Question 1

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.

Accepted Answer

Discretionary costs are costs that are not predetermined or required, but are rather optional and up to the discretion of management. These costs relate to expenses such as advertising or research and development, where the amount spent is determined by management's judgment rather than a set formula. Option B correctly states that discretionary costs relate to decisions about the maximum amount that will be spent on activities such as travel and marketing.

Question 2

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?

Accepted Answer

Managers are less likely to ask if the cost is an engineered estimate when deciding whether to use past costs to estimate future costs. They focus more on relevance, discretion, and expected changes.

Question 3

Which of the following statements 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.

Accepted Answer

Option B is false because useful cost information can be obtained from the accounting information system. It may require some additional analysis or manipulation, but the information is typically available. Options A, C, and D are true statements. Some cost information may not be easily accessible, the accounting system design can impact the availability of cost information, and the nature of cost information can affect its usefulness for decision-making.

Question 4

Smith Company is attempting to develop the cost function for repair costs. The following past data are available: $\begin{array}{lr}\text { Machine Hours }&\text {Repair Costs }\
4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$ Using the high-low method, what is the fixed repair cost?
A) $1,185
B) $850
C) $475
D) $565

Accepted Answer

The fixed repair cost is the cost that does not change with the level of activity. In this case, the fixed repair cost is the cost of the repair crew and their equipment. The high-low method is a method of estimating the fixed and variable costs of a cost function. The high-low method uses the highest and lowest levels of activity to estimate the fixed and variable costs. In this case, the highest level of activity is 5,900 machine hours and the lowest level of activity is 3,400 machine hours. The difference in the repair costs between the highest and lowest levels of activity is $2,500. The difference in the machine hours between the highest and lowest levels of activity is 2,500 machine hours. The fixed repair cost is the repair cost at the lowest level of activity minus the variable repair cost per machine hour times the difference in the machine hours between the highest and lowest levels of activity. The variable repair cost per machine hour is $2,500 / 2,500 machine hours = $1.00 per machine hour. The fixed repair cost is $4,585 - $1.00 per machine hour * (5,900 machine hours - 3,400 machine hours) = $1,185.

Question 5

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

Accepted Answer

Estimating a cost function using past cost data is only useful if past costs are relevant and not discretionary. Relevant costs are those costs that are directly related to producing a product or providing a service. Non-discretionary costs are those costs that are difficult to change in the short-term, such as rent, salaries, and insurance. By using past cost data that includes relevant and non-discretionary costs, a cost function can be developed that can help estimate future costs and make better business decisions.

Question 6

Smith Company is attempting to develop the cost function for repair costs. The following past data are available:
$\begin{array}{lr}\text { Machine Hours }&\text {Repair Costs }\
4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$
Using the high-low method, what is the variable repair cost per machine hour?
A) $0.15
B) $1.00
C) $4.00
D) $5.00

Accepted Answer

The high-low method involves taking the highest and lowest activity levels and their associated costs to determine the variable cost per unit. The variable cost per machine hour is calculated as the difference in costs divided by the difference in machine hours between the highest and lowest activity levels. Here, the highest activity level is 5,900 hours with costs of $7,085, and the lowest is 3,400 hours with costs of $4,585. The variable cost per machine hour = ($7,085 - $4,585) / (5,900 - 3,400) = $2,500 / 2,500 = $1.00.

Question 7

A learning curve is the rate at which:
A) Students learn material for an exam
B) Direct labour employees are provided training by their organizations
C) Labour hours decrease as production increases when a new product is manufactured
D) Profitability decreases because employees have become less efficient.

Accepted Answer

A learning curve is the rate at which production time and/or cost decreases as a result of experience and learning gained from repeated production of a product. It is based on the concept that the more you produce something, the more efficient you become at doing it, resulting in fewer labour hours required to manufacture the product. Therefore, option C is the correct choice as it reflects the relationship between production and labour hours on a learning curve.

Question 8

In most accounting information systems, costs are often recorded and coded so they can be summarized based on different:
A) Cost drivers
B) Cost objects
C) Volumes of activity
D) Independent variables

Accepted Answer

Costs are usually recorded and coded based on cost objects, which are the items, activities or services for which the costs are incurred. This allows the costs to be allocated to the appropriate cost object for reporting purposes. Cost drivers, volumes of activity and independent variables may also be used in cost accounting, but they are not the primary means of summarizing costs.

Question 9

Bava Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $\begin{array}{llr}& \text { Direct } & \text { Maintenance } \
\text { Month } & \text { Labour Hours } & \text { Costs Incurred }\
\text { June } & 4,000 & \$ 900 \
\text { July } & 6,500 & 1,325 \
\text { August } & 7,000 & 1,500 \
\text { September } & 5,500 & 1,150
\end{array}$ Using the high-low method, what is the variable maintenance cost per direct labour hour?
A) $1.00
B) $0.10
C) $0.20
D) $1.50

Accepted Answer

The high-low method involves taking the highest and lowest activity levels and using them to calculate the variable cost per unit. The formula is: $$ \text{Variable Cost per Unit} = \frac{\text{Cost at High Activity Level} - \text{Cost at Low Activity Level}}{\text{High Activity Level} - \text{Low Activity Level}} $$Using the highest activity level (7,000 hours in August with a cost of $1,500) and the lowest activity level (4,000 hours in June with a cost of $900), the calculation is: $$ \frac{1,500 - 900}{7,000 - 4,000} = \frac{600}{3,000} = 0.20 $$Therefore, the variable maintenance cost per direct labour hour is $0.20.

Question 10

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

Accepted Answer

Although a past cost function provides useful information for estimating future costs, managers may need to update it for changes in the future. Additionally, managers may choose to use other methods alongside the past cost function to estimate future costs, and are not limited to using only the information provided by the past cost function. Therefore, statements I and III are both true, but II is not necessarily true.

Question 11

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

Accepted Answer

The major disadvantage of the high-low method is that it only uses the two most extreme data points (highest and lowest) to determine the cost function, which may not accurately represent the relationship between cost and activity levels over the entire range of data. This can lead to errors in cost estimation and decision-making.

Question 12

Tom and Mike are installing new flooring in their home. The house has 5 rooms of approximately equal size where the flooring will be replaced. Tom and Mike spent 3 hours removing the old flooring from the first room. If Tom and Mike are operating with an 85% learning curve, what is the estimated average time to remove the flooring from all 5 rooms? Note: ln(85%) / ln(2) = -0.234.
A) 2.05 hours total
B) 2.05 hours per room
C) 2.55 hours total
D) 2.55 hours per room

Accepted Answer

The learning curve theory suggests that the time taken to complete a task will decrease at a consistent rate as a person gains experience. Given an 85% learning curve, this means each subsequent room's flooring removal time will be 85% of the previous room's time. The formula to calculate the time for each subsequent task is Tn = T1 * n^b, where Tn is the time taken for the nth task, T1 is the time taken for the first task, n is the task number, and b is the learning rate (calculated as ln(learning percentage)/ln(2)). Since the learning rate is given as -0.234, we can calculate the average time per room, but the exact total or average time requires summing the times for each room, which involves more detailed calculations than provided. However, the correct interpretation of the learning curve effect is that it reduces the time per task, not the total time directly. Given the options, stating an average time per room (rather than total time) after applying the learning curve effect makes B the correct choice, as it aligns with how learning curves are applied in practice.

Question 13

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

Accepted Answer

Past cost information can be unavailable, irrelevant, or outdated, making it not always reliable for predicting future costs.

Question 14

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

Accepted Answer

The variable overhead cost per machine hour can be calculated using the high-low method. The change in total overhead cost divided by the change in machine hours gives the variable cost per hour: (($11.25 - $10.50) * 3000) / (3500 - 3000) = $6.00.

Question 15

Bava Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $\begin{array}{llr}& \text { Direct } & \text { Maintenance } \
\text { Month } & \text { Labour Hours } & \text { Costs Incurred }\
\text { June } & 4,000 & \$ 900 \
\text { July } & 6,500 & 1,325 \
\text { August } & 7,000 & 1,500 \
\text { September } & 5,500 & 1,150
\end{array}$ Using the high-low method, what is the fixed maintenance cost?
A) $500
B) $300
C) $200
D) $100

Accepted Answer

The answer of Bava Company wants to develop a cost...

Question 16

Which of the following statements is true?
A) Past costs are always relevant for decisions and are often useful in estimating future cost behaviour.
B) Past costs are always relevant for decisions, but are rarely useful in estimating future cost behaviour.
C) Past costs are never relevant for decisions, nor are they useful in estimating future cost behaviour.
D) Past costs are never relevant for decisions, but are often useful in estimating future cost behaviour.

Accepted Answer

Past costs may not always be relevant for making current decisions as they are sunk costs that cannot be changed. However, past costs can often provide useful information for estimating future cost behavior such as trends in cost increases or decreases. Therefore, option D stating that past costs are never relevant for decisions but often useful in estimating future cost behavior is the best choice.

Question 17

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

Accepted Answer

The company's accounting information system is the best source for determining historical costs as it is specifically designed to record and track all financial transactions and expenses, including historical costs. The other options may provide some information but may not be as accurate or comprehensive. Interviews with managers may be biased or incomplete, financial statements may only provide a summary of costs, and the Internet may have unreliable or outdated information.

Question 18

Smith Company is attempting to develop the cost function for repair costs. The following past data are available: $$\begin{array} { c c } 
\text { Machine Hours } & \text { Repair Costs } \
\hline 4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$$ Using the high-low method, what is the estimated repair cost for 4,500 machine hours?
A) $5,785
B) $5,585
C) $5,685
D) $5,985

Accepted Answer

The high-low method calculates the variable cost per machine hour as (7,085 - 4,585) / (5,900 - 3,400) = $1. The fixed cost is then calculated using one of the data points, e.g., 7,085 - (5,900 * 1) = $1,185. The estimated cost for 4,500 hours is 1,185 + (4,500 * 1) = $5,685.

Question 19

Bava Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $\begin{array}{llr}& \text { Direct } & \text { Maintenance } \
\text { Month } & \text { Labour Hours } & \text { Costs Incurred }\
\text { June } & 4,000 & \$ 900 \
\text { July } & 6,500 & 1,325 \
\text { August } & 7,000 & 1,500 \
\text { September } & 5,500 & 1,150
\end{array}$ Using the high-low method, what is the cost function for maintenance costs?
A) $500 + $1.00 per direct labour hour
B) $300 + $1.50 per direct labour hour
C) $100 + $0.20 per direct labour hour
D) $200 + $0.10 per direct labour hour

Accepted Answer

The answer of Bava Company wants to develop a cost...

Question 20

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

Accepted Answer

Fixed overhead cost = $15,750Explanation:Fixed overhead cost = Total overhead cost - Variable overhead costVariable overhead cost per hour = (Overhead cost at 3,500 hours - Overhead cost at 3,000 hours) / (3,500 hours - 3,000 hours)= ($10.50 - $11.25) / (3,500 hours - 3,000 hours)= -$0.75 / 500 hours= -$0.0015 per hourFixed overhead cost = $10.50 per hour - $0.0015 per hour * 3,500 hours= $10.50 per hour - $5.25= $15,750

Quiz 2: Cost Concepts, Behaviour, and Estimation

Discretionary costs reflect:

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?

Which of the following statements is false?

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

A learning curve is the rate at which:

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

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.

The major disadvantage of the high-low method is that:

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

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?

Which of the following statements is true?

The best source for determining historical costs is usually:

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?