Deck 3: Cost Behaviour, Cost Drivers and Cost Estimation

Question 1

Total costs are $140 000 when 10 000 units are made. Of this amount, variable costs are $4 per unit. What are the total costs when 8000 units are produced?

A) $140 000
B) $136 000
C) $132 000
D) $124 000

Answer 1

C

Question 2

The variable costs per unit are $4 when a company makes 10 000 units. What are the per unit variable costs when 8000 units are produced?

A) $6.00
B) $4.00
C) $4.50
D) $5.00

Answer 2

B

Question 3

The relationship between cost and activity is called:

A) cost prediction.
B) cost behaviour.
C) cost analysis.
D) cost approximation.

Answer 3

B

Question 4

A manufacturer plans to increase production within the relevant range of activity. What behaviour can the company expect for each of the following?

A)
B)
C)
D)

Question 5

Forecasting a cost at a particular level of activity is called:

A) cost estimation.
B) cost prediction.
C) cost behaviour.
D) cost functions.

Question 6

Which of the following describes a method of cost estimation in which a cost line is drawn through a scatter diagram to help the analyst visualise the relationship between cost and activity?

A) Least squares regression
B) High-low
C) Visual fit
D) Multiple regression

Question 7

As a firm begins to operate outside the relevant range, the accuracy of cost estimates for fixed and variable costs:

A)
B)
C)
D) Do not change

Question 8

Within the relevant range of activity, costs:

A) can be estimated with reasonable accuracy.
B) exhibit decreasing marginal cost patterns.
C) exhibit increasing marginal cost patterns.
D) None of the given answers

Question 9

Variable cost per unit:

A) increases in direct proportion to changes in the cost driver.
B) decreases in direct proportion to changes in the cost driver.
C) remains unchanged as the level of the cost driver changes.
D) increases, but not in direct proportion to changes in the cost driver.

Question 10

A cost that has both a fixed and variable component is called a:

A) step-fixed cost.
B) step-variable cost.
C) semivariable cost.
D) discretionary cost.

Question 11

Total costs are $80 000 when 8000 units are made. Of this amount, variable costs are $48 000. What are the total costs when 10 000 units are produced?

A) $ 92 000
B) $ 98 000
C) $100 000
D) $108 000

Question 12

The fixed costs per unit are $10 when a company makes 10 000 units. What are the per unit fixed costs when 12 500 units are produced?

A) $6.00
B) $12.00
C) $10.00
D) $ 8.00

Question 13

Which of the following describes a cost-estimation method that involves a careful examination of the ledger accounts?

A) Least squares regression
B) Visual fit
C) Account classification
D) Multiple regression

Question 14

Costs that remain fixed over wide ranges of activity but jump to a different amount outside that range are called:

A) step-fixed costs.
B) step-variable costs.
C) semivariable costs.
D) curvilinear costs.

Question 15

The level of activity within which fixed costs remain unchanged is called the:

A) extreme range.
B) relevant range.
C) activity range.
D) relevant range AND activity range.

Question 16

The relevant range is that range of activity where:

A) management may not find it important to concern itself.
B) management does not expect the firm to operate.
C) fixed costs remain unchanged.
D) the expected costs exceed the benefits from the activity.

Question 17

A cost that remains unchanged in total as the activity level (or cost driver) changes is called a:

A) fixed cost.
B) variable cost.
C) step-fixed cost.
D) step-variable cost.

Question 18

A cost that changes in total in direct proportion to a change in the cost driver is a:

A) variable cost.
B) fixed cost.
C) semivariable cost.
D) step-variable cost.

Question 19

Fixed costs per unit:

A) is unrelated to activity levels.
B) change as activity varies.
C) remain unchanged as activity level changes.
D) None of the given answers

Question 20

Which per unit cost does the slope of the total cost line represent?

A) Fixed
B) Variable
C) Semivariable
D) Step-variable

Question 21

Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000 units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at $13.00 per unit. Determine the cost formula that expresses the behaviour of Yang's total costs:

A) Y $60 000 + $5X
B) Y $20 000 + $13X
C) Y $45 000 + $4X
D) Y $40 000 + $9X

Question 22

Which of the following are problems frequently encountered in data collection?

A) Outliers
B) Missing data
C) Mismatched time periods
D) All of the given answers

Question 23

Technical Engineering presently leases a copying machine on a monthly basis. The lease agreement requires a fixed fee each month in addition to a charge per copy. Technical Engineering made 2400 copies and paid a total of $162 in rent in September and in October they paid $195 for 3500 copies. Determine Technical's monthly fixed fee.

A) $138
B) $ 90
C) $ 66
D) $ 55

Question 24

In activity-based costing analysis, set-up costs are classified as a:

A) unit cost.
B) batch cost.
C) product cost.
D) facility cost.

Question 25

The Longreach Toy Factory has determined machine hours to be the cost driver of the company's electricity costs. During the first six months of the year, the company incurred the following electricity costs:
Using the high-low method, estimate the variable cost per machine hour.

A) $8.38
B) $7.44
C) $5.50
D) None of the given answers

Question 26

If a very short time period, such as a week, is used for a regression study, rather than a longer period such as a month:

A) coping with inflation becomes more difficult.
B) accounting measurement errors are more likely.
C) time and motion studies will be required to supplement the cost and volume data.
D) coping with inflation becomes more difficult AND time and motion studies will be required to supplement the cost and volume data.

Question 27

In activity-based costing analysis, package design is classified as a:

A) unit cost.
B) batch cost.
C) product cost.
D) facility cost.

Question 28

Technical Engineering presently leases a copying machine on a monthly basis. The lease agreement requires a fixed fee each month in addition to a charge per copy. Technical Engineering made 2400 copies and paid a total of $162 in rent in September and in October they paid $195 for 3500 copies. Determine Technical Engineering's variable cost per copy.

A) $0.06
B) $0.04
C) $0.03
D) $0.01

Question 29

A regression model in which more than one independent variable is used to predict the dependent variable is called a:

A) simple regression model.
B) multiple regression model.
C) dependent model.
D) B and C

Question 30

In regression analysis, the variable that is being predicted is:

A) the independent variable.
B) the dependent variable.
C) the explanatory variable.
D) the dependent variable AND the explanatory variable.

Question 31

The method of cost estimation that fits a cost line between two data points is:

A) least squares regression.
B) high-low.
C) account classification.
D) multiple regression.

Question 32

Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000 units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at $13.00 per unit. Determine their total cost if Yang produces 10 000 units.

A) $130 000
B) $125 000
C) $110 000
D) $100 000

Question 33

Technical Engineering presently leases a copying machine on a monthly basis. The lease agreement requires a fixed fee each month in addition to a charge per copy. Technical made 2400 copies and paid a total of $162 in rent in September and in October they paid $195 for 3500 copies. Determine the total amount that would be paid for 1800 copies.

A) $120
B) $138
C) $144
D) $163

Question 34

The Longreach Toy Factory has determined machine hours to be the cost driver of the company's electricity costs. During the first six months of the year, the company incurred the following electricity costs:
Using the high-low method, determine the cost formula that expresses the cost behaviour of the company's electricity costs.

A) Y = $3735 + $6.20X
B) Y = $1664 + $8.38X
C) Y = $4760 + $5.00X
D) Y = $4400 + $5.50X

Question 35

The method of cost estimation that minimises the sum of the squared deviations between the cost line and the data points is:

A) least squares regression.
B) visual fit.
C) account classification.
D) None of the given answers

Question 36

In activity-based costing analysis, direct materials are classified as a:

A) unit cost.
B) batch cost.
C) product cost.
D) facility cost.

Question 37

In assessing the costs and benefits of using a particular cost driver, which of the following must be taken into account?
I) The availability of cost data.
Ii) The time frame for analysing the cost behaviour.
Iii) Whether it is a fixed or variable cost.

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

Question 38

Which of the following statements is true concerning cost estimation methods?

A) Cost behaviour is always assumed to depend on more than one cost driver.
B) Cost behaviour patterns are curvilinear.
C) Costs and benefits of using sophisticated and costly cost-estimation methods must be evaluated.
D) Cost behaviour is always assumed to depend on more than one cost driver AND costs and benefits of using sophisticated and costly cost-estimation methods must be evaluated.

Question 39

Within the relevant range, a curvilinear cost function can be graphed as a:

A) straight line.
B) set of straight lines.
C) solid line.
D) curved line.

Question 40

In activity-based costing analysis, the manufacturing manager's salary is classified as a:

A) unit cost.
B) batch cost.
C) product cost.
D) facility cost.

Question 41

When using regression analysis to determine estimated costs, what criteria are necessary to evaluate a particular regression line?

A) Closeness to pre-analysis guess
B) Goodness of fit
C) Coefficient of determination
D) Goodness of fit AND coefficient of determination

Question 42

For a manufacturer of kitchens, which of the following would you expect to be a direct cost?

A) Hourly labour cost of employees installing kitchens
B) Material for kitchen benchtops
C) Hourly labour cost of employees installing kitchens AND material for kitchen benchtops
D) Rent of factory premises

Question 43

Which of the following would always be a mixed (semivariable) cost for a firm?

A) Raw materials because it includes direct and indirect materials
B) Direct labour
C) Manufacturing overhead
D) Raw materials AND manufacturing overhead

Question 44

Eldervale Winery is a producer of premium wine. Which of the following is an example of a unit level cost?

A) The cost of the labels on each bottle of wine
B) The cost of designing the labels on a wine bottle
C) Advertising costs
D) Costs of delivering wine to customers

Question 45

In the regression formula Y = a + bX, b is:

A) the slope of the line.
B) the cost driver.
C) the intercept on the vertical axis.
D) the dependent variable.

Question 46

Which of the following statements is most complete and correct?

A) Activity-based costing uses non-volume-based cost drivers only.
B) Activity-based costing uses volume-based cost drivers.
C) Activity-based costing recognises that both volume-based and non-volume-based cost drivers may be appropriate.
D) None of the given answers.

Question 47

Which term describes a cost resulting from the existence of the organisational structure and premises used by the firm?

A) Discretionary
B) Fixed
C) Committed
D) Engineered

Question 48

Which of the following are important in estimating the cost of machine maintenance?

A) The relevant range
B) The time period selected
C) The cost driver selected
D) All of the given answers

Question 49

Lawson Lumber uses the high-low method to estimate electricity cost, which varies in relation to machine hours. Based on the following data, how would the cost function be stated if 'X' is the number of machine hours?

A) $525 + $0.35 X
B) $300 + $0.50 X
C) $500 + $0.50 X
D) $470 + $0.35 X

Question 50

Consider the following equation:
Total cost = fixed costs + (cost driver rate $\times$ cost driver quantity)
If a cost can be estimated using this equation, it is probably a:

A) fixed cost.
B) variable cost.
C) mixed or semivariable cost.
D) non-linear cost.

Question 51

For a fixed cost, as volume increases:

A) the cost behaviour depends on the type of fixed cost involved.
B) total fixed costs remain constant and fixed costs per unit increase.
C) both total fixed costs and fixed costs per unit remain constant.
D) total fixed costs remain constant and fixed costs per unit decrease.

Question 52

Which of the following increases as volume of activity decreases?

A) Fixed cost per unit
B) Variable cost per unit
C) Total fixed cost
D) Total variable cost

Question 53

Which of the following statements are assumptions underlying cost estimation?

A) Cost behaviour depends on one or a few activities.
B) All costs are production driven.
C) There is a strong correlation between the cost and the cost driver.
D) Cost behaviour depends on one or a few activities AND there is a strong correlation between the cost and the cost driver.

Question 54

An example of a discretionary cost for a firm that manufactures furniture is:

A) direct material.
B) advertising.
C) labour.
D) glue and nails.

Question 55

Which of the following is not an example of a cost driver for a delivery truck?

A) Location of customers
B) Depreciation
C) Litres of fuel used
D) Number of customers

Question 56

For a manufacturer of kitchens, which of the following would you expect to be a fixed cost?

A) Hourly labour cost of employee installing kitchens
B) Material for kitchen benchtops
C) Adhesive for benchtops
D) Rent of factory premises

Question 57

Which of the following is an example of an engineered cost?

A) Direct materials
B) Advertising
C) Insurance
D) Factory supervisor's salary

Question 58

Which of the following are valid reasons for a firm not using objective techniques?
I) Data may not be available.
Ii) Cost estimates are sufficiently accurate for the firm's purposes.
Iii) Accountants may be ignorant of appropriate techniques.
Iv) The firm gives low priority to cost estimation.

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

Question 59

In which approach to costs estimation, is task analysis used?

A) Account classification
B) Engineering method
C) High-low method
D) Managerial judgement

Question 60

In which approach to cost estimation, is least squares used?

A) Engineering method
B) High-low method
C) Regression analysis
D) Managerial judgement

Question 61

The results of the regression analysis to estimate delivery costs are as follows:
Which of the following is an appropriate cost equation based on the above regression output?

A) Delivery costs = $366.39 + $0.58 X₁, where X₁ is the number of cargos.
B) Delivery costs = $0.662 + $2.985 X₁, where X₁ is the number of cargos.
C) Delivery costs = $242.51 + $1.74 X₁, where X₁ is the number of cargos.
D) Delivery costs = $48861.07 + $1.74 X₁, where X₁ is the number of cargos.

Question 62

When estimating cost behaviours, the appropriateness of the drivers can be tested by measuring the strength of the relationship between

A) past costs and their selected cost driver.
B) past costs and future costs.
C) past costs and predicted costs.
D) predicted costs and their selected driver.

Question 63

Define the term 'relevant range' and explain its importance to understanding cost behaviour.

Question 64

The following is an extract of a cost report for Big Whale Car Wash for the six months from June to November. Management considers the activities in these six months as within the relevant range for the purpose of cost estimation.
The car washing labour cost is a:

A) variable cost.
B) fixed cost.
C) step-fixed cost.
D) Semi-variable cost.

Question 65

Distinguish between least squares regression (simple) and multiple regression as cost estimation methods.

Question 66

The results of the regression analysis to estimate the operation costs of the polishing machine ('polishing cost per month') are as follows:
Interpret the above regression output, and construct a regression equation to describe the relationship between polishing costs per month and number of batches. Explain how confident you are with the cost equation in estimating future polishing costs.

Question 67

The following is an extract of a cost report for Big Whale Car Wash for the six months from June to November. Management considers the activities in these six months as within the relevant range for the purpose of cost estimation.
The car washing labour cost is a:

A) variable cost.
B) fixed cost.
C) step-fixed cost.
D) semi-variable.

Question 68

Describe how the learning effect will affect cost prediction.

Question 69

The following is an extract of a cost report for Big Whale Car Wash for the six months from June to November. Management considers the activities in these six months as within the relevant range for the purpose of cost estimation.
The car washing labour cost is a:

A) variable cost.
B) fixed cost.
C) step-fixed cost.
D) semi-variable.

Question 70

Which of the following statements about the coefficient of determination (R²) is correct?

A) R² is a measure of economic plausibility.
B) The higher the R², the more confident we are when using a regression model to predict costs.
C) R² is a measure of data accuracy.
D) R² is a useful measure only for simple regressions.

Question 71

Explain why many businesses are finding that more and more of their costs no longer vary directly with the volume of production.

Question 72

To test the significance of a result using the regression equation as a whole and to assess that the result is not due to random factors, management would consider the result of the

A) F-statistic.
B) adjusted R2.
C) p-value.
D) co-efficient.

Question 73

'Time and motion studies' refers to:

A) the process in which managers use their judgment to estimate the time it takes to carry out each individual work task, in order to estimate cost.
B) the process in which employees complete timesheets each day; the timesheets then form the basis for cost estimation.
C) the process in which employees are observed when they undertake work tasks; these observations are then used to estimate cost.
D) the process in which the cost of work tasks are compared over time and across different divisions.

Question 74

The results of the regression analysis to estimate delivery costs are as follows:
Which of the following statements represent a valid conclusion based on the above regression analysis output?

A) 54.4% of transportation cost can be explained by the number of cargos.
B) The F-statistic is considered significant; therefore, the relationship in the regression is unlikely to happen by chance.
C) The p-value associated with the intercept suggests that the delivery costs are entirely variable.
D) Given the t-statistic, number of cargos is a poor cost driver of delivery cost.

Question 75

The main reason for analysing cost behaviour is to

A) provide estimates of cost behaviour.
B) provide estimates for cost predictions.
C) provide a timeframe for analysing cost behaviour.
D) provide estimates of cost behaviour for cost predictions.

Question 76

Compare and contrast the following types of costs:
i. Variable and step-variable
ii. Fixed and step-fixed

Question 77

Truweight Ltd has introduced a new line of weight machines for the catering industry which has required additional steps in the production line. During the first two months of production the labour time for the weight machines was as follows:
The average labour time per unit for February was

A) 1800 hours.
B) 100 hours.
C) 90 hours.
D) 80 hours.

Question 78

An activity or factor that causes costs to be incurred is known as a

A) cost prediction.
B) cost estimation.
C) cost driver.
D) cost behaviour.

Question 79

Truweight Ltd has introduced a new line of weight machines for the catering industry which has required additional steps in the production line. During the first two months of production the labour time for the weight machines was as follows:
The learning curve percentage is

A) 10 per cent.
B) 90 per cent.
C) 100 per cent.
D) 110 per cent.

Question 80

When a manager notices an outlier during the cost estimation process, the appropriate response is to:

A) no response is required, unless multiple outliers are observed.
B) attempt to identify the reasons for the outlier.
C) divide the outlier by the standard deviation, before including the outlier in the regression model
D) re-collect all the data, as an outlier indicates that the data has been corrupted.