Deck 3: Measurement of Cost Behavior

Question 1

The fixed costs required to achieve a desired level of production or to provide a desired level of service,while maintaining product or service attributes,are ________.

A) discretionary fixed costs
B) committed fixed costs
C) capacity costs
D) step costs

Answer 1

C

Question 2

It may be difficult to trace costs to products or services if the costs are ________.

A) volume-driven
B) driven by activities directly related to volume
C) driven by multiple cost drivers
D) none of the above

Answer 2

C

Question 3

Which of the following costs can be canceled in the short run?

A) salary of CEO of company
B) mortgage payment on factory building
C) lease payments on two-year lease for leased equipment in factory
D) management consulting services engaged to change company logo

Answer 3

D

Question 4

________ have no obvious relationship to levels of output activity,but are determined as part of the periodic planning process.

A) Discretionary fixed costs
B) Committed fixed costs
C) Capacity costs
D) Engineered costs

Question 5

________ arise as a result of strategic decisions about the scale and scope of an organization's activities.

A) Capacity costs
B) Discretionary fixed costs
C) Mixed costs
D) Committed fixed costs

Question 6

In a corporate setting,property taxes are an example of a(n)________.

A) mixed cost
B) committed fixed cost
C) discretionary fixed cost
D) engineering cost

Question 7

Simon Inc.currently produces 110,000 units at a cost of $440,000.The cost is variable.Next year Simon Inc.expects to produce 115,000 units.Simon's relevant range for production is 100,000 to 120,000 units.If 115,000 units are produced next year,what is the expected variable cost?

A) $420,000
B) $430,000
C) $440,000
D) $460,000

Question 8

A car lease payment is computed based solely on the number of miles driven.This is an example of a ________.

A) variable cost
B) mixed cost
C) step cost
D) stair cost

Question 9

Knowledge about the behavior of different costs in a service department such as maintenance can be used to ________.

A) plan costs
B) provide feedback to managers
C) make decisions about the most efficient use of resources
D) all of the above

Question 10

Many organizations use a linear relationship with a single cost driver to describe a cost even though the cost may have multiple cost drivers.Why?

A) This approach is easier and less expensive.
B) The cost of developing a more complex function is greater than the benefit.
C) Cost estimates from the simple function are accurate enough for most decisions.
D) All of the above

Question 11

Costs arising from the possession of facilities,equipment and a basic organizational structure are ________.

A) capacity costs
B) discretionary costs
C) committed fixed costs
D) engineered costs

Question 12

The following data points are available.This is an example of a ________ cost.
$\begin{array}{ll}\text { Units }&\text { Costs }\\600 & \$ 560 \\650 & \$ 565 \\800 & \$ 580 \\900 & \$ 590\end{array}$

A) variable
B) fixed
C) mixed
D) none of the above

Question 13

Managers can influence the amount of fixed and variable costs in a firm through decisions about ________.

A) product attributes
B) capacity level
C) amount of high technology equipment used for manufacturing products
D) all of the above

Question 14

In an economic downturn,a company could temporarily reduce or eliminate a(n)________.

A) lease payment
B) salaries of key personnel
C) employee training program
D) insurance on corporate offices

Question 15

If a company eliminates all discretionary costs due to a severe recession,this could ________.

A) ensure that the company reports a net loss
B) ensure that the company reports a net profit
C) reestablish a company's competitive position in an industry
D) impair a company's competitive position in an industry

Question 16

A hospital adds a new addition and needs to acquire some new equipment for the addition.The cost driver for the equipment is patient-days per month.The new addition increases the patient-days per month outside the relevant range.What type of equipment costs will change as a result of the addition?

A) discretionary fixed costs
B) discretionary variable costs
C) committed fixed costs
D) committed variable costs

Question 17

Donahue currently produces 120,000 units at a cost of $400,000.Of the $400,000 cost,$200,000 is a fixed cost.Next year Donahue expects to produce 145,000 units.Donahue's relevant range for production activities is 100,000 to 150,000 units.If 145,000 units are produced next year,what is the expected fixed cost for next year?

A) $200,000
B) $241,667
C) $441,667
D) $483,333

Question 18

The use of high technology equipment to manufacture products instead of highly skilled labor usually results in ________.

A) higher discretionary fixed costs
B) higher discretionary variable costs
C) lower risk
D) higher operating leverage

Question 19

Due to the economic downturn,a company has reduced charitable donations to community groups.This is an example of a ________.

A) variable cost
B) committed fixed cost
C) capacity cost
D) discretionary fixed cost

Question 20

Managers can eliminate ________ costs entirely for a given year in dire times such as a major recession.However,managers cannot eliminate ________ costs.

A) discretionary variable costs; committed variable costs
B) discretionary fixed costs; committed fixed costs
C) discretionary variable costs; committed fixed costs
D) committed fixed costs; committed variable costs

Question 21

Which statement regarding fixed costs is TRUE?

A) Discretionary fixed costs preserve management's flexibility.
B) Committed fixed costs preserve management's flexibility.
C) Both discretionary and committed fixed costs preserve management's flexibility.
D) Discretionary fixed costs limit management's flexibility.

Question 22

Companies can reduce or eliminate committed fixed costs when demand falls during an economic downturn.

Question 23

Managers cannot eliminate discretionary fixed costs.

Question 24

The use of high-technology methods rather than labor in manufacturing products usually means a much greater fixed-cost component to total costs.

Question 25

Costs that may be essential to the long-run achievement of the organization's goals,but that managers can almost reduce to zero in the short-run,are called ________.

A) capacity costs
B) committed fixed costs
C) discretionary fixed costs
D) mixed costs

Question 26

In an economic recession,a company could NOT eliminate ________.

A) employee training program
B) research and development projects
C) public relations department
D) depreciation expense on factory machines

Question 27

In a graph of a mixed cost function,the y-axis is ________ and the x-axis is ________.

A) fixed cost; cost driver activity
B) fixed cost; variable cost per unit
C) mixed cost; volume in units
D) cost; cost driver activity

Question 28

In a linear cost function,the fixed cost is ________.

A) dependent on the cost driver
B) dependent on the independent variable
C) independent of the cost driver
D) independent of the intercept

Question 29

When estimating the cost of the maintenance department in a hospital for a month,what cost driver should be used?

A) number of patients per month
B) number of nurses working per month
C) number of operations per month
D) number of patients per month times the length of stay per patient

Question 30

When estimating the total cost of a one-way flight from New York to Los Angeles,what cost driver should be used?

A) number of miles on flight
B) number of passengers on flight
C) number of pounds of baggage on flight
D) number of passengers on flight times the number of miles on flight

Question 31

Most companies make capacity decisions frequently.

Question 32

A mixed-cost function is graphed as a ________.

A) nonlinear line
B) curved line
C) line with a break for fixed costs
D) straight-line

Question 33

Capacity costs are variable costs related to a desired level of production or service.

Question 34

Committed fixed costs usually arise from the possession of facilities,equipment and a basic organizational structure.

Question 35

Volume-driven costs can be easily traced to products or services.

Question 36

In an economic downturn,a company could temporarily reduce or eliminate a(n)________.

A) property taxes on factory building
B) insurance on factory building
C) lease payments on computers in corporate headquarters
D) public relations department

Question 37

In a corporate setting,a mortgage payment would be identified as a ________.

A) purely variable cost
B) discretionary fixed cost
C) committed fixed cost
D) mixed cost

Question 38

In a linear cost function,the slope measures the ________.

A) total fixed cost
B) total variable cost
C) variable cost per unit of cost driver
D) fixed cost per unit of cost driver

Question 39

Only major changes in the scale or scope of operations can change ________ in future periods.Managers can vary spending levels for ________ in the short run.

A) committed fixed costs; capacity costs
B) committed fixed costs; discretionary fixed costs
C) discretionary fixed costs; capacity costs
D) capacity costs; committed fixed costs

Question 40

In an economic downturn,a company could temporarily reduce or eliminate ________.

A) depreciation expense on corporate building
B) bond interest payment
C) property taxes on corporate building
D) advertising and promotion

Question 41

Goodness of fit pertains to how well a cost function predicts cost behavior.

Question 42

When managers graph a linear cost function with one cost driver,the intercept represents the ________ cost and the slope represents the ________ cost.

A) variable; fixed
B) fixed; variable
C) fixed; mixed
D) variable; mixed

Question 43

A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s).

Question 44

Consider the following linear mixed-cost function:
Y = $110,000 + $5.50X
Where: Y = total annual custodial cost
$$X = \text { number of patient-days }$$
What does the $5.50 represent?

A) total fixed cost
B) total variable cost
C) fixed cost per patient-day
D) variable cost per patient-day

Question 45

In a mixed-cost linear function with one cost driver,the intercept is the ________ and the slope is the ________.

A) fixed cost; step cost
B) fixed cost; variable cost
C) variable cost; fixed cost
D) variable cost; step cost

Question 46

Managers apply two criteria to obtain accurate and useful cost functions.These criteria are ________.

A) plausibility and believability
B) plausibility and reliability
C) reliability and validity
D) validity and plausibility

Question 47

In a linear mixed cost function,the slope of the function is the fixed cost per unit of the cost driver.

Question 48

When referring to a cost function,plausibility refers to whether you can rely upon the cost function for predicting the future.

Question 49

Sunset Motel's cost function is given as:
Y = $75,000 + $9.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Sunset Motel has 8,000 guest days.In the next year,Sunset Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected total variable custodial cost for next year?

A) $60,000
B) $75,000
C) $95,000
D) $170,000

Question 50

When estimating the cost of the laundry department in a hospital,which of the following cost drivers should be used?

A) number of patients
B) number of patients times the length of stay per patient
C) number of patients in intensive care and critical care
D) number of pounds of laundry

Question 51

When developing cost functions,which of the following statements is FALSE?

A) The cost function must be believable.
B) The cost function should explain past cost behavior.
C) Personal observations of costs and activities provide the best evidence of a plausible relationship between a cost and its cost driver.
D) The cost function does not have to be plausible.

Question 52

In relation to a cost function,the term reliability means ________.

A) whether the costs and activities can be easily observed
B) whether the cost function conforms to a given mathematical model
C) how well the cost function predicts future costs
D) how well the cost function explains past cost behavior

Question 53

A linear cost function is estimated over the relevant range of 0 to 1,000 orders.The equation estimated is: Y = $25,000 + $89X where Y equals the total order-processing cost and X equals the number of orders.If the number of orders increases to 1,800,what is the predicted total order-processing cost?

A) $25,000
B) $160,200
C) $185,200
D) cannot be determined

Question 54

Consider the following linear mixed-cost function:
Y = $120,000 + $2.70X
Where: $\quad Y =$ total annual maintenance cost
$X =$ mumber of patient-days
What does the $120,000 represent?

A) variable cost per patient-day
B) total variable cost
C) fixed cost per patient-day
D) total fixed cost

Question 55

Sunrise Motel's cost function is given as:
Y = $75,000 + $9.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Sunrise Motel has 8,000 guest days.In the next year,Sunrise Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected fixed custodial cost for next year?

A) $7.50
B) $50,000
C) $62,500
D) $75,000

Question 56

A cause and effect relationship between a ________ and a ________ is desirable in order to obtain accurate and useful cost functions.

A) cost driver; cost function
B) cost function; resource cost
C) cost driver; resource cost
D) step cost; capacity cost

Question 57

Atlanta Senior Center is planning its annual fundraiser.The event committee has developed the following budget for the event.
$\begin{array}{ll}\text { Ballroom rental } & \$ 3,000 \\\text { Entertainment } & \$ 2,500 \\\text { Printing } & \$ 600 \text { plus } \$ 9 \text { per person } \\\text { Food } & \$ 30 \text { per person } \\\text { Decorations } & \$ 700 \text { plus } \$ 5 \text { per person }\end{array}$
Required:

A) Determine the cost function.
B) If Atlanta Senior Center charges $100 per person, and 1,000 people attend, how much profit will be derived by this event?

Question 58

Sheboygan Motel's cost function is given as:
Y = $120,000 + $2.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year,Sheboygan Motel has 8,000 guest days.In the next year,Sheboygan Motel expects an occupancy level of 10,000 guest days.(All costs next year will remain in the same relevant range as the current year.)What is the expected total custodial cost for next year?

A) $37,000
B) $120,000
C) $125,000
D) $145,000

Question 59

When estimating a cost function,we assess reliability using ________.

A) visual inspection
B) plausible relationships
C) goodness of fit
D) intuition

Question 60

Managers should apply plausibility and reliability to obtain accurate and useful cost functions.

Question 61

When estimating cost functions,engineering analysis based on observations of employee behavior has the following disadvantage: ________.

A) the employees may have altered their normal work habits because they are being observed
B) it is less expensive than account analysis
C) it does not use all of the data points
D) the coefficient of determination is not reliable

Question 62

When using the visual-fit method to estimate a cost function,we can estimate the fixed cost by ________.

A) the point where the sketched line (through all or most of the data points) intersects the x-axis
B) the point where the sketched line (through all or most of the data points) intersects the y-axis
C) calculating the variable cost per unit of the cost driver
D) subtracting the variable cost at any cost driver level from the total cost

Question 63

The cost of the Maintenance Department at Forest Manufacturing has always been charged to the production departments based on the number of employees.Recently,an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each production department.The Maintenance Department cost is $500,000.The following data is available:

Required:
1.Determine the amount of the maintenance department cost that should be allocated to Department A and Department B if the cost driver used is: (A)number of employees and (B)square feet of space.
2.Does the choice of the cost driver affect the costs assigned to each department?

Question 64

A disadvantage of the high-low method to estimate a cost function is ________.

A) historical data may hide past inefficiencies
B) historical data may be obsolete
C) historical data may not reflect changes made in the organization
D) all of the above

Question 65

Companies may be forced to use engineering analysis or account analysis to estimate cost functions because ________.

A) engineering analysis is the least costly method
B) historical data are too subjective
C) the other estimation methods are too difficult to use
D) historical data are not available

Question 66

Three cost drivers are used to estimate the cost of processing insurance claims.The cost drivers are: (1)claim amount,(2)age of vehicle in accident and (3)age of driver in accident.The percentages attributable to the cost drivers are 50% for claim amount,and 15% for each of the other two cost drivers.What is the cost to process Claim #101? The claim amount is $1,000.The age of the vehicle is 5 years.The age of the driver is 20 years.

A) $3.00
B) $3.75
C) $500
D) $503.75

Question 67

Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service.

Question 68

The high-low,visual-fit and least squares regression methods are more objective methods to estimate cost functions than ________ and ________.

A) activity analysis; account analysis
B) activity analysis; engineering analysis
C) account analysis; engineering analysis
D) capacity analysis; activity analysis

Question 69

To approximate cost functions for a particular manufacturing process,engineering analysis relies on ________.

A) statistical analysis
B) mathematical analysis
C) graphs
D) actual observations of the ongoing process

Question 70

When examining the output from regression analysis,the fixed cost measure is labeled the ________ by most computer programs.

A) coefficient of determination
B) X coefficient
C) standard error of estimate
D) constant or intercept

Question 71

When examining the output from regression analysis,with one independent variable,the variable cost measure is labeled the ________ by most computer programs.

A) coefficient of determination
B) X coefficient
C) standard error of estimate
D) constant or intercept

Question 72

When using the visual-fit method to estimate a cost function,the variable cost per unit of the cost driver is equal to the ________.

A) the point where the sketched line (through all or most of the data points) intersects the x-axis
B) the point where the sketched line (through all or most of the data points) intersects the y-axis
C) slope of the sketched line (through all or most of the data points)
D) any point on the sketched line divided by the fixed cost

Question 73

With the high-low method,the most accurate way to measure the intercept and slope for a cost function is to ________.

A) plot the data points and draw a line
B) plot the data points, identify the high and low points and draw a line between the high and low points
C) plot the data points and draw a straight line through the points as close as possible to all the points
D) use algebra using the two data points with the highest and lowest activity levels

Question 74

Due to the use of statistics,least squares regression analysis estimates a cost function more ________ than other cost measurement methods.

A) easily
B) rapidly
C) reliably
D) subjectively

Question 75

An activity analysis has shown that the number of components added to Product X and Product Y is the cost driver for support costs.Support costs are $20 per component.Product X has 4 components and Product Y has 8 components.What amounts of support costs should be assigned to Product X and Product Y?

Question 76

To estimate the monthly maintenance cost for the maintenance department in a hospital,the following monthly costs are available:
$\begin{array}{ll}\text { Monthly Expense }&\text { Costs }\\\text { Supervisor Salary Expense } & \$ 3,000 \\\text { Depreciation Expense-Maintenance Equipment } & \$ 5,000 \\\text { Repairs Expense-Maintenance Equipment } & \$ 5,000 \\\text { Supplies Expense } & \$ 7,000 \\\text { Wages Expense-Maintenance Workers } & \$ 10,000\end{array}$
The Supervisor Salary Expense and the Depreciation Expense are fixed costs.The remaining expenses are variable costs.There are 1,000 patient days in a month,which is the cost driver for maintenance costs.Estimate the cost function where Y is the monthly maintenance cost and X is the variable cost per patient day.

A) Y = $8 + $22X
B) Y = $8,000 + $22,000X
C) Y = $8,000 + $22X
D) Y = $30,000 + $22,000X

Question 77

The greatest benefit of activity analysis is that it directs management accountants to the ________.

A) relevant costs for decision making
B) most accurate product cost
C) appropriate cost driver for each cost
D) most accurate product price

Question 78

The process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service is called ________.

A) account analysis
B) activity analysis
C) cost analysis
D) product analysis

Question 79

Direct labor cost is the primary cost driver of support costs for two products.Product One has direct labor costs of $8.50 per unit and Product Two has direct labor costs of $130 per unit.The support costs assigned to each product is the direct labor cost times five.What is the support cost assigned to Product One and Product Two?

Question 80

To estimate cost functions using account analysis,each account is classified as a ________ cost or ________ cost with respect to ________.

A) mixed; fixed; sales volume in units
B) mixed; variable: sales volume in units
C) variable; fixed; a cost driver
D) mixed; fixed; production in units