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Chapter 3 Cost Behavior

1. A cost that changes in total as output changes is a variable cost. a. True

b. False

ANSWER: True

2. The cost of raw materials used is usually a fixed cost. a. True

b. False

ANSWER: False

RATIONALE: The cost of raw materials used is usually a variable cost.

3. Fixed costs are costs that in total remain constant within the relevant range as the level of output increases or decreases.

a. True

b. False

ANSWER: True

4. As output decreases fixed costs per unit will increase. a. True

b. False

ANSWER: True

5. As output increases variable cost per unit will also increase. a. True

b. False

ANSWER: False

6. The cost of advertising is usually a discretionary fixed cost. a. True

b. False

ANSWER: True

7. A discretionary fixed cost can be changed relatively easily at management discretion. a. True

b. False

ANSWER: True

8. The relevant range is the range of output within which the assumed cost relationship is valid for the normal operations of the firm.

a. True

b. False

ANSWER: True

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Chapter 3 Cost Behavior

9. Determining cost behavior is not essential to planning, controlling, and decision making. a. True

b. False

ANSWER: False

RATIONALE: Determining cost behavior is essential to planning, controlling, and decision making.

10. A variable cost increases in total when output increases but the per-unit costs remains the same. a. True

b. False

ANSWER: True

11. Cost relationships may change at output levels outside of the relevant range. a. True

b. False

ANSWER: True

12. Computing unit fixed costs may result in misleading information. a. True

b. False

ANSWER: True

13. Discretionary fixed costs often involve a long-term contract. a. True

b. False

ANSWER: False

RATIONALE: Discretionary fixed costs can be changed at managements discretion.

14. Total variable costs = Variable rate amount of output. a. True

b. False

ANSWER: True

15. A driver is a factor that causes or leads to a change in a cost. a. True

b. False

ANSWER: True

16. Mixed costs have both a fixed and a variable component. a. True

b. False ANSWER: True

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Chapter 3 Cost Behavior

17. Managerial judgment is critically important in determining cost behavior. a. True

b. False

ANSWER: True

18. The high-low method is an objective method to separate the cost behavior of a mixed cost. a. True

b. False

ANSWER: True

19. Outliers are points that seem to fit the general pattern of behavior. a. True

b. False

ANSWER: False

RATIONALE: Outliers are points that do not seem to fit the general pattern of behavior.

20. The slope of a mixed cost line is equal to the fixed element of the cost. a. True

b. False

ANSWER: False

21. Using the high-low method, the calculation of the cost line uses the highest and lowest activity period. a. True

b. False

ANSWER: True

22. Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an outlier. a. True

b. False

ANSWER: False

23. Using a linear regression program, the term Intercept refers to the variable cost. a. True

b. False

ANSWER: False

RATIONALE: Using a regression program, the term Intercept refers to the fixed cost.

24. Using a regression program, the term X Variable 1 refers to the dependent variable. a. True

b. False ANSWER: False

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Chapter 3 Cost Behavior

25. Using regression, the value of X Variable 1 equals the slope of the line. a. True

b. False

ANSWER: True

26. The ________________ is the range of output over which the assumed cost relationship is valid for the normal

operations of a firm.

ANSWER: relevant range

27. A cost __________ is a casual factor that measures the output of the activity that leads costs to change.

ANSWER: driver

28. __________________ is the general term for describing whether a cost changes when the level of output

changes.

ANSWER: Costbehavior

29. The fabric used to manufacture curtains is an example of a material or a ____________ cost.

ANSWER: variable

30. Depreciation on factory equipment would be an example of a(n) _________ cost.

ANSWER: fixed

31. A type of cost behavior where the true total cost function is increasing at a decreasing rate is called

______________.

ANSWER: semi-variable.

32. Rental expense for a warehouse is an example of a ___________ cost.

ANSWER: fixed

33. Fixed costs that cannot be easily changed and typically involve a long-term contract are known as

___________________.

ANSWER: committedfixedcosts.

34. A fixed cost that management can easily decide to increase or decrease is known as a _________________.

ANSWER: discretionaryfixedcost.

35. ___________________ are costs that in total vary in direct proportion to changes in output within the relevant

range.

ANSWER: Variable costs

36. A _______________ displays a constant level of cost for a range of output and then jumps to a higher level of

cost at some point. ANSWER: step cost

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Chapter 3 Cost Behavior

37. _______________________ are costs that have both a fixed and a variable component. ANSWER: Mixedcosts

38. ______________________________ is a statistical way to find the best-fitting line through a set of data points. ANSWER: The method of least squares or regression analysis

39. __________________________ is critically important in determining cost behavior and is by far the most widely used method in practice.

ANSWER: Managerialjudgement

40. The _________________________ is a way to see the cost relationship by plotting the data points on a graph.

ANSWER: scattergraph method

41. The ________________________ is a variable whose value depends on the value of another variable.

ANSWER: dependentvariable

42. Graphically, the ______________ is the point at which the cost line intercepts the cost (vertical) axis.

ANSWER: intercept

43. An advantage of the high-low method is that it ___________.

ANSWER: isobjective

provides a quick overview

is easy to use

44. The percentage of variability in the dependent variable explained by an independent variable is called the ____________________________________.

ANSWER: coefficientofdetermination.

45. The spreadsheet regression program supplies more than the estimates of the coefficients; it also provides information that can be used to see how ________ the cost equation is which is a feature not available for the high-low method.

ANSWER: reliable

46. Knowing how costs change as output changes is essential to a. planning and controlling.

b. controlling and decision making.

c. planning, controlling and decision making.

d. None of these are correct. ANSWER: c

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Chapter 3 Cost Behavior

47. A fixed cost within the relevant range

a. increases in total as output decreases.

b. does not change in total as output changes. c. decreases in total as output increases.

d. All of these are correct.

ANSWER: b

48. Which of the following would be an example of a fixed cost? a. wages for an assembly line worker

b. electric bill

c. depreciation on equipment

d. materials used

ANSWER: c

49. Which of the following would not be an example of a fixed cost? a. glue used to put together tables

b. insurance on factory building

c. depreciation on factory building

d. property taxes

ANSWER: a

50. Discretionary fixed costs

a. cannot be easily changed.

b. often involve a long-term contract.

c. can be changed easily at managements discretion. d. increase as output increases.

ANSWER: c

51. Which of the following is an example of a discretionary fixed cost? a. depreciation of equipment

b. advertising costs

c. rental of machinery

d. insurance on automobiles

ANSWER: b

52. Which of the following is not an example of a discretionary fixed cost? a. research and development

b. training costs

c. advertising costs

d. direct materials ANSWER: d

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Chapter 3 Cost Behavior

53. A committed fixed cost

a. can easily be changed.

b. often involves a long-term contract.

c. changes when the level of output changes. d. all of these are correct

ANSWER: b

54. Variable costs within the relevant range

a. stay constant on a per unit basis as output changes. b. increase in total as output increases.

c. decrease in total as output decreases.

d. All of these are correct.

ANSWER: d

55. Which of the following would be a variable cost for a dentists office? a. depreciation on equipment

b. cost of renting office space

c. cost of teeth cleaning material

d. salary of dentist

ANSWER: c

56. Total variable costs

a. increases as output increases.

b. decreases as output decreases.

c. equal a variable rate amount of output. d. all of these are correct.

ANSWER: d

57. A factor that causes or leads to a change in a cost or activity is a(n) a. cost formula.

b. step cost.

c. mixed cost.

d. driver.

ANSWER: d

58. Which of the following would probably be a fixed cost in a fast-food restaurant? a. cost of hamburger

b. cost of french fries

c. shift managers salary

d. utility cost ANSWER: c

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Chapter 3 Cost Behavior

59. Which of the following would probably be a variable cost at a college? a. salary of the head janitor

b. cost of registration forms

c. salary of the college president

d. none of these options

ANSWER: b

60. The relevant range

a. is the normal range of output.

b. is the range of output where cost relationships are valid. c. may change from period to period.

d. All of these are correct.

ANSWER: d

61. Per-unit fixed costs

a. can be misleading and lead to poor decisions. b. stay the same as output changes.

c. decrease as output decreases.

d. increase as output increases.

ANSWER: a

62. Which of the following would probably be a discretionary fixed cost for a law firm? a. salary of receptionist

b. advertising

c. depreciation on furniture and equipment

d. cost of legal forms

ANSWER: b

63. Which of the following would probably be a committed fixed cost for an accounting firm? a. lease of computers

b. rent on the office building

c. property taxes on building

d. All of these are correct.

ANSWER: d

64. Per-unit variable costs

a. can be misleading and lead to poor decisions. b. increase as output increases.

c. decrease as output decreases.

d. remain constant within the relevant range.

ANSWER: d

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Chapter 3 Cost Behavior

65. If output increases

a. per-unit fixed cost will increase.

b. total variable costs will increase.

c. per-unit variable costs will increase. d. per-unit variable costs will decrease.

ANSWER: b

66. If output decreases

a. total fixed costs will remain the same. b. total variable costs will increase.

c. per-unit fixed costs will decrease.

d. All of these are correct.

ANSWER: a

67. If output increases by 50% and is still within the relevant range a. total fixed costs will increase by 50%.

b. per-unit fixed cost will remain the same.

c. total variable costs will increase by 50%.

d. net income will increase by 50%. ANSWER: c

Figure 3-2.

Lassiter Toys, Inc. Cost of Materials

No. of toys produced Total cost of materials 100,000 $20,000 200,000 40,000 300,000 60,000

68. Refer to Figure 3-2. The cost behavior of the materials cost is a. fixed

b. variable

c. committed d. discretionary

ANSWER: b

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Chapter 3 Cost Behavior

69. Refer to Figure 3-2. What is the materials cost per unit of output? a. $0.10

b. $0.20 c. $0.60 d. $0.40

ANSWER: b

RATIONALE: SUPPORTING CALCULATIONS: $20,000 / 100,000 = $0.20

70. Refer to Figure 3-2. What should the total materials cost be at a production level of 220,000 toys? a. $44,000

b. $88,000 c. $22,000 d. $132,000

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: 220,000 $0.20

Figure 3-6.

Taran Company incurred the following costs for the months of January and February.

Type of Cost January Insurance $ 5,000 Utilities 4,000 Depreciation 3,500 Materials 10,000 71. Refer to Figure 3-6. From the information above we can assume that a. insurance and depreciation are fixed costs.

b. output decreased from January to February.

c. output stayed the same from January to February. d. insurance is a mixed cost.

ANSWER: a

February $ 5,000 5,000 3,500 20,000

72. Refer to Figure 3-6. Assume that output was 5,000 units in January and 10,000 units in February, utility cost is a mixed cost, and the fixed cost of utilities was $3,000. What was the variable rate per unit of output for utilities cost? a. $0.60

b. $0.40

c. $0.20

d. $0.30

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: Variable cost = $4,000 $3,000

Variable rate: $1,000 / 5,000 = $0.20

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Chapter 3 Cost Behavior

73. Refer to Figure 3-6. If output was 5,000 units in January and 10,000 units in February we can assume that a. utilities and materials are variable costs.

b. utilities, insurance, and depreciation are fixed costs.

c. insurance and depreciation are mixed costs.

d. materials are the only variable cost.

ANSWER: d

74. The range of output over which the assumed cost relationship is valid for normal operations of a firm is called the a. mixed range.

b. relevant range.

c. linear range.

d. dependent range.

ANSWER: b

75. Cost behavior analysis focuses on

a. how costs react to increases in activity levels only. b. how costs will change in the future.

c. how costs react to changes in activity level.

d. None of these are correct.

ANSWER: c

76. Fixed cost per unit is $9 when 20,000 units are produced and $6 when 30,000 units are produced.

What is the total fixed cost when nothing is produced? a. $180,000

b. $360,000

c. $150,000

d. $240,000 ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: $9 20,000 or $6 30,000

77. If production volume increases from 8,000 to 10,000 units, a. total costs will increase by 20%.

b. total costs will increase by 25%.

c. total variable costs will increase by 25%.

d. mixed and variable costs will increase by 25%. ANSWER: c

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Chapter 3 Cost Behavior

78. When the volume of activity increases within the relevant range, the fixed cost per unit a. decreases.

b. increases at first, then decreases. c. remains the same.

d. increase.

ANSWER: a

79. The cost formula for monthly depreciation cost in a factory is

Total cost = $10,000

This cost is

a. strictly variable. b. strictly fixed.

c. a mixed cost.

d. a step cost.

ANSWER: b

80. A mixed cost

a. remains constant when the output level increases. b. cannot be separated.

c. contains both a fixed and variable component.

d. All of these are correct.

ANSWER: c

81. When a mixed cost is graphed the Y-intercept corresponds to the a. step cost.

b. variable rate.

c. fixed cost.

d. price of the units sold.

ANSWER: c

82. When a mixed cost is graphed the slope of the line equals a. the variable cost per unit of the activity driver.

b. the total variable cost.

c. the sales price per unit.

d. the total fixed cost. ANSWER: a

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Chapter 3 Cost Behavior

83. Step costs

a. remain the same within the relevant range.

b. have an increased fixed component at specified intervals. c. increase in direct proportion to increases in output.

d. None of these are correct.

ANSWER: b

84. The formula for a mixed cost is

a. total cost = total variable cost + ( fixed rate amount of output). b. total cost = total fixed cost + (variable rate amount of output). c. total cost = variable rate amount of output.

d. None of these are correct.

ANSWER: b

85. Which of the following would probably be a mixed cost? a. rent on building

b. raw materials

c. repairs and maintenance

d. depreciation

ANSWER: c

86. A mixed cost

a. will vary in direct proportion to changes in output. b. stays the same regardless of output.

c. has the same cost behavior as a step cost.

d. will decrease in total when output decreases.

ANSWER: d

87. If a costs step-cost behavior follows very narrow steps, the costs may be approximated using: a. straight variable cost assumptions.

b. fixed costs assumptions.

c. step-fixed cost assumptions.

d. mixed cost assumptions. ANSWER: a

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Chapter 3 Cost Behavior

Figure 3-1.

Total cost = Fixed cost + (Variable Rate Output)

88. Refer to Figure 3-1. In the cost formula above which element would be the dependent variable?

a. variable rate b. fixed cost

c. total cost

d. output

ANSWER: c

89. Refer to Figure 3-1. In the cost formula above which element would be the independent variable? a. fixed cost

b. total cost

c. output

d. variable rate

ANSWER: c

90. Refer to Figure 3-1. In the cost formula above which element would be the intercept? a. fixed cost

b. total cost

c. output

d. variable rate

ANSWER: a

91. Refer to Figure 3-1. In the cost formula above which element would be the slope? a. variable rate

b. output

c. fixed cost d. total cost

ANSWER: a

92. The high-low method

a. is the most accurate methods.

b. is not affected by the presence of outliers. c. has the advantage of objectivity.

d. has the advantage of subjectivity.

ANSWER: c

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Chapter 3 Cost Behavior

93. The scatter-graph method

a. displays a constant level of cost for a range of output. b. has the advantage of subjectivity.

c. may reveal the presence of outliers.

d. all of these are correct

ANSWER: c

94. The method of least squares

a. is a way to find the best fitting line through a set of data points.

b. is a statistical way of separating a mixed cost.

c. always produces the same cost formula when used on the same data set. d. all of these are correct

ANSWER: d

95. Using the high-low method, the variable rate of a mixed cost equals a. total cost at high point (variable rate output at high point)

b. total cost at high point (variable rate output at low point)

c.

d.

ANSWER: d

96. The method of least squares

a. uses the results of regression analysis to construct a cost formula. b. is the least accurate method.

c. analyzes a cost relationship by plotting the data points on a graph. d. can easily be calculated by hand.

ANSWER: a

97. Managerial judgment

a. is the most accurate way to determine cost behavior. b. is the least used method in practice.

c. is critically important in determining cost behavior.

d. none of these are correct

ANSWER: c

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Chapter 3 Cost Behavior

98. The scatter-graph method

a. allows a cost analyst to inspect data visually. b. is objective.

c. only uses two data points.

d. none of these are correct

ANSWER: a

99. Ruskin Company had utilities cost of $95,000 at an output level of 30,000 units. The utilities cost was a mixed cost and the fixed portion was $50,000. What would the estimate of total utilities cost be at an output level of 40,000 units?

a. $65,000

b. $95,000 c. $110,000 d. $125,000

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS:

Variable rate: $45,000 / 30,000 = $1.50

Total cost: (40,000 $1.50) + $50,000 = $110,000

Figure 3-3.

Okafor Company manufactures skis. The management accountant wants to calculate the fixed and variable costs associated with the leasing of machinery. Data for the past four months were collected.

Month April May June July

Machine hours

Lease cost

$21,000 550

100. Refer to Figure 3-3. Using the high-low method calculate the variable rate for the lease cost a. $38.18

b. $38.20 c. $61.50 d. $37.25

ANSWER: b

RATIONALE: SUPPORTING CALCULATIONS: ($22,230 $16,500) / (570 420) = $38.20

16,500 420 19,000 510 22,230 570

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Chapter 3 Cost Behavior

101. Refer to Figure 3-3. Using the high-low method calculate the fixed cost of leasing a. $482

b. $516 c. $420 d. $456

ANSWER: d

RATIONALE: SUPPORTING CALCULATIONS: $22,230 ($38.20 570) = $456.00

OR

$16,500 ($38.20 420) = $456.00

102. Refer to Figure 3-3. What would Okafor Companys cost formula be to estimate the cost of leasing within the relevant range?

a. total lease cost = $456 + ($38.20 machine hours) b. total lease cost = $516 + ($38.18 machine hours) c. total lease cost = $420 + ($37.25 machine hours) d. none of these are correct

ANSWER: a

103. Refer to Figure 3-3. What would the estimate of Okafor Companys total lease cost be at a level of 500 machine hours?

a. $19,606 b. $19,556 c. $16,464 d. $18,546

ANSWER: b

RATIONALE: SUPPORTING CALCULATIONS: $19,556 = $456 + ($38.20 500)

Figure 3-4.

Botana Company constructed the following formula for monthly utility cost.

Total utility cost = $1,200 + ($8.10 labor hours)

Assume that 775 labor hours are budgeted for the month of April.

104. Refer to Figure 3-4. Calculate the total variable utility cost for the month of April.

a. $1,200.00 b. $7,477.50 c. $6,277.50 d. $5,077.50

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: ($8.10 775)

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Chapter 3 Cost Behavior

105. Refer to Figure 3-4. Calculate the total utility cost for the month of April. a. $7,477.50

b. $6,277.50 c. $1,200.00 d. $5,077.50

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: $7,477.50 = $1,200 + ($8.10 775)

106. Refer to Figure 3-4. If Botana Company incurs 9,600 labor hours for the year, what would be the estimate of total utility cost?

a. $76,560

b. $78,960

c. $92,160

d. none of these are correct

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: ($1,200 12) + ($8.10 9,600)

Figure 3-5.

Maxwell Company makes treadmills. The company controller wants to calculate the fixed and variable costs associated with the janitorial costs incurred in the factory. Data for the past four months were collected.

Month September October November December

Janitorial costs

Machine hours

107. Refer to Figure 3-5. Using the high-low method calculate the fixed cost of the janitorial services a. $4,080

b. $7,320

c. $6,120

d. none of these are correct

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS:

($11,400 $10,200) / (610 510) = $12

$11,400 ($12 610) = $4,080 OR

$10,200 ($12 510) = $4,080

$11,000 575 11,400 610 10,200 510 10,725 550

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Chapter 3 Cost Behavior

108. Refer to Figure 3-5. What would Maxwell Companys estimate of total janitorial cost be at a level of 600 machine hours?

a. $11,280 b. $7,500 c. $4,080 d. $6,120

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: $4080 + ($12 600)

Figure 3-7.

Margola Company produces hand-held calculators. The company controller wanted to calculate the fixed and variable costs associated with the maintenance cost incurred by the factory. Data for the past four months were collected.

Maintenance Month cost

Machine hours

June $4,180 328 July 3,956 310 August 4,686 386 September 4,240 352

Coefficients shown by a regression program are:

Intercept 1,150

X Variable 1 9.06

109. Refer to Figure 3-7. Using the results of regression, calculate the fixed cost of maintenance.

a. $1,150.00

b. $978.37

c. $9.06

d. None of these are correct.

ANSWER: a

110. Refer to Figure 3-7. Using the results of regression, calculate the variable rate of maintenance cost. a. $1,150 per machine hour

b. $12.74 per machine hour

c. $9.06 per machine hour

d. $12.14 per machine hour ANSWER: c

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Chapter 3 Cost Behavior

111. Refer to Figure 3-7. Using the results of regression, the cost formula for maintenance cost was a. $1,150 machine hours

b. ($4,686 $3,956) / (386 310)

c. $9.06 machine hours

d. $1,150 + ($9.06 machine hours)

ANSWER: d

112. Refer to Figure 3-7. Using the results of regression, what would be the budgeted cost for maintenance next month assuming that 340 machine hours are budgeted? (Round to the nearest dollar.)

a. $4,230

b. $3,928

c. $1,150 d. $2,943

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: $1,150 + ($9.06 340)

Figure 3-8.

Martin Company makes cell phones. The company controller wanted to calculate the fixed and variable costs associated with electricity use in the factory. Data for the past four months were collected.

Month

January

February

March

April

Coefficients shown by a regression program are:

Intercept 2,255

Electricity cost

Machine hours

X Variable 1 9.48

113. Refer to Figure 3-8. Using the results of regression, calculate the variable rate of the electricity cost.

a. $9.67 per machine hour b. $9.48 per machine hour c. $2,255 per machine hour d. none of these are correct

ANSWER: b

114. Refer to Figure 3-8. Using the results of regression, calculate the fixed cost of electricity. a. $2,255

b. $9.48

c. $2,200

d. None of these are correct.

ANSWER: a

$7,560 570 8,220 625 7,480 546 7,186 518

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Chapter 3 Cost Behavior

115. Refer to Figure 3-8. Using the results of regression, the cost formula for electricity cost was a. $9.48 machine hours

b. $2,255 machine hours

c. $2,255 + ($9.48 machine hours)

d. None of these are correct.

ANSWER: c

116. Refer to Figure 3-8. Using the results of regression, what would be the total budgeted cost for electricity next month assuming that 615 machine hours are budgeted? (Round to the nearest dollar.)

a. $2,225

b. $8,240

c. $8,085 d. $4,015

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: $2,255 + ($9.48 615)

Figure 3-9.

The following cost formula was developed using monthly data for a retail clothing store.

Total cost = $75,620 + ($242 number of customers)

117. Refer to Figure 3-9. The term $75,620

a. is the independent variable. b. is the dependent variable. c. is the intercept.

d. is the variable rate.

ANSWER: c

118. Refer to Figure 3-9. The term $242 a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate.

ANSWER: d

119. Refer to Figure 3-9. The term number of customers a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate. ANSWER: a

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Chapter 3 Cost Behavior

120. Refer to Figure 3-9. The term total cost a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate. ANSWER: b

Figure 3-10.

The following cost formula was developed using the monthly data for an accounting firm.

Total cost = $87,100 + ($210 number of tax returns)

121. Refer to Figure 3-10. The term $87,100

a. is the independent variable. b. is the dependent variable. c. is the intercept.

d. is the variable rate.

ANSWER: c

122. Refer to Figure 3-10. The term number of tax returns a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate.

ANSWER: a

123. Refer to Figure 3-10. The term $210 a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate.

ANSWER: d

124. Refer to Figure 3-10. The term total cost a. is the independent variable.

b. is the dependent variable.

c. is the intercept.

d. is the variable rate. ANSWER: b

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Chapter 3 Cost Behavior

Figure 3-11.

The following four months of data were collected on utility cost and the number of labor hours in a factory.

Month January February March April

Utility Labor cost hours $22,100 3,975 24,600 5,430 23,500 4,400 20,140 3,200

125. Refer to Figure 3-11. Select the correct set of high and low months.

a. h igh: February, low: April b. h igh: February, low: March c. h igh: January, low: March d. h igh: January, low: April

ANSWER: a

126. Refer to Figure 3-11. Using the high-low method, compute the variable rate for the utility cost. a. $1.02

b. $2.80 c. $1.07 d. $2.00

ANSWER: d

RATIONALE: SUPPORTING CALCULATIONS:

($24,600 $20,140) / (5,430 3,200) = $2.00

127. Refer to Figure 3-11. Using the high-low method, compute the fixed cost of electricity. a. $13,740

b. $10,860

c. $6,400

d. None of these are correct.

ANSWER: a

RATIONALE: SUPPORTING CALCULATIONS: $24,600 ($2.00 5,430) = $13,740

OR

$20,140 ($2.00 3,200) = $13,470

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128. Refer to Figure 3-11. What would be the estimate of electricity cost if the factory incurred 4,700 labor hours next month?

a. $9,400 b. $20,260 c. $23,140 d. $19,560

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: $13,740 + ($2.00 4,700)

Figure 3-12.

The method of least squares was used to develop a cost equation to predict the cost of monthly equipment maintenance. The following computer output was received:

Intercept 32,000 Slope 25

The driver used was the number of machine hours.

129. Refer to Figure 3-12. What was the cost formula for equipment maintenance?

a. total maintenance cost = $25 machine hours

b. total maintenance cost = $32,000

c. total maintenance cost = $32,000 + ($25 machine hours) d. None of these are correct.

ANSWER: c

130. Refer to Figure 3-12. Using the cost formula for the equipment maintenance cost, what is the predicted cost of equipment maintenance for April assuming that 5,000 machine hours will be incurred in April?

a. $32,000

b. $125,000

c. $157,000

d. None of these are correct.

ANSWER: c

RATIONALE: SUPPORTING CALCULATIONS: $32,000 + ($25 5,000)

131. Refer to Figure 3-12. What is the independent variable of the cost formula for equipment maintenance? a. number of machine hours

b. the variable rate

c. the fixed cost

d. the total cost ANSWER: a

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Chapter 3 Cost Behavior

Figure 3-13.

The following 6 months of data were collected on electricity cost and the number of machine hours in a factory.

Electricity Machine Month cost hours

June $25,160 July 26,170 August 27,250 September 26,680 October 27,950 November 27,500

132. Refer to Figure 3-13. Select the correct set of high and low months.

a. high: June, low: July

b. high: June, low: October

c. high: October, low: September d. high: October, low: June

ANSWER: d

4,500 4,810 5,120 5,010 5,430 5,190

133. Refer to Figure 3-13. An independent variable value used in calculating the cost line using the high-low method is: a. $27,950

b. 5,430 c. $25,160 d. 4,000

ANSWER: b

134. Refer to Figure 3-13. A dependent variable value used in calculating the cost line using the high-low method is: a. $27,900

b. 5,430 c. $25,160 d. 4,500

ANSWER: c

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135. Margolo Company makes cross-country skis. The company controller wants to calculate the fixed and variable costs associated with janitorial services incurred by the factory. Data for the past 6 months were collected.

Janitorial Labor Month cost hours

January $9,200 February 8,800 March 9,350 April 9,620 May 8,400 June 9,400 Select the correct set of high and low months.

a. high: June, low: April

b. high: June, low: May

c. high: January, low: February d. high: April, low: May

ANSWER: d

10,120 9,500 10,500 11,100 8,660 10,650

136. Advantages of the method of least squares over the high-low method include all of the following except a. a statistical method is used to mathematically derive the cost function.

b. only two points are used to develop the cost function.

c. the squared differences between actual observations and the line (cost function) are minimized.

d. All the observations have an effect on the cost function.

ANSWER: b

137. If an automobile manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data

a. are useful in predicting future costs.

b. are of little or no value in predicting future costs.

c. should be used without adjustments to predict future costs. d. are representative of future costs.

ANSWER: b

138. Which of the following is an advantage of using the scatter-graph method over the high-low method to estimate costs?

a. It is a statistical method to determine best fit.

b. A cost analyst can review the data visually and eliminate outliers.

c. The quality of the cost formula relies on the objective judgment of the analysts. d. The cost formula can be determined simply by looking at two points of data.

ANSWER: b

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139. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as follows: a. (total costs fixed costs) / unit volume

b. (total costs / unit volume) fixed costs

c. (total costs unit volume) (fixed costs / unit volume)

d. total costs (fixed costs / unit volume) ANSWER: a

Figure 3-14.

Blacken Company manufactures motorcycles. The companys management accountant wants to calculate the fixed

and variable costs associated with utility cost incurred by the

Utility Month cost

March $30,255 April 32,750 May 34,712 June 31,850 July 30,720

factory. Data for the past five months were collected.

Machine hours 2,200 2,525 2,710 2,410 2,290

140. Refer to Figure 3-14. Using a regression program, the value of the intercept (rounded to the nearest penny) is a. $0.99.

b. $195.35.

c. $10,630.80. d. $190,267.00.

ANSWER: c

141. Refer to Figure 3-14. Using a regression program, the value of the X Variable 1 (rounded to the nearest penny) is a. $0.99.

b. $8.83.

c. $195.35.

d. $11,594.00.

ANSWER: b

142. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,300 machine hours (rounded to the nearest dollar) is

a. $30,940. b. $37,116. c. $25,945. d. $10,631.

ANSWER: a

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143. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,600 machine hours (rounded to the nearest dollar) is

a. $28,288. b. $33,589. c. $45,945. d. $10,631.

ANSWER: b

144. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,550 machine hours (rounded to the nearest dollar) is

a. $28,288. b. $37,116. c. $33,147. d. $10,631.

ANSWER: c

145. Refer to Figure 3-14. Using a regression program, the yearly utility cost equation (with all variables to the nearest penny) is

a. total utility cost = $127,569.60 + ($8.83 machine hours). b. total utility cost = $10,630.80 + ($8.83 machine hours). c. total utility cost = $8.83 + ($10,630.80 machine hours). d. total utility cost = $10,630.80 ($8.83 machine hours).

ANSWER: b

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146. Laconic Company manufactures ultra sound equipment. Based on past experience, Laconic has found that total annual repair and maintenance cost can be represented by the following formula: total annual repair and maintenance cost = $205,000 + $7.50x, where x = machine hours. Last year, Laconic incurred 145,000 machine hours.

Required:

A. What was the total repair and maintenance cost incurred by Laconic last year?

B. What was the total fixed repair and maintenance cost incurred by Laconic last year?

C. What was the total variable repair and maintenance cost incurred by Laconic last year?

D. What was the repair and maintenance cost per machine hour last year?

E. What was the fixed repair and maintenance cost per machine hour last year?

F. What was the variable repair and maintenance cost per machine hour last year?

ANSWER:

A. $205,000 + ($7.50 145,000) = $1,292,500

B. $205,000

C. $7.50 145,000 = $1,087,500

D. $1,292,500 / 145,000 = $8.91

E. $205,000 / 145,000 = $1.41

F. $7.50

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147. Harnow Company manufactures drill presses. Based on past experience, Harnow has found that its total overhead cost can be represented by the following formula: Total overhead cost = $35,500 + $1.25x, where x = number of machine hours. Last year Harnow incurred 120,000 machine hours.

Required (round to the nearest cent):

A. What was the total overhead cost incurred by Harnow last year?

B. What was the total variable overhead cost incurred by Harnow last year?

C. What was the total overhead cost per machine hour last year?

D. What was the fixed overhead cost per machine hour last year?

E.

If Harnow incurs 140,000 machine hours next year, what will be the total overhead cost per machine hour?

ANSWER:

A. $185,500 = $35,500 + ($1.25 120,000)

B. $1.25 120,000 = $150,000

C. $185,500 / 120,000 = $1.55

D. $35,500 / 120,000 = $.30

E. $210,500 = $35,500 + ($1.25 140,000) $210,500 / 140,000 = $1.50

148. The average unit cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of 22,500 units is $2.10.

Required:

A. Develop an equation for total monthly costs.

B. What are the total monthly costs if 15,000 units are produced?

ANSWER:

A. (9,000 $3) = $27,000 (22,500 $2.10) = $47,250

Variable cost per unit = ($47,250 $27,000) / (22,500 9,000) = $1.50 Fixed costs per month = $27,000 ($1.50 9,000) = $13,500

Total monthly costs = $13,500 + $1.50(# of units)

B. $13,500 + (15,000 $1.50) = $13,500 + $22,500 = $36,000

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149. Just Burn It! Manufactures blank CDs. The company incurs $22,000 in monthly depreciation costs on its manufacturing equipment as well as monthly advertising costs of $2,000 to place ads in newspapers and on the radio. Each CD requires materials and manufacturing overhead resources. On average the company uses 26,000 pounds of material to manufacture 12,000 CDs per month. Each pound of material costs $2.50. The manufacturing overhead is driven by machine hours and on average the company incurs $30,000 in manufacturing overhead to produce 12,000 CDs per month.

Required:

1.) Create a formula for the monthly cost of the CDs for Just Burn It!

2.) If the company plans to manufacture 15,000 CDs next month, what is the expected fixed cost? What is the total variable cost? What is the total cost?

ANSWER:

Calculations:

1.) 26,000 pounds / 12,000 CDs = 2.17 pounds per CD Cost per pound = $2.50 2.17/CD = $5.43 per CD OR

26,000 $2.50 = $65,000

$65,000 / 12,000 = $5.42

Cost of manufacturing overhead = $30,000 / 12,000 CDs = $2.50 per CD Total variable rate = $5.43 + 2.50 = $7.93

OR $5.42 + $2.50 = $7.92

Cost formula:

Total cost of CDs = $24,000 + ($7.93 number of CDs)

OR

$24,000 + ($7.92 number of CDs)

2.) Total cost of CDs = $24,000 + (7.93 x 15,000) OR $24,000 + ($7.92 15,000)

total cost of CDs = 24,000 + 118,950 OR $24,000 + $118,000 total cost of CDs = $142,950 OR $142,800

Fixed cost = $24,000 Variable cost = $118,950 OR $118,800

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150. Boswan Company incurred the following costs and machine hours for the months of April and May.

Type of cost April Insurance $10,000 Factory supplies 3,000 Direct labor 20,000 Maintenance 5,500

Machine hours 1,000

Required:

May $10,000 4,500 30,000 5,750

1,500

Assuming that the driver for all costs is machine hours, determine the cost behavior of each of the four types of costs above (fixed, variable, or mixed).

B. Assume that the following is the cost formula for maintenance cost. Total maintenance cost = $5,000 + ($0.50 no. of machine hours)

A.

C.

Construct a cost formula to be used to estimate total monthly costs within the relevant range.

Estimate the total monthly costs to be incurred by Boswan Company at a level of 1,200 machine hours.

ANSWER:

A. Insurance (Fixed)

Factory Supplies (Variable)

Direct Labor (Variable) Maintenance (Mixed)

B. Total costs = Fixed costs ($10,000 + $5,000) +

[Variable rate ($3.00 + $20.00 + $0.50) no. of machine hours]

C. $43,200 = $15,000 + ($23.50 1,200)

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151. Consider each of the following independent situations.

A. The salary of a legal secretary in a law firm.

B.

A lease contract for an automobile which requires a monthly payment of $300 plus $.05

per mile.

C. The cost of lumber for a homebuilder.

D. The cost of Internet service which is calculated based on hours of usage.

E.

F.

The cost of telephone service which includes a fixed monthly charge of $50 plus $.10 a minute for long distance calls.

The salary cost of seasonal tax preparers for a CPA firm. One tax preparer can prepare 100 tax returns per month.

G. A factory supervisors salary.

H. The cost of sugar in the production of soft drinks.

Required: For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost.

ANSWER: A.

Fixed B. Mixed

C. Variable

D. Variable

E. Mixed

F. Step

G. Fixed

H. Variable

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152. Ross Company has the following information available regarding costs at various levels of monthly production:

Production volume Direct materials Direct labor

Indirect materials Supervisors salaries Depreciation on plant Maintenance

7,000 units

10,000 units $100,000 80,000 30,000 12,000 10,000 44,000 21,000 1,600 2,000 $300,600

Utilities

Insurance on plant and equipment

Property taxes on plant

Total $219,600 Required:

$

70,000 56,000 21,000 12,000 10,000 32,000 15,000

1,600 2,000

A.

B. C.

ANSWER:

B.

C.

Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings:

Fixed Costs Mixed Costs

Develop an equation for total monthly production costs.

Predict total costs for a monthly production volume of 8,000 units.

Variable Costs

A.

Variable Costs Direct materials Direct labor Indirect materials

Fixed Costs Supervisors salaries Depreciation Insurance

Property taxes

Mixed Costs Maintenance Utilities

Variable costs = ($300,600 $219,600) / ($10,000 $7,000) = $27.00

Fixed costs = $300,600 ($27.00 10,000) = $30,600 per month

Total monthly production costs = $30,600 + [$27.00 (# of

units)]

Total costs = $30,600 + ($27.00 8,000) = $246,600

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153. Olson Company makes hearing aids. Olson has found that total electricity cost for the factory can be represented by the following formula: total annual electricity cost = $149,000 + $2.75x, where x = labor hours. Last year, Olson incurred 212,000 labor hours.

Required:

A. What is the independent variable in Olsons cost formula?

B. What was the total electricity cost incurred by Olson last year?

C.

What would be Olson Companys estimated electricity cost for next year if they have budgeted 229,000 labor hours?

ANSWER: A. B.

C.

labor hours

$149,000 + ($2.75 212,000) = $732,000 $149,000 + ($2.75 229,000) = $778,750

154. Harnock Company constructed the following cost formula for its monthly janitorial cost. Total monthly janitorial cost = $5,000 + ($.48 units of output)

Required:

A. Identify the independent variable.

B. Identify the dependent variable.

C. Identify the intercept.

D. Identify the slope.

E. Compute the total janitorial cost if Harnock produces 10,000 units of output next year.

ANSWER:

A. units of output

B. Total monthly janitorial cost

C. $5,000

D. 0.48

E. ($5,000 12) + ($.48 10,000) = $64,800 (total yearly janitorial costs)

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155. Spangle Company constructed the following cost formula for its monthly maintenance cost. Total monthly maintenance cost = $9,000 + ($1.75 no. machine hours)

Required:

A. Identify the independent variable.

B. Identify the dependent variable.

C. Identify the intercept.

D. Identify the slope.

E. Compute the total maintenance cost if Spangle uses 12,000 machine hours next year.

machine hours

B. Total monthly maintenance cost

C. $9,000

D. $1.75

E. ($9,000 12) + ($1.75 12,000) = $129,000

ANSWER: A.

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156. Arcadia Company incurred the following costs and machine hours during the first Assume that the driver for all costs is machine hours.

three months of the current year.

March $18,000 15,000 7,600 12,000

950

Type of cost January Electricity $20,000 Depreciation 15,000

February $15,000 15,000 5,600 12,000

Factory supplies Property taxes

Machine hours

Required:

9,600 12,000

B. C.

If Arcadia had total costs in April of $53,000, how many machine hours did they incur during April?

If Arcadia expects to incur 1,500 machine hours in May what would be the estimate of their total costs?

ANSWER:

A. ($20,000 $15,000) / (1,200 700) = $10.00 per machine hour

$20,000 ($10.00 1,200) = $8,000 OR $15,000 ($10.00 700) = $8,000 Total cost = $8,000 + ($10.00 no. of machine hours)

B. $53,000 Fixed costs ($35,000) = $18,000 of variable costs

Fixed Costs = Depreciation + Property Taxes + Fixed Portion of Electricity

Variable rate (Factory Supplies; $8.00, Electricity; $10.00) machine hours = $18,000 Machine hours = 1,000

Alternate solution method:

Since all of the costs have the same driver, it is possible to do a high-low calculation on the summarized costs or

($56,600 $47,600) / (1200 700) = $18 per MH

$47,600 ($18 700) = $35,000 OR

$56,000 ($18 1,200) = $35,000

Total cost = $18 per MH + $35,000

C. Fixed Costs ($8,000 + $15,000 + $12,000) + ($18.00 1,500) = $62,000

157. Graber and Johnson, Attorneys at Law, recently opened a law practice in the Northwest. Their goal is to generate

1,200 700

A. Using the high-low method, construct a cost formula for electricity cost.

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a monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their billable hours in the first month of operations (January) were 150 and in the second month of operations (February), 175 billable hours. The costs incurred at these levels for January and February are given below.

Salaries:

Mr. Graber Ms. Johnson Legal secretary

150 billable hours

$10,000.00 10,000.00 4,000.00

175 billable hours

$10,000.00 10,000.00 4,000.00

500.00

525.00 1,000.00 449.50 $26,474.50

Depreciation (furniture)

Supplies 450.00 Rent 1,000.00 Utilities 412.00 Total cost $26,362.00

Required:

A. Classify each cost as fixed, variable, or mixed using billable hours

B.

components.

C. Compute the net income/loss for January and February.

500.00

as the driver. Use the high-low method to separate mixed costs into their fixed and variable

If they expect to average 200 billable hours each month what do they need to set as a D. billing rate per hour to achieve their goal of generating $10,000 of monthly net income?

Show your calculations.

ANSWER:

A. Fixed: Salaries

Depreciation Rent

Variable: Supplies

Mixed: Utilities

B. ($449.50 $412) / (175 150) = $1.50 per billable hour $449.50 ($1.50 175) = $187 fixed utility cost

C.

Revenues: (150 $150; 175 $150) Less: costs

Net income

D. Total costs at a 200 billable-hour level: Salaries

Depreciation

January $ 22,500.00 26,362.00 $(3,862.00)

February $26,250.00 26,474.50 $(224.50)

$24,000 500

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Chapter 3 Cost Behavior

Rent

Supplies (200 $3.00)

Utilities [$187 + ($1.50 200)]

Add: desired net income

Divide by 200 billable hours Necessary billing rate

1,000 600 487 $26,587

10,000 $36,587 200 $182.94

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158. Below are the overhead costs and labor hours for Smith & Co.

Month Overhead Costs January $ 9,640 February 12,680 March 11,080 April 11,720 May 13,000 June 10,120 July 8,840 August 6,600

Labor Hours 490

680

580

620

700

520

440

300

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.

2.) Calculate the variable rate per labor hour.

3.) Construct the cost formula for total overhead cost.

4.) The company is estimating that in September the labor hours will be 600. How much should they estimate to have in total overhead cost for September?

ANSWER:

Low point

$6,600 ($16 300) = $1,800 fixed cost

Cost formula

Total cost = $1,800 + ($16 labor hours)

4.) September = 600 labor hours

Total cost = $1,800 + ($16 600)

Total cost = $11,400

High point

Fixed cost = total cost (variable rate labor hours) $13,000 ($16 700) = $1,800 fixed cost

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159. The controller at Speedy Delivery wants to break-out the cost of deliveries into fixed and variable components so that they will be better able to predict costs for next year. Below are the delivery cost incurred each month and the number of deliveries.

Month Delivery Cost

January $2,176.00 105 February 2,272.00 110 March 1,926.40 92 April 1,696.00 80 May 1,600.00 75 June 2,752.00 135 July 3,616.00 180 August 1,849.60 88 September 1,676.80 79 October 3,808.00 190 November 3,961.60 198 December 4,000.00 200

Required: Using the high-low method:

1.) Calculate the fixed cost of overhead.

2.) Calculate the variable rate per labor hour.

3.) Construct the cost formula for total overhead cost.

4.) The company is estimating that in January the number of deliveries will be 125. How much should they estimate to have in total delivery costs for January?

ANSWER: ($4,000 $1,600) / (200 75) = $19.20 variable rate High point:

$4,000 (200 $19.20) = $160 fixed cost Low point:

$1,600 (75 $19.20) = $160 fixed cost Cost formula:

Total cost = $160 + ($19.20 no. of deliveries)

Total delivery cost for January: Total cost = $160 + ($19.20 125) Total cost = $2,560

Deliveries

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160. The following six months of data were collected on electricity cost and the number of machine hours in a factory.

Electricity Month cost

June $25,160 July 26,170 August 27,250 September 26,680 October 27,950 November 27,500 Required:

A. Using the high-low method compute the variable rate

B. Using the high-low method compute the fixed cost of

Machine hours 4,500 4,810 5,120 5,010 5,430 5,190

C.

Estimate the total electricity cost to be incurred in December if 5,300 machine hours are incurred.

ANSWER:

A. ($27,950 $25,160) / (5,430 4,500) = $3.00 per machine hour

B. $27,950 ($3.00 5,430) = $11,660 OR

$25,160 ($3.00 4,500) = $11,660

C. $27,560 = $11,660 + ($3.00 5,300)

for the electricity cost. electricity.

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161. Margolo Company makes cross-country skis. The company controller wants to calculate the fixed and variable costs associated with janitorial services incurred by the factory. Data for the past six months were collected.

Janitorial Labor Month cost hours

January $9,200 February 8,800 March 9,350 April 9,620 May 8,400 June 9,400 Required:

10,120 9,500 10,500 11,100 8,660 10,650

A. Using the high-low method compute the variable rate of the janitorial cost.

B. Using the high-low method compute the fixed cost of janitorial services.

C.

Compute the estimated janitorial cost to be incurred during the next six months assuming that 58,200 labor hours will be worked.

ANSWER:

A. ($9,620 $8,400) / (11,100 8,660) = $0.50 per labor hour

B. $9,620 ($0.50 11,100) = $4,070 OR

$8,400 ($0.50 8,660) = $4,070

C. ($4,070 6) + ($0.50 58,200) = $53,520

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162. Blacken Company manufactures motorcycles. The companys management accountant wants to calculate the fixed

and variable costs associated with utility cost incurred by the

Utility Month cost

March $30,255 April 32,750 May 34,712 June 31,850 July 30,720 August 29,980 Required:

A. Using the high-low method calculate the variable rate

B. Using the high-low method calculate the fixed cost of

C. Construct a cost formula for total utility cost.

D. Estimate the cost of utilities if 2,425 machine hours are used.

ANSWER:

factory. Data for the past six months were collected.

Machine hours 2,200 2,525 2,710 2,410 2,290 2,150

A. ($34,712 $29,980) / (2,710 2,150) = $8.45 per machine hour

B. $34,712 ($8.45 2,710) = $11,812.50 OR

$29,980 ($8.45 2,150) = $11,812.50

C. Total utility cost = $11,812.50 + ($8.45 no. of machine hours)

D. Total utility cost = $11,812.50 + ($8.45 2,425)

= $11,812.50 + $20,491.25 = $32,303.75

per machine hour for the utility cost. utilities.

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163. Coefficients shown by a regression program are:

Intercept 7,600 X Variable 1 5.10 Required:

Using the results of regression calculate the fixed cost of maintenance and the variable

A.

rate per machine hour.

B. Using the results of regression, construct the cost formula for the total maintenance cost.

C.

Calculate the budgeted cost for maintenance assuming that 610 hours are worked next month.

ANSWER:

A. Fixed cost = $7,600

Variable rate = $5.10 per machine hour

B. Total maintenance cost = $7,600 + ($5.10 no. of machine hours)

C. $10,711 = $7,600 + ($5.10 610)

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Chapter 3 Cost Behavior

164. Andover Company makes weather balloons. The company controller wanted to calculate the fixed and variable costs associated with the maintenance costs incurred by the factory. Data for the past six months were collected.

Maintenance Month cost

Machine hours

January $10,120 526 February 9,560 389 March 9,712 412 April 10,460 569 May 10,226 541 June 9,686 399 Required:

Using the high-low method, calculate the fixed cost of maintenance and the variable rate

A.

per machine hour.

B. Using the high-low method, construct the cost formula for the total maintenance cost.

C.

Calculate the budgeted cost for maintenance assuming that 485 hours are worked next month.

ANSWER:

A. ($10,460 $9,560) / (569 389) = $5.00 per machine hour

$10,460 ($5.00 569) = $7,615 fixed cost OR

$9,560 ($5.00 389) = $7,615 fixed cost

B. Total maintenance cost = $7,615 + ($5.00 no. of machine hours)

C. $10,040 = $7,615 + ($5.00 485)

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Chapter 3 Cost Behavior

165. Hipcuts Company operates a chain of trendy beauty salons. The companys chief executive officer is interested in accumulating some information on the overhead costs incurred by the company. You have been asked to analyze the following six months worth of data.

Overhead No. of Month cost Appointments

April $60,160 May 56,500 June 58,900 July 63,500 August 59,325 September 62,400

A regression analysis produced the following coefficients.

867 624 689 974 730 901

Intercept 42,900

X Variable 1 20.46

Required:

A. Using the results of regression, construct a cost formula for the total overhead cost.

B.

The CEO would like to limit total overhead cost in future months to 16% of total revenues. Will that be possible if total revenues are expected to average $300,000 per month and total appointments per month are expected to average 825? Show all of your calculations.

ANSWER:

A. Total overhead costs = $42,900 + ($20.46 no. of appointments)

B. $59,779.50 = $42,900 + ($20.46 825)

$59,779.50 / $300,000 = 0.199 or 19.9%

No, it is not possible to meet the CEOs goal.

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Chapter 3 Cost Behavior

166. Grindgood Company operates a chain of cozy coffee shops. The companys chief executive officer is interested in accumulating some information on the overhead costs incurred by the company. You have been asked to analyze the following six months worth of data.

Overhead No. of Cost Labor Hours

Month

April

May

June

July

August

September

Required:

A. Using the high-low method, construct a cost formula for the total overhead cost.

B. C.

The CEO would like to limit total overhead cost in future months to 20% of total revenues. Will that be possible if total revenues are expected to average $300,000 per month and total labor hours per month are expected to average 780? Show all of your calculations.

Compute the total cost of overhead assuming 925 labor hours are incurred in a given month.

ANSWER:

A. ($63,500 $56,500) / (974 624) = $20.00 per labor hour

$63,500 ($20.00 974) = $44,020 fixed cost OR

$56,500 ($20.00 624) = $44,020 fixed cost

Total overhead cost = $44,020 + ($20.00 no. of labor hours)

B. $59,620 = $44,020 + ($20.00 780)

$59,620 / $300,000 = 0.199 or 19.9%.

Yes it will be possible to meet the CEOs goal.

C. $44,020 + ($20 925) = $44,020 + $18,500 = $62,520

$60,160 867 56,500 624 58,900 689 63,500 974 59,325 730 62,400 901

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Chapter 3 Cost Behavior

167. The cost accountant for Bolagio Company used an Excel spreadsheet program to run ordinary least squares on a set of cost data for its utility cost. Bolagios cost driver for utility cost is machine hours. The following results were produced.

Intercept 2,490 X Variable 4.89 Required:

Construct the cost formula for Bolagios utility cost using the results from the method of least squares.

Using the formula computed in (A), what is the estimated cost of utilities for May assuming that Bolagio will incur 110,000 machine hours?

ANSWER:

A. B.

A. Total utility cost = $2,490 + ($4.89 no. of machine hours)

B. $540,390 = $2,490 + ($4.89 110,000)

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Chapter 3 Cost Behavior

168. Machine hours and electricity costs for Wells Industries for last year were as follows:

Machine Month Hours

January 2,000 February 2,320 March 1,520 April 2,480 May 3,040 June 2,640 July 3,280 August 2,800 September 1,600 October 2,960 November 3,760 December 3,360 Required:

Electricity Costs

$ 9,200

10,500 6,750 11,500 14,125 11,000 12,375 11,375 7,750 13,000 15,500 13,875

Using the high-low method, develop an estimate of variable electricity costs per machine

A.

hour.

B. Using the high-low method, develop an estimate of fixed electricity costs per month.

C. Using the high-low method, develop a cost function for monthly electricity costs.

D. Estimate electricity costs for a month in which 3,000 machine hours are worked.

ANSWER:

A. ($15,500 $6,750) / (3,760 1,520) = $3.91

B. $15,500 ($3.91 3,760) = $798.40 OR

$6,750 ($3,91 1,520) = $812.50

C. Electricity costs = $798.40 + ($3.91 Machine hours)

D. $798.40 + ($3.91 3,000) = $12,528.40

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Chapter 3 Cost Behavior

169. Tamo Company used an Excel spreadsheet program to run ordinary least squares on a set of cost data for its utility cost. The cost driver for labor cost is employee hours. The following results were produced.

Intercept 1,145 X Variable 13.82

Required:

Construct the cost formula for Tamos labor cost using the results from the method of

A.

B.

least squares.

Using the formula computed in (A), what is the estimated cost of utilities for October assuming that Tamo will incur 560 employee hours?

ANSWER: A. Total labor cost = 1,145 + ($13.82 no. of employee hours)

B. $8,884.20 = $1,145 + ($13.82 560)

170. Explain the difference between a committed and a discretionary fixed cost.

ANSWER: Acommittedfixedcostisnormallyunchangeablebymanagement.Acommittedfixedcostusuallyis the result of a long-term contract. An example of a committed fixed cost is a lease agreement. If output decreases, the lease payments are generally still required. A discretionary fixed cost can easily be changed at management discretion. An example of a discretionary fixed cost is the cost of advertising. Management may make the decision to cut costs by reducing advertising costs.

171. Why is it necessary to separate a mixed cost into its variable and fixed components?

ANSWER: Formanagementtoeffectivelyplan,control,andmakedecisions,understandinghowcostschangeas output changes is essential. Without the knowledge of the fixed and variable components of a mixed cost, it is difficult to estimate the total mixed cost at various levels of output.

172. Why would cost behavior change outside of the relevant range?

ANSWER: Therelevantrangeisthenormalrangeofactivitywherecostrelationshipsordinarilyremainvalid.Ifan organizations output is outside of the relevant range, various fixed costs may increase or decrease. For example; the factory supervisors salary is normally fixed, but if output increases beyond the relevant range, an additional supervisor may be needed. If output decreases dramatically outside of the relevant range, the factory supervisor may no longer be needed and the fixed cost would be eliminated.

173. Explain the differences between a variable, fixed, and a mixed cost.

ANSWER: A variable cost changes in direct proportion to changes in the cost driver within the relevant range. A variable cost remains the same on a per-unit basis regardless of changes in output. A fixed cost stays the same in total at all levels within the relevant range. On a per-unit basis, a fixed cost will decrease when output increases and vice versa. A mixed cost has both a fixed and a variable component.

174. Why is managerial judgment essential to predicting cost behavior?

ANSWER: Managerial judgment is important because estimated statistical results often requir

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