximately equal between labor and machinery,management is considering other possible cost drivers.By considering different cost drivers,it is anticipated that the estimating process can be improved.The following cost estimating equations with their r² values have been determined for 20X5:
Required:
a.Which equation should be selected for the analysis?
b.What other factors should be included in the selection of the estimating equation?

Question 33

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 34

What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?

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

A particular cost item could be variable for one cost object and fixed for another cost object.

Question 37

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

Question 38

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

Question 39

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

Question 40

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 $1.70 per pound
b.Total cost is fixed at $8,000 per month regardless of the number of units produced.
c.Auto rental has a fixed fee of $80.00 per day plus $2.00 per mile driven.
d.Machine operating costs include $1,000 of maintenance per month,and $12.00 of coolant usage costs for each day the machinery is in operation.

Question 41

Answer the following questions using the information below:
Genend's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$\begin{array}{lr}\text { Sales ( } 6,000 \text { microwave ovens) } & \$ 1,740,000 \\\text { Cost of goods sold } & 960,000 \\\text { Store manager's salary per year } & 100,000 \\\text { Operating costs per year } & 250,000 \\\text { Advertising and promotion per year } & 30,000 \\\text { Commissions (3\% of sales) } & 52,200\end{array}$

-What were the total fixed costs for 2015?

A) $1,392,200
B) $380,000
C) $350,000
D) $1,012,200

Question 42

Answer the following questions using the information below:
At the Verill 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.
$$\begin{array}{l}\text { Total library and information center costs are } \$ 200,000 \text {. }\\\begin{array} { l r r r } \text { Department } & \text { A } & \text { B } & \text { C } \\\text { Number of employees } & 135 & 530 & 135 \\\text { Number of engineers } & 0 & 80 & 20\end{array}\end{array}$$

-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) $30,000
B) $33,750
C) $0
D) $66,667

Question 43

Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable ($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours during the next period.
What will be the variable cost per hour?

A) $78
B) $48.75
C) $62.50
D) $100

Question 44

Isondo's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$$\begin{array} { l r } \text { Sales (1,200 televisions) } & \$ 1,200,000 \\\text { Cost of goods sold } & 540,000 \\\text { Store manager's salary per year } & 108,000 \\\text { Operating costs per year } & 216,000 \\\text { Advertising and promotion per year } & 24,000 \\\text { Commissions ( } 3 \% \text { of sales) } & 36,000\end{array}$$

-What were total fixed costs for 2015?

A) $924,000
B) $576,000
C) $348,000
D) $224,000

Question 45

Answer the following questions using the information below:
Genend's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$\begin{array}{lr}\text { Sales ( } 6,000 \text { microwave ovens) } & \$ 1,740,000 \\\text { Cost of goods sold } & 960,000 \\\text { Store manager's salary per year } & 100,000 \\\text { Operating costs per year } & 250,000 \\\text { Advertising and promotion per year } & 30,000 \\\text { Commissions (3\% of sales) } & 52,200\end{array}$

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

A) the account analysis method
B) the operating costing method
C) the marginal costing method
D) the cost-volume-profit analysis method

Question 46

Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable ($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours during the next period.
What will be the total variable cost for the estimated 7,000 hours?

A) $341,250
B) $546,000
C) $700,000
D) $437,500

Question 47

Answer the following questions using the information below:
Genend's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$\begin{array}{lr}\text { Sales ( } 6,000 \text { microwave ovens) } & \$ 1,740,000 \\\text { Cost of goods sold } & 960,000 \\\text { Store manager's salary per year } & 100,000 \\\text { Operating costs per year } & 250,000 \\\text { Advertising and promotion per year } & 30,000 \\\text { Commissions (3\% of sales) } & 52,200\end{array}$

-What are the estimated total costs if Genend's store expects to sell 8,000 units next year?

A) $812,117
B) $1,729,600
C) $1,952,200
D) $380,450

Question 48

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

A) the accrual accounting method
B) the high-low method
C) the industrial engineering method
D) the cash accounting method

Question 49

Isondo's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$$\begin{array} { l r } \text { Sales (1,200 televisions) } & \$ 1,200,000 \\\text { Cost of goods sold } & 540,000 \\\text { Store manager's salary per year } & 108,000 \\\text { Operating costs per year } & 216,000 \\\text { Advertising and promotion per year } & 24,000 \\\text { Commissions ( } 3 \% \text { of sales) } & 36,000\end{array}$$

-What was the variable cost per unit sold for 2015?

A) $30
B) $480
C) $770
D) $450

Question 50

At the Auric 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.
$$\begin{array}{l}\text { Total personnel department costs are } \$ 287,500 \text {. }\\\begin{array} { l r r r } \text { Department } & \underline { \mathbf { A } } & \underline { \mathbf { B } } & \underline { \mathbf { C } } \\\text { Number of employees } & 70 & 280 & 225 \\\text { Number of new hires } & 25 & 13 & 12\end{array}\end{array}$$

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

A) $35,000
B) $10,667
C) $143,750
D) $43,700

Question 51

Isondo's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$$\begin{array} { l r } \text { Sales (1,200 televisions) } & \$ 1,200,000 \\\text { Cost of goods sold } & 540,000 \\\text { Store manager's salary per year } & 108,000 \\\text { Operating costs per year } & 216,000 \\\text { Advertising and promotion per year } & 24,000 \\\text { Commissions ( } 3 \% \text { of sales) } & 36,000\end{array}$$

-What are the estimated total costs if the company expects to sell 3,500 units next year?

A) $2,028,000
B) $3,619,000
C) $3,271,000
D) $1,429,000

Question 52

Answer the following questions using the information below:
At the Verill 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.
$$\begin{array}{l}\text { Total library and information center costs are } \$ 200,000 \text {. }\\\begin{array} { l r r r } \text { Department } & \text { A } & \text { B } & \text { C } \\\text { Number of employees } & 135 & 530 & 135 \\\text { Number of engineers } & 0 & 80 & 20\end{array}\end{array}$$

-Which cost estimation method is being used by Verill Company?

A) the regression analysis method
B) the marginal costing method
C) the conference method
D) the operating costing method

Question 53

At the Auric 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.
$$\begin{array}{l}\text { Total personnel department costs are } \$ 287,500 \text {. }\\\begin{array} { l r r r } \text { Department } & \underline { \mathbf { A } } & \underline { \mathbf { B } } & \underline { \mathbf { C } } \\\text { Number of employees } & 70 & 280 & 225 \\\text { Number of new hires } & 25 & 13 & 12\end{array}\end{array}$$

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

A) $35,000
B) $10,667
C) $140,000
D) $43,700

Question 54

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

A) the cash accounting method
B) the conference method
C) the accrual accounting method
D) the quantitative analysis method

Question 55

Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable ($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours during the next period.
Which of the following represents the correct linear cost function?

A) y = $390,000 + $ 48.75X
B) y = $110,000 + $100 X
C) y = $110,000 + $78 X
D) y = $390,000 + $62.50 X

Question 56

Answer the following questions using the information below:
At the Verill 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.
$$\begin{array}{l}\text { Total library and information center costs are } \$ 200,000 \text {. }\\\begin{array} { l r r r } \text { Department } & \text { A } & \text { B } & \text { C } \\\text { Number of employees } & 135 & 530 & 135 \\\text { Number of engineers } & 0 & 80 & 20\end{array}\end{array}$$

-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) $30,000
B) $33,750
C) $0
D) $66,667

Question 57

At the Auric 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.
$$\begin{array}{l}\text { Total personnel department costs are } \$ 287,500 \text {. }\\\begin{array} { l r r r } \text { Department } & \underline { \mathbf { A } } & \underline { \mathbf { B } } & \underline { \mathbf { C } } \\\text { Number of employees } & 70 & 280 & 225 \\\text { Number of new hires } & 25 & 13 & 12\end{array}\end{array}$$

-Which cost estimation method is being used by Auric Company?

A) the simple regression method
B) the conference method
C) the account analysis method
D) the marginal costing method

Question 58

Answer the following questions using the information below:
Genend's Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$\begin{array}{lr}\text { Sales ( } 6,000 \text { microwave ovens) } & \$ 1,740,000 \\\text { Cost of goods sold } & 960,000 \\\text { Store manager's salary per year } & 100,000 \\\text { Operating costs per year } & 250,000 \\\text { Advertising and promotion per year } & 30,000 \\\text { Commissions (3\% of sales) } & 52,200\end{array}$

-What was the variable cost per unit sold for 2015?

A) $8.70
B) $160
C) $168.70
D) $232

Question 59

Isondo's TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.
$$\begin{array} { l r } \text { Sales (1,200 televisions) } & \$ 1,200,000 \\\text { Cost of goods sold } & 540,000 \\\text { Store manager's salary per year } & 108,000 \\\text { Operating costs per year } & 216,000 \\\text { Advertising and promotion per year } & 24,000 \\\text { Commissions ( } 3 \% \text { of sales) } & 36,000\end{array}$$

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

A) the operating costing method
B) the marginal costing method
C) the account analysis method
D) the cost-volume-profit analysis method

Question 60

Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable ($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours during the next period.
What will be the total cost for the estimated 7,000 hours?

A) $451,250
B) $547,500
C) $700,000
D) $656,000

Question 61

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

Question 62

The cost of the personnel department at the Binix 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 $180,000.
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 Binix Company?

Question 63

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 64

Place the following steps in order for estimating a cost function using quantitative analysis. A = Plot the data
B = Collect data on the dependent variable and the cost driver.
C = Choose the dependent variable
D = Identify the independent variable,or cost driver
E = Estimate the cost function

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

Question 65

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 66

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

Question 67

Put the following steps in order for using the high-low method of estimating a cost function: A = Identify the cost function
B = Calculate the constant
C = Calculate the slope coefficient
D = Identify the highest and lowest observed values

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

Question 68

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 69

The high-low method ________.

A) measures the difference between actual cost and estimated cost for each observation of the cost driver
B) calculates the standard deviation of residuals
C) calculates the slope coefficient using only two observed values within the relevant range and their respective costs
D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations, Y

Question 70

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 71

The cost to be predicted is referred to as the ________.

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

Question 72

When using the high-low method,the numerator of the equation that determines the slope is the ________.

A) difference between the positive and negative values of dependent and independent variables
B) difference between the fixed cost and variable cost associated with the cost driver
C) difference between the high and low observations of the cost driver
D) difference between the costs associated with highest and lowest observations of the cost driver

Question 73

Which of the following represents cross-sectional data?

A) indirect manufacturing labor costs for the past 5 years
B) number of machine-hours used for the past 10 years
C) personnel costs of a month at 10 different organizations
D) maintenance cost of machine in a plant for the past 3 years

Question 74

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 75

All individual cost items included in the dependent variable should have ________.

A) a different cost driver
B) an independent relationship with the independent variable
C) an economically plausible relationship with the cost driver
D) a heterogeneous cost pool

Question 76

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 77

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

A) cost driver
B) fixed cost component
C) slope coefficient
D) direct cost

Question 78

In the estimation of a cost function using quantitative analysis,the independent variable ________.

A) is the cost to be predicted
B) is the product of fixed costs and slope coefficient
C) is the factor used to predict the dependent variable
D) is the product of total costs and slope coefficient

Question 79

How many separate cost pools should be formed given the following information? $\begin{array}{ll} \text { Cost}& \text { Cost driver}\\\text { Postage costs } & \text { \# of brochures mailed } \\\text { Printing and paper costs } & \text { \# of brochures mailed } \\\text { Quality control costs } & \text { \# of inspections } \\\text { Customer service costs } & \text { \# of customers served }\end{array}$

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

Question 80

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