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# Cost Accounting 15th Edition Charles T. Horngren Test Bank

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Cost Accounting, 15e (Horngren/Datar/Rajan)
Chapter 10 Determining How Costs Behave

Objective 10.1

1) A cost function is a ________.
A) process of calculating present value of projected cash flows
B) process of allocating costs to cost centers or cost objects
C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost
D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship between inputs and outputs
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking

2) Bennet Company employs 20 individuals. Eighteen employees are paid \$18 per hour and the rest are salaried employees paid \$3,000 a month. Which of the following is the total cost function of personnel?
A) y = a + bX
B) y = b
C) y = bX
D) y = a
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

3) Crimson Services, Inc., employs 8 individuals. They are all paid \$16.50 per hour. How would total costs of personnel be classified?
A) variable cost
B) mixed cost
C) irrelevant cost
D) fixed cost
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

4) For February, the cost components of a picture frame include \$0.30 for the glass, \$0.75 for the wooden frame, and \$0.80 for assembly. The assembly desk and tools cost \$500. Two hundred fifty frames are expected to be produced in the coming year. What cost function best represents these costs?
A) y = 1.85 + 500X
B) y = 500 + 1.85X
C) y = 3.85 + 600X
D) y = 1.05 + 500X
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking
5) The cost components of a heater include \$30 for the compressor, \$10 for the sheet molded compound frame, and \$75 per unit for assembly. The factory machines and tools cost is \$60,000. The company expects to produce 1,000 heaters in the coming year. What cost function best represents these costs?
A) y = 60,000 + 115X
B) y = 1,000 + 60,000X
C) y = 60,000 + 1,000X
D) y = 1,000 + 115X
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

6) Which of the following statements is true of a linear cost function?
A) It presents variable cost as a slope coefficient.
B) It presents total cost as an intercept.
C) It presents variable cost as an intercept.
D) It presents total cost as slope coefficient.
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

7) A finance manager has to select one of the four different suppliers of raw materials. The total cost functions under the four options are given below. Assume the quality of the raw material to be the same, which of the following is preferred by the finance manager?
A) y = 200 + 5X
B) y = 200 + 5.50X
C) y = 200 + 4.50X
D) y = 200 + 4.70X
Answer: C
Diff: 3
Objective: 1
AACSB: Analytical thinking

8) If the total cost function is y = 5,000 + 7X, calculate the variable cost for 4,000 units.
A) \$33,000
B) \$28,000
C) \$20,000
D) \$5,000
Answer: B
Explanation: B) Explanation: Variable cost for 4,000 units = \$7 4,000 units = \$28,000
Diff: 2
Objective: 1
AACSB: Application of knowledge
9) The cost function y = 2,000 + 6X ________.
A) has a slope coefficient of 2,000
B) has an intercept of 6
C) is a straight line
D) represents a fixed cost
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking

10) The cost function y = 150 + 10X ________.
A) has a slope coefficient of 150
B) has an intercept of 150
C) is a nonlinear
D) represents a fixed cost
Answer: B
Diff: 2
Objective: 1
AACSB: Analytical thinking

11) The cost function y = 10,000 + 3X ________.
A) represents a mixed cost
B) will intersect the y-axis at 3
C) has a slope coefficient of 10,000
D) is a curved line
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

12) Which of the following functions represents the least total cost assuming the number of units is equal in each case?
A) y = 180 + 7X
B) y = 90 + 6X
C) y = 90 + 7X
D) y = 180 + 6X
Answer: B
Diff: 3
Objective: 1
AACSB: Analytical thinking

13) Which of the following is an equation of a fixed cost function?
A) y = (a + b)X
B) y = a + bX
C) y = bX
D) y = a
Answer: D
Diff: 2
Objective: 1
AACSB: Analytical thinking
14) One assumption frequently made in cost behavior estimation is that changes in total costs can be explained by changes in the level of a single activity.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

15) A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

16) All cost functions are linear.
Answer: FALSE
Explanation: All cost functions are not linear, but for cost-behavior estimation we assume some are linear within a relevant range.
Diff: 1
Objective: 1
AACSB: Analytical thinking

17) In a cost function y = 18,000, the slope coefficient is zero.
Answer: TRUE
Diff: 2
Objective: 1
AACSB: Analytical thinking

18) When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range.
Answer: TRUE
Diff: 2
Objective: 1
AACSB: Analytical thinking

19) y = a + bX, y = a, and y = bX are the three basic types of linear cost functions.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

20) All other things being equal, the longer the time horizon the more likely a cost will be fixed.
Answer: FALSE
Explanation: All other things being equal, the longer the time horizon, the more likely the cost will be variable.
Diff: 1
Objective: 1
AACSB: Analytical thinking
21) Outside of the relevant range, variable and fixed cost-behavior patterns remain constant.
Answer: FALSE
Explanation: Outside of the relevant range, variable and fixed cost-behavior patterns may change.
Diff: 2
Objective: 1
AACSB: Analytical thinking

22) A particular cost item could be variable for one cost object and fixed for another cost object.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

23) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.
a. Direct manufacturing labor is \$10 per hour.
b. Direct materials cost \$15.60 per cubic yard.
c. Utilities have a minimum charge of \$5,000, plus a charge of \$0.30 per kilowatt-hour.
d. Machine operating costs include \$300,000 of machine depreciation per year, plus \$100 of utility costs for each day the machinery is in operation.
Answer:
a. y = \$10X
b. y = \$15.60X
c. y = \$5,000 + \$0.30X
d. y = \$300,000 + \$100 X
Diff: 2
Objective: 1
AACSB: Analytical thinking

24) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.
a. Direct materials cost is \$1.70 per pound
b. Total cost is fixed at \$8,000 per month regardless of the number of units produced.
c. Auto rental has a fixed fee of \$80.00 per day plus \$2.00 per mile driven.
d. Machine operating costs include \$1,000 of maintenance per month, and \$12.00 of coolant usage costs for each day the machinery is in operation.
Answer:
a. y = \$1.70X
b. y = \$8,000
c. y = \$80 + \$2.00X
d. y = \$1,000 + \$12X
Diff: 2
Objective: 1
AACSB: Analytical thinking

Objective 10.2

1) A linear cost function can only represent fixed cost behavior.
Answer: FALSE
Explanation: A linear cost function can represent fixed, mixed, or variable cost behavior.
Diff: 1
Objective: 2
AACSB: Analytical thinking
2) In a graphical display of a cost function, the steepness of a line represents the total amount of fixed costs.
Answer: FALSE
Explanation: In a graphical display of a cost function, the constant or the y-intercept represents the amount of fixed costs whereas the steepness of a line represents the variable cost.
Diff: 2
Objective: 2
AACSB: Analytical thinking

3) It can be inferred that when there is a high correlation between two variables, one is the cause of the other.
Answer: FALSE
Explanation: It cannot be inferred that a high correlation between two variables indicates that one is the cause of the other. A high correlation simply indicates that the variables move together.
Diff: 2
Objective: 2
AACSB: Analytical thinking

4) An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs.
Answer: TRUE
Diff: 2
Objective: 2
AACSB: Analytical thinking

5) Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year.
Answer: FALSE
Explanation: Managers are interested in estimating past cost-behavior functions because the estimates can help them make more accurate cost predictions, or forecasts, about future costs. But better management decisions, cost predictions, and estimation of cost functions can be achieved only if managers correctly identify the factors that affect costs.
Diff: 2
Objective: 2
AACSB: Analytical thinking
6) What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?
Answer: The two usual assumptions behind a simple linear cost function are:
1) Variations in the level of a single activity (the cost driver) explain the variations in the related total costs; and
2) Cost behavior is approximated by a linear cost function within the relevant range. This means that total cost versus the level of a single activity that is related to that cost is a straight line within the relevant range.

Once linearity is established, there are three possible types of linearity:
1) A strictly variable cost of the form Y = bX, where b is the slope of the straight line and is the variable cost per unit of the cost driver;
2) A strictly constant cost of the form Y = a, where a is the total fixed cost or constant; and
3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fixed cost or constant, and b is the variable cost per unit of the driver or the slope of the straight line.
Diff: 2
Objective: 2
AACSB: Analytical thinking

Objective 10.3

1) The conference method estimates cost functions ________.
A) using quantitative methods that can be very time consuming and costly
B) based on analysis and opinions gathered from various departments
C) using time-and-motion studies
D) by mathematically analyzing the relationship between inputs and outputs in physical terms
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

2) The account analysis method estimates cost functions ________.
A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis
B) using time-and-motion studies
C) at a high cost, which renders it seldom used
D) in a manner that cannot be usefully combined with any other cost estimation methods
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

3) Quantitative analysis methods estimate cost functions ________.
A) using the time-and-motion studies
B) based on analysis and opinions gathered from various departments
C) using a formal mathematical method to fit cost functions to past data observations
D) using the pooling of knowledge from each value chain function
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical thinking
4) Variable cost per labor-hour is \$8.50. Fixed cost is \$10,500. Calculate the total cost for 350 labor hours. Machine hours during the period are 50.
A) \$10,925
B) \$13,475
C) \$13,900
D) \$3,400
Answer: B
Explanation: B) Total cost = \$10,500 + (\$8.50 350) = \$13,475
Diff: 2
Objective: 3
AACSB: Application of knowledge

5) Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?
A) the account analysis method
B) the conference method
C) the marginal costing method
D) the incremental costing method
Answer: A
Diff: 1
Objective: 3
AACSB: Analytical thinking

6) Which cost estimation method uses a formal mathematical method to develop cost functions based on past data?
A) the cash accounting method
B) the conference method
C) the accrual accounting method
D) the quantitative analysis method
Answer: D
Diff: 1
Objective: 3
AACSB: Analytical thinking

7) Which cost estimation method may use time-and-motion studies to analyze the relationship between inputs and outputs in physical terms?
A) the accrual accounting method
B) the high-low method
C) the industrial engineering method
D) the cash accounting method
Answer: C
Diff: 1
Objective: 3
AACSB: Analytical thinking

At the Auric Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs.

Total personnel department costs are \$287,500.

Department A B C
Number of employees 70 280 225
Number of new hires 25 13 12

8) If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A?
A) \$35,000
B) \$10,667
C) \$140,000
D) \$43,700
Answer: A
Explanation: A) Personnel costs of Department A = [70 / (70 + 280 + 225)] \$287,500 = \$35,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

9) If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A?
A) \$35,000
B) \$10,667
C) \$143,750
D) \$43,700
Answer: C
Explanation: C) Personnel costs of Department A = [25 / (25 + 13 + 12)] \$287,500 = \$143,750
Diff: 2
Objective: 3
AACSB: Application of knowledge

10) Which cost estimation method is being used by Auric Company?
A) the simple regression method
B) the conference method
C) the account analysis method
D) the marginal costing method
Answer: B
Diff: 3
Objective: 3
AACSB: Analytical thinking

Answer the following questions using the information below:

At the Verill Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs.

Total library and information center costs are \$200,000.

Department A B C
Number of employees 135 530 135
Number of engineers 0 80 20

11) Which cost estimation method is being used by Verill Company?
A) the regression analysis method
B) the marginal costing method
C) the conference method
D) the operating costing method
Answer: C
Diff: 3
Objective: 3
AACSB: Analytical thinking

12) If the number of employees is considered the cost driver, what amount of library and information center costs will be allocated to Department A?
A) \$30,000
B) \$33,750
C) \$0
D) \$66,667
Answer: B
Explanation: B) Library and information costs of Department A = [135/ (135 + 530 + 135)] \$200,000 = \$33,750
Diff: 2
Objective: 3
AACSB: Application of knowledge

13) If the number of engineers is considered the cost driver, what amount of library and information center costs will be allocated to Department A?
A) \$30,000
B) \$33,750
C) \$0
D) \$66,667
Answer: C
Explanation: C) Library and information costs of Department A = [0 / (0 + 80 + 20)] \$200,000 = \$0
Diff: 2
Objective: 3
AACSB: Application of knowledge

Isondos TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.

Sales (1,200 televisions) \$ 1,200,000
Cost of goods sold 540,000
Store managers salary per year 108,000
Operating costs per year 216,000
Advertising and promotion per year 24,000
Commissions (3% of sales) 36,000

14) What was the variable cost per unit sold for 2015?
A) \$30
B) \$480
C) \$770
D) \$450
Answer: B
Explanation: B) Variable cost per unit = (\$540,000 + \$36,000) / 1,200 = \$480 per unit
Diff: 2
Objective: 3
AACSB: Application of knowledge

15) What were total fixed costs for 2015?
A) \$924,000
B) \$576,000
C) \$348,000
D) \$224,000
Answer: C
Explanation: C) Fixed costs = \$108,000 + \$216,000 + \$24,000 = \$348,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

16) What are the estimated total costs if the company expects to sell 3,500 units next year?
A) \$2,028,000
B) \$3,619,000
C) \$3,271,000
D) \$1,429,000
Answer: A
Explanation: A) Total cost = fixed costs (\$108,000 + \$216,000 + \$24,000) + variable costs (3,500 units \$480
variable costs per unit) = \$1,680,000 = \$2,028,000 total estimated costs.
Diff: 3
Objective: 3
AACSB: Application of knowledge

17) Which cost estimation method is being used by Isondos TV and Appliance Store?
A) the operating costing method
B) the marginal costing method
C) the account analysis method
D) the cost-volume-profit analysis method
Answer: C
Diff: 3
Objective: 3
AACSB: Analytical thinking

Answer the following questions using the information below:

Genends Good Value Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2015 operations.

Sales (6,000 microwave ovens) \$ 1,740,000
Cost of goods sold 960,000
Store managers salary per year 100,000
Operating costs per year 250,000
Advertising and promotion per year 30,000
Commissions (3% of sales) 52,200

18) Which cost estimation method is being used by Genends Good Value Appliance Store?
A) the account analysis method
B) the operating costing method
C) the marginal costing method
D) the cost-volume-profit analysis method
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

19) What was the variable cost per unit sold for 2015?
A) \$8.70
B) \$160
C) \$168.70
D) \$232
Answer: C
Explanation: C) Variable cost per unit = (\$960,000 + \$52,200) / 6,000 = \$168.70 per unit
Diff: 2
Objective: 3
AACSB: Application of knowledge

20) What were the total fixed costs for 2015?
A) \$1,392,200
B) \$380,000
C) \$350,000
D) \$1,012,200
Answer: B
Diff: 2
Objective: 3
AACSB: Application of knowledge
21) What are the estimated total costs if Genends store expects to sell 8,000 units next year?
A) \$812,117
B) \$1,729,600
C) \$1,952,200
D) \$380,450
Answer: B
Explanation: B) Total cost = fixed cost (\$100,000 + \$250,000 + 30,000) + variable costs (8,000 units \$168.70 variable costs per unit) = \$1,349,600 = \$1,729,600.
Diff: 3
Objective: 3
AACSB: Application of knowledge

Answer the following questions using the information below:

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

22) Which of the following represents the correct linear cost function?
A) y = \$390,000 + \$ 48.75X
B) y = \$110,000 + \$100 X
C) y = \$110,000 + \$78 X
D) y = \$390,000 + \$62.50 X
Answer: C
Explanation: C) Fixed costs are given at \$110,000 based on 8,000 hours of labor; variable costs are \$390,000 during the period divided by 5,000 labor hours during the period = \$78.00 variable cost per labor hour.
Diff: 2
Objective: 3
AACSB: Analytical thinking

23) What will be the variable cost per hour?
A) \$78
B) \$48.75
C) \$62.50
D) \$100
Answer: A
Explanation: A) Variable cost per hour = (\$390,000/5,000) = \$78
Diff: 2
Objective: 3
AACSB: Application of knowledge
24) What will be the total variable cost for the estimated 7,000 hours?
A) \$341,250
B) \$546,000
C) \$700,000
D) \$437,500
Answer: B
Explanation: B) Total variable cost = (\$390,000/5,000) 7,000 = \$546,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

25) What will be the total cost for the estimated 7,000 hours?
A) \$451,250
B) \$547,500
C) \$700,000
D) \$656,000
Answer: D
Explanation: D) Total cost = \$110,000 + [(\$390,000/5,000) 7,000] = \$656,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

26) The quantitative analysis method of cost estimation is based on opinions from various departments and is quick and of low cost to apply.
Answer: FALSE
Explanation: The conference method of cost estimation is based on opinions from various departments and is quick and of low cost to apply.
Diff: 1
Objective: 3
AACSB: Analytical thinking

27) The account analysis method of cost estimation classifies account costs as fixed, mixed, or variable using qualitative judgments.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

28) The account analysis method estimates cost functions by classifying various cost accounts as variable, fixed, or mixed with respect to the identified level of activity.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

29) The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking
30) The cost of the personnel department at the Binix Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are \$180,000.

Department Department Department
Cost Driver A B C
Number of employees 390 325 65
The number of new hires 25 35 20

Required:
Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is:
a. number of employees.
b. the number of new hires.
c. Which cost estimation method is being used by Binix Company?
Answer: Department Department Department
Cost Driver A B C
a. Number of employees 390/780 180,000 325/780 180,000 65/780 180,000
\$90,000 \$75,000 \$15,000
b. The number of new hires 25/80180,000 35/80180,000 20/80180,000
\$56,250 \$78,750 \$45,000
c. Binix Company is using the conference method for cost estimation.
Diff: 3
Objective: 3
AACSB: Application of knowledge

31) Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver.
Answer: The four approaches to cost estimation are:

1. industrial engineering method
2. conference method
3. account analysis method
4. quantitative analysis of current or past cost relationships

The industrial engineering method, also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms.

The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.).

The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver.

Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression analysis, to fit linear cost functions to past data observations.
Diff: 2
Objective: 3
AACSB: Analytical thinking

Objective 10.4

1) The cost to be predicted is referred to as the ________.
A) independent variable
B) dependent variable
C) cost driver
D) regression
Answer: B
Diff: 2
Objective: 4
AACSB: Analytical thinking

2) In the estimation of a cost function using quantitative analysis, the independent variable ________.
A) is the cost to be predicted
B) is the product of fixed costs and slope coefficient
C) is the factor used to predict the dependent variable
D) is the product of total costs and slope coefficient
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

3) How many separate cost pools should be formed given the following information?

Cost Cost driver
Postage costs # of brochures mailed
Printing and paper costs # of brochures mailed
Quality control costs # of inspections
Customer service costs # of customers served

A) 1 cost pool
B) 2 cost pools
C) 3 cost pools
D) 4 cost pools
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

4) Place the following steps in order for estimating a cost function using quantitative analysis.

A = Plot the data
B = Collect data on the dependent variable and the cost driver.
C = Choose the dependent variable
D = Identify the independent variable, or cost driver
E = Estimate the cost function

A) D C E A B
B) C D B A E
C) A D C E B
D) E D C B A
Answer: B
Diff: 2
Objective: 4
AACSB: Analytical thinking

5) All individual cost items included in the dependent variable should have ________.
A) a different cost driver
B) an independent relationship with the independent variable
C) an economically plausible relationship with the cost driver
D) a heterogeneous cost pool
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

6) Which of the following represents cross-sectional data?
A) indirect manufacturing labor costs for the past 5 years
B) number of machine-hours used for the past 10 years
C) personnel costs of a month at 10 different organizations
D) maintenance cost of machine in a plant for the past 3 years
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

7) A plot of data that results in bunched points with little slope generally indicates ________.
A) a strong relationship
B) a weak relationship
C) a positive relationship
D) a negative relationship
Answer: B
Diff: 3
Objective: 4
AACSB: Analytical thinking

8) A plot of data that results in one extreme observation most likely indicates that ________.
A) more than one cost pool should be used
B) an unusual event such as a plant shutdown occurred during that month
C) the cost-allocation base has been incorrectly identified
D) individual cost items do not have the same cost driver
Answer: B
Diff: 2
Objective: 4
AACSB: Analytical thinking

9) Cross-sectional data analysis includes ________.
A) using a variety of time periods to measure the dependent variable
B) using the highest and lowest observation
C) observing different entities during the same time period
D) comparing information in different cost pools
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

10) Time-series data analysis includes ________.
A) using a variety of time periods to measure the dependent variable
B) using the highest and lowest observation
C) observing different entities during the same time period
D) comparing information in different cost pools
Answer: A
Diff: 2
Objective: 4
AACSB: Analytical thinking
11) When using the high-low method, the two observations used are the high and low observations of the ________.
A) cost driver
B) fixed cost component
C) slope coefficient
D) direct cost
Answer: A
Diff: 2
Objective: 4
AACSB: Analytical thinking

12) When using the high-low method, the numerator of the equation that determines the slope is the ________.
A) difference between the positive and negative values of dependent and independent variables
B) difference between the fixed cost and variable cost associated with the cost driver
C) difference between the high and low observations of the cost driver
D) difference between the costs associated with highest and lowest observations of the cost driver
Answer: D
Diff: 2
Objective: 4
AACSB: Analytical thinking

13) The high-low method ________.
A) measures the difference between actual cost and estimated cost for each observation of the cost driver
B) calculates the standard deviation of residuals
C) calculates the slope coefficient using only two observed values within the relevant range and their respective costs
D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations, Y
Answer: C
Diff: 3
Objective: 4
AACSB: Analytical thinking

14) Put the following steps in order for using the high-low method of estimating a cost function:

A = Identify the cost function
B = Calculate the constant
C = Calculate the slope coefficient
D = Identify the highest and lowest observed values

A) D C A B
B) C D A B
C) A D C B
D) D C B A
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking
15) Regression analysis ________.
A) calculates the slope coefficient using only two observed values within the relevant range and their respective costs
B) measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables
C) estimates the cost functions using the time-and-motion studies
D) measures the variability or dispersion in a set of data points
Answer: B
Diff: 3
Objective: 4
AACSB: Analytical thinking

16) Which of the following statements shows a difference between simple regression and multiple regression?
A) Simple regression uses more than one dependent and independent variables, whereas multiple regression uses only one dependent and independent variable.
B) Simple regression uses only the independent variables, whereas multiple regression uses only dependent variables.
C) Simple regression uses only one dependent and one independent variable, whereas multiple regression uses one dependent and more than one independent variable.
D) Simple regression uses only one dependent variable and more than one independent variables, whereas multiple regression uses more than one dependent variable and only one independent variable.
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

17) The slope of the line of regression is the ________.
A) rate at which the dependent variable varies
B) rate at which the independent variable varies
C) difference between the fixed cost and variable cost associated with the cost driver
D) difference between actual cost and estimated cost for each observation of the cost driver
Answer: A
Diff: 2
Objective: 4
AACSB: Analytical thinking

Answer the following questions using the information below:

Uninder Company uses the high-low method to estimate the cost function. The information for 2015 is provided below:
Machine-hours Labor Costs
Highest observation of cost driver 550 \$22,000
Lowest observation of cost driver 250 \$ 13,000

18) What is the slope coefficient?
A) \$52.00
B) \$43.75
C) \$30.00
D) \$40.00
Answer: C
Explanation: C) Slope = (\$22,000 \$13,000) / (550 250) = \$30
Diff: 2
Objective: 4
AACSB: Application of knowledge

19) What is the constant for the estimated cost equation?
A) \$5,500
B) \$13,000
C) \$16,500
D) \$22,000
Answer: A
Explanation: A) Using highest observation: Constant = \$22,000 (\$30.00 550 hours) = \$5,500
OR: Using lowest observation: Constant = \$13,000 (\$30.00 250 hours) = \$5,500
Diff: 2
Objective: 4
AACSB: Application of knowledge

20) What is the estimated cost function for the above data?
A) y = 13,000 + 43.75X
B) y = 5,500 + 30X
C) y = 22,000 + 40X
D) y = 16,500 + 52X
Answer: B
Diff: 2
Objective: 4
AACSB: Application of knowledge

21) What is the estimated total cost when 400 machine-hours are used?
A) \$20,800
B) \$29,000
C) \$16,000
D) \$17,500
Answer: D
Explanation: D) The total cost, y = \$5,500 + (\$30 400) = \$17,500
Diff: 3
Objective: 4
AACSB: Application of knowledge
Answer the following questions using the information below:

Syosis Company uses the high-low method to estimate its cost function. The information for 2015 is provided below:

Machine-hours Costs
Highest observation of cost driver 2,500 \$300,000
Lowest observation of cost driver 1,500 \$ 220,000

22) What is the slope coefficient?
A) \$120.00
B) \$147.00
C) \$80.00
D) \$130.00
Answer: C
Explanation: C) Slope = (\$300,000 \$220,000) / (2,500 1,500) = \$80
Diff: 2
Objective: 4
AACSB: Analytical thinking

23) What is the constant for the estimated cost equation?
A) \$220,000
B) \$300,000
C) \$100,000
D) \$0
Answer: C
Explanation: C) EITHER: High observation: Constant = \$300,000 (\$80.00 2,500 hours) = \$100,000
OR: Low observation: Constant = \$220,000 (\$80.00 1,500 hours) = \$100,000
Diff: 2
Objective: 4
AACSB: Application of knowledge

24) What is the estimated cost function for the above data?
A) y = 300,000 +120X
B) y = 220,000 +147X
C) y = 100,000 +80X
D) y = 130X
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking
25) What is the estimated total cost when 1,300 machine-hours are used?
A) \$411,100
B) \$204,000
C) \$456,000
D) \$156,000
Answer: B
Explanation: B) The total cost, y = \$100,000 + (\$80 1,300) = \$204,000
Diff: 2
Objective: 4
AACSB: Application of knowledge

Answer the following questions using the information below:

For Divaxo Company, labor-hours are 30,000 and wages \$130,000 at the high point of the relevant range, and labor-hours are 18,000 and wages \$85,000 at the low point of the relevant range.

26) What is the slope coefficient?
A) \$4.45
B) \$3.75
C) \$4.33
D) \$4.72
Answer: B
Explanation: B) Slope = (\$130,000 \$85,000) / (30,000 18,000) = \$3.75 per labor-hour
Diff: 2
Objective: 4
AACSB: Application of knowledge

27) What is the constant?
A) \$17,500
B) \$45,000
C) \$7,000
D) \$4,375
Answer: A
Explanation: A) High observation: Constant = \$130,000 (\$3.75 30,000) = \$17,500
OR: Low observation: Constant = \$85,000 (\$3.75 18,000) = \$17,500
Diff: 2
Objective: 4
AACSB: Application of knowledge

28) What is the estimated total labor costs at Divaxo Company when 11,000 labor-hours are used?
A) \$51,944
B) \$58,750
C) \$56,270
D) \$52,042
Answer: B
Explanation: B) Total labor costs, y = \$17,500 + (\$3.75 11,000) = \$58,750
Diff: 3
Objective: 4
AACSB: Application of knowledge
Answer the following questions using the information below:

The Frontive Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Frontive Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

Cost Hours
\$24,700 5,000
26,000 5,500
34,000 7,500
45,370 10,300
38,000 9,500

29) What is the cost function?
A) y = \$45,370 + \$4.19X
B) y = \$24,700 + \$4.40X
C) y = \$34,000 + \$4.94X
D) y = \$5,200 + \$3.90X
Answer: D
Explanation: D) b = (\$45,370 \$24,700) / (10,300 5,000) = \$3.90 for the highest and lowest values of the cost driver
Using highest observation: \$45,370 = a + (\$3.90 10,300)
a = \$5,200
Cost function is Y = \$5,200 + \$3.90X
Diff: 3
Objective: 4
AACSB: Application of knowledge

30) What is the estimated total cost at an operating level of 9,000 hours?
A) \$35,100
B) \$40,300
C) \$44,460
D) \$39,644
Answer: B
Explanation: B) b = (\$45,370 \$24,700) / (10,300 5,000) = \$3.90 for the highest and lowest values of the cost driver
\$45,370 = a + (\$3.90 10,300)
a = \$5,200
Cost function is Y = \$5,200 + \$3.90X
Y = \$5,200 + (\$3.90 9,000)
Y = \$40,300
Diff: 3
Objective: 4
AACSB: Application of knowledge
Answer the following questions using the information below:

Presented below are the production data for the first six months of the year for the mixed costs incurred by Vertise Company.

Month Cost Units
January \$4,890 4,100
February 4,426 3,520
March 6,730 5,200
April 9,724 8,250
May 5,900 4,900
June 7,336 6,600

Vertise Company uses the high-low method to analyze mixed costs.

31) How would the cost function be stated?
A) y = \$484 + \$1.12X
B) y = \$5,298 + \$1.19X
C) y = \$2,388 + \$1.12
D) y = \$7,850 + \$1.18X
Answer: A
Explanation: A) b = (\$9,724 \$4,426) / (8,250 3,520) = \$1.12
\$9,724 = a + \$1.12 8,250
a = \$484
Cost function is Y=\$484 + \$1.12X
Diff: 3
Objective: 4
AACSB: Application of knowledge

32) What is the estimated total cost at an operating level of 6,500 units?
A) \$7,752.44
B) \$7,764.00
C) \$7,280.00
D) \$7,661.33
Answer: B
Explanation: B) b = (\$9,724 \$4,426) / (8,250 3,520) = \$1.12
\$9,724 = a + \$1.12 8,250
a = \$484
Cost function is: Y = \$484 + \$1.12X
Y = \$484 + \$1.12 6,500 = \$7,764
Diff: 3
Objective: 4
AACSB: Application of knowledge
Answer the following questions using the information below:

The Bovise Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Bovise Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

Month Cost Hours
January \$40,000 3,600
February 38,500 3,000
March 36,280 3,300
April 38,000 3,500
May 69,850 5,850
June 45,000 4,250

33) How is the cost function stated?
A) y = \$26,672 + \$11.94X
B) y = \$1,360 + \$11.37
C) y = \$31,350 + \$12.83X
D) y = \$5,500 + \$11X
Answer: D
Explanation: D) b = (\$69,850 \$38,500) / (5,850 3,000) = \$11
\$69,850 = a + (\$11 5,850)
a = \$5,500
Diff: 3
Objective: 4
AACSB: Application of knowledge

34) What is the estimated total cost at an operating level of 3,100 hours?
A) \$71,133
B) \$39,600
C) \$36,607
D) \$63,687
Answer: B
Explanation: B) b = (\$69,850 \$38,500) / (5,850 3,000) = \$11
\$69,850 = a + (\$11 5,850)
a = \$5,500
y = \$5,500 + (\$11 3,100) = \$39,600
Diff: 3
Objective: 4
AACSB: Application of knowledge

35) A homogeneous relationship exists when each activity whose costs are included in the dependent variable has the same cost driver.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking
36) The first step in estimating a cost function using quantitative analysis is to plot the data.
Answer: FALSE
Explanation: The first step in estimating a cost function using quantitative analysis is to choose the dependent variable.
Diff: 2
Objective: 4
AACSB: Analytical thinking

37) In estimating a cost function using quantitative analysis, the dependent variable is the factor used to predict the independent variable.
Answer: FALSE
Explanation: In estimating a cost function using quantitative analysis, the independent variable is the factor used to predict the dependent variable.
Diff: 2
Objective: 4
AACSB: Analytical thinking

38) Cross-sectional data pertain to the same entity (organization, plant, activity, and so on)
over successive past periods.
Answer: FALSE
Explanation: Time-series data pertain to the same entity (organization, plant, activity, and so on)
over successive past periods.
Diff: 1
Objective: 4
AACSB: Analytical thinking

39) Simple regression analysis estimates the relationship between the dependent variable
and one independent variable.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

40) Two common forms of quantitative analysis methods of cost estimation are the high-low method and regression analysis.
Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking

41) The high-low method relies on only two observations, the highest and lowest, to estimate a linear cost function.
Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking

42) The dependent variable is a cost to be predicted and managed, whereas an independent variable or cost driver is the factor used to predict the dependent variable.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking
43) The vertical difference, called the residual term, measures the distance between actual cost and estimated cost for each observation of the cost driver.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

44) The high-low method is more accurate than the regression method of estimating a cost function.
Answer: FALSE
Explanation: The regression method is more accurate than the high-low method since it uses all available data to estimate a cost function.
Diff: 1
Objective: 4
AACSB: Analytical thinking

45) In using high-low method, the slope coefficient is calculated by dividing the difference between highest and lowest observations of the cost driver by the difference between costs associated with highest and lowest observations of the cost driver.
Answer: FALSE
Explanation: In high-low method, slope coefficient is calculated by dividing the difference between costs associated with highest and lowest observations of the cost driver by the difference between highest and lowest observations of the cost driver.
Diff: 2
Objective: 4
AACSB: Analytical thinking

46) Simple regression analysis estimates the relationship between the dependent variable and one independent variable.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

47) The high-low method involves choosing the period of highest cost driver activity and the period of lowest cost driver activity.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

48) Multiple regression analysis uses only independent variables and not dependent variables.
Answer: FALSE
Explanation: Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables.
Diff: 2
Objective: 4
AACSB: Analytical thinking
49) In regression analysis, the term goodness of fit indicates the strength of the relationship between the cost driver and the costs.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

50) Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

51) The managers of the production department have decided to use the production levels of 2015 and 2016 as examples of the highest and lowest years of operating levels. Data for those years are as follows:

Year Chemicals used Overhead Costs
2015 336,000 gallons \$292,800
2016 288,000 gallons \$254,400
Required:
What is the cost estimating equation for the department if gallons of chemicals are used as the cost driver?
Answer: Slope (variable cost) = (\$292,800 \$254,400) / (336,000 288,000) = \$0.80
Constant (fixed cost) = \$292,800 (\$0.80 336,000) = \$24,000
Estimating equation = \$24,000 + (\$0.80 per gallon of direct material total number of gallons)
Diff: 2
Objective: 4
AACSB: Application of knowledge

52) Prelias Storage ran its freezer in February, a slow month, for 378 hours for a total cost of \$61,230. In July, a peak month, the freezer ran for 756 hours for a total cost of \$87,690.

Required:
a. What is the cost estimating equation for the department if hours of freezer use are used as the cost driver?
b. What is the estimated total cost at an operating level of 600 hours?
Answer:
a. Slope (variable costs) = (\$87,690 \$61,230) / (756 378) = \$70
Constant (fixed cost) = \$87,690 (756 \$70) = \$34,770
Estimating equation = \$34,770 + (\$70 per direct labor hour number of direct labor hours)
b. Total costs of 600 hours = \$34,770 + (\$70 600) = \$76,770
Diff: 2
Objective: 4
AACSB: Application of knowledge

53) The Bover Company has provided the following information:

Units of Output 33,000 Units 46,200 Units
Direct materials \$ 316,800 \$ 443,520
Workers wages 1,188,000 1,663,200
Supervisors salaries 343,200 343,200
Equipment depreciation 166,320 166,320
Maintenance 89,760 121,440
Utilities 422,400 580,800
Total \$2,526,480 \$3,318,480

Using the high-low method and the information provided above,
a. identify the linear cost function equation and
b. estimate the total cost at 38,000 units of output.
Answer:
a. Variable cost = (\$3,318,480 \$2,526,480) / (46,200 33,000) = \$60.00
Fixed cost = \$3,318,480 (\$60.00 46,200) = \$546,480
Cost function is y = \$546,480 + \$60.00X
b. Output level of 38,000 units= \$546,480 + (\$60.00 38,000) =
= \$2,826,480 total cost
Diff: 2
Objective: 4
AACSB: Application of knowledge

54) As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department:

Observation Machine-hours Total Operating Costs
January 4,700 \$43,000
February 5,060 45,395
March 4,180 42,535
April 4,500 43,600
May 4,250 42,890

Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. If Junes estimated machine-hours are 4,300, calculate the total estimated costs of the Machining Department?
Answer:
a. Slope coefficient = (\$45,395 \$42,535) / (5,060 4,180) = \$3.25 per machine-hour
Constant = \$45,395 (\$3.25 5,060) = \$28,950
Estimating equation = \$28,950 + \$3.25X
b. Junes estimated costs = \$28,950 + (\$3.25 4,300) = \$42,925
Diff: 2
Objective: 4
AACSB: Application of knowledge

55) Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, Kansas. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:

Machine-hours Kilowatt-hours Total Overhead Costs
January 4,560 5,424,000 \$405,600
February 4,380 5,208,000 404,160
March 4,680 5,400,000 407,040
April 3,960 5,148,000 404,160
May 3,900 5,040,000 391,200
June 3,720 4,944,000 384,000

Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c. For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power. The overhead costs totaled \$365,000. Which cost driver was the best predictor for July?
Answer:
a. Machine-hours:
Slope coefficient = (\$407,040 \$384,000) / (4,680 3,720)
= \$24.00 per machine-hour
Constant = \$384,000 (\$24 3,720) = \$294,720
Machine-hour estimating equation = \$294,720 + \$24X
b. Kilowatt-hours:
Slope coefficient = (\$407,040 \$384,000) / (5,400,000 4,944,000) = \$0.0505 per kilowatt-hour
Constant = \$407,040 (\$0.0505 5,400,000) = \$134,198

Kilowatt-hour estimating equation =\$134,198 + (\$0.0505 per KWH number of KWH)

c. Julys estimated costs:
with machine-hours = \$294,720 + (\$24 4,000) = \$390,720

with kilowatt-hours = \$134,198 + (\$0.0505 4,550,000) = \$363,973

The best estimator for July was the kilowatt-hour cost driver.
Diff: 3
Objective: 4
AACSB: Application of knowledge

56) Patrick Ross, the president of Corises Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:

Month Machine-hours Overhead Costs
February 1,870 \$22,500
March 3,080 24,475
April 1,100 24,321
May 2,750 23,650
June 3,850 31,196

Required:
Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.
Answer: High: June 3,850 \$31,196
Low: April 1,100 24,321
Difference 2,750 \$ 6,875

Variable cost per MH: \$6,875/2,750 = \$2.50 per MH

Fixed cost: \$24,321 = a + \$2.50 1,100
a = \$21,571
Cost function is Y = \$21,571 + \$2.50X
Diff: 2
Objective: 4
AACSB: Application of knowledge

57) List and briefly describe the six steps in estimating a cost function under quantitative analysis.
Answer: The first step is to select the dependent variable. Selection of which dependent variable to use will depend on the cost function being estimated. Once the dependent variable has been selected, it is necessary to identify the independent variable or cost driver. The cost driver is the factor that is used to predict the dependent variable costs. The cost driver should have an economically plausible relationship with the dependent variable and be measurable. The third step involves collecting data on the dependent variable and the cost driver. The data may be time-series data or they may be cross-sectional data. Once the data are collected, they need to be plotted, which is step four. Plotting the data allows for the relationship between the cost driver and the dependent variable to be more readily observed. This also allows for the identification of extreme observations that should be further investigated. The fifth step is to estimate the cost function, using some form of quantitative analysis. The last step is to evaluate the cost driver of the estimated cost function to determine if the cost function provides a good estimation.
Diff: 2
Objective: 4
AACSB: Analytical thinking

Objective 10.5

1) An inaccurate cost function with a slope coefficient that is estimated too low may most likely result in ________.
A) predicting total costs that are too high
B) initiating cost cutting measures when they are unnecessary
C) evaluating a weak manager as having strong performance
D) promoting a product that is actually more profitable than budgeted
Answer: B
Diff: 2
Objective: 5
AACSB: Analytical thinking

2) An inaccurate cost function with a constant that is estimated too high may most likely result in ________.
A) evaluating a weak manager as providing strong performance
B) promoting a product that is actually less profitable than budgeted
C) predicting total costs that are too low
D) replicating processes that are truly cost saving
Answer: A
Diff: 2
Objective: 5
AACSB: Analytical thinking

3) Which of the following is true if the constant in the cost function is low compared to the last year?
A) total variable costs have decreased
B) production has increased
C) the sales commission percentage has decreased
D) total fixed cost have decreased
Answer: D
Diff: 2
Objective: 5
AACSB: Analytical thinking

4) Which of the following is true if a slope coefficient in a cost function is decreased from the last year?
A) fixed cost per unit has decreased
B) variable cost per unit has decreased
C) production has decreased
D) contribution margin has decreased
Answer: B
Diff: 2
Objective: 5
AACSB: Analytical thinking

5) If machine maintenance is scheduled at a time when production is at a low level, then ________.
A) low production is the cost driver of high repair costs
B) an understanding of operations is needed to determine an appropriate cost driver
C) low production should be avoided since it is the cause of machine maintenance
D) machine maintenance cannot be accurately predicted
Answer: B
Diff: 3
Objective: 5
AACSB: Analytical thinking

6) Goodness-of-fit measures how well the predicted values in a cost estimating equation ________.
A) match the cost driver
B) determine the level of activity
C) match the actual cost observations
D) rely on the independent variable
Answer: C
Diff: 2
Objective: 5
AACSB: Analytical thinking

7) A steeply sloped regression line indicates ________.
A) a strong relationship between the cost driver and costs
B) a greater proportion of fixed costs than variable costs
C) an increase in number of units produced during the period
D) a strong relationship between fixed cost and variable cost
Answer: A
Diff: 3
Objective: 5
AACSB: Analytical thinking

8) The smaller the residual terms, the ________.
A) better is the fit between the actual cost observations and estimated costs
B) weaker the relationship between the cost driver and costs
C) more the number of units produced during the period
D) stronger the relationship between fixed cost and variable cost
Answer: A
Diff: 2
Objective: 5
AACSB: Analytical thinking

9) Which of the following statements is true of activity-based costing?
A) There is a clear cause-and-effect relationship between costs and the cost driver in the long run.
B) There is no variety of cost drivers and cost pools.
C) The system focuses on activities in together and not on individual activities.
D) A single cost driver should be identified for all the activities.
Answer: A
Diff: 2
Objective: 5
AACSB: Analytical thinking
10) Which of the following statements is true of choosing cost drivers under activity-based costing?
A) All the cost drivers should be unit-level cost drivers.
B) There should be a clear cause-and-effect relationship between cost drivers and cost pools.
C) Cost drivers are independent variables.
D) A single cost driver should be identified for all the activities.
Answer: C
Diff: 2
Objective: 5
AACSB: Analytical thinking

11) Machine-hours is a more economically plausible cost driver of machine maintenance than number of direct manufacturing labor-hours.
Answer: TRUE
Diff: 2
Objective: 5
AACSB: Analytical thinking

12) The larger the vertical difference between actual costs and predicted costs the better the goodness of fit.
Answer: FALSE
Explanation: The smaller the vertical difference between actual costs and predicted costs the better the goodness of fit.
Diff: 2
Objective: 5
AACSB: Analytical thinking

13) The major advantages of quantitative methods are that they are objective, so managers can use them to evaluate different cost drivers.
Answer: TRUE
Diff: 2
Objective: 5
AACSB: Analytical thinking

14) A flat or slightly sloped regression line indicates a strong relationship between the cost driver and costs.
Answer: FALSE
Explanation: A flat or slightly sloped regression line indicates a weak relationship between the cost driver and costs.
Diff: 2
Objective: 5
AACSB: Analytical thinking

15) To implement ABC systems, managers must identify a cost driver for each activity.
Answer: TRUE
Diff: 1
Objective: 5
AACSB: Analytical thinking

16) Activity-based costing systems use the quantitative analysis method exclusively for cost estimation because of its accuracy.
Answer: FALSE
Explanation: Because ABC systems have a great number and variety of cost drivers and cost pools it requires many cost relationships to be estimated. ABC systems use a variety of estimation methods industrial engineering, conference, and quantitative analysis. In making the choice of method to use, managers trade off detail, accuracy, feasibility, and costs of estimating cost functions.
Diff: 2
Objective: 5
AACSB: Analytical thinking

17) The conference method and the account analysis method use subjective assessments to choose a cost driver and to estimate the fixed and variable components of the cost function.
Answer: TRUE
Diff: 2
Objective: 5
AACSB: Analytical thinking

18) What are the three criteria a company should use to evaluate and choose a cost driver? Briefly explain each of the three criteria.
Answer: The three criteria a company should use to evaluate a cost driver are economic plausibility, goodness of fit, and significance of the independent variable.

Economic plausibility involves the theoretical existence of a causal relationship between a driver and the costs it is supposed to drive.

Goodness of fit involves the observed differences between predictions of costs based on the cost driver and the actual costs that occurred.

Significance of the independent variable involves the steepness of the slope of the cost driver relative to the slope of other possible cost drivers. The steeper the slope (given the same goodness of fit) the stronger is the relationship between the cost driver and the related costs.
Diff: 2
Objective: 5
AACSB: Analytical thinking

Objective 10.6

1) Which of the following is a nonlinear cost function?
A) increase in revenues with increase in sales in units
B) total fixed cost of \$25,000
C) variable cost of \$5 per unit
D) learning curve function
Answer: D
Diff: 2
Objective: 6
AACSB: Analytical thinking
2) Which of the following is an example of nonlinear cost function?
A) variable-cost functions
B) fixed-cost functions
C) learning curves
D) mixed cost functions
Answer: C
Diff: 2
Objective: 6
AACSB: Analytical thinking

3) With a step fixed-cost function ________.
A) the cost varies with the changes in the activity
B) fixed cost is often approximated with a continuous variable-cost function
C) fixed cost changes proportionally with the level of activity
D) the cost remains the same over wide ranges of the activity in each relevant range
Answer: D
Diff: 2
Objective: 6
AACSB: Analytical thinking

4) A step variable-cost function ________.
A) is fixed over the long run but not over the short run
B) is often approximated with a continuous variable-cost function
C) remains the same over a wide range of activity
D) example includes adding additional warehouse space
Answer: B
Diff: 2
Objective: 6
AACSB: Analytical thinking

5) A learning curve is a function ________.
A) that measures the decline in labor-hours per unit due to workers becoming better at a job
B) that increases at a greater rate as workers become more familiar with their tasks
C) where unit costs increase as productivity increases
D) that is linear
Answer: A
Diff: 2
Objective: 6
AACSB: Analytical thinking

6) An experience curve ________.
A) is a narrower application of the learning curve
B) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases
C) only measures the decline in labor-hours per unit as units produced increases
D) measures the increase in cost per unit as productivity increases
Answer: B
Diff: 2
Objective: 6
AACSB: Analytical thinking
7) To complete the first setup on a new machine took an employee 300 minutes. Using an 85% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take ________.
A) 127.50 minutes
B) 210 minutes
C) 277.50 minutes
D) 255 minutes
Answer: B
Explanation: B) The time taken for the second set up on machine = 300 0.85 = 255; (300 + X) / 2 = 255; X = 210 minutes
Diff: 3
Objective: 6
AACSB: Application of knowledge

8) To complete the first setup on a new machine took an employee 100 minutes. Using an 80% incremental unit-time learning model indicates that the second setup on the new machine is expected to take ________.
A) 80 minutes
B) 120 minutes
C) 70 minutes
D) 60 minutes
Answer: A
Explanation: A) The time taken for the second set up on machine = 100 0.80 = 80 minutes
Diff: 2
Objective: 6
AACSB: Application of knowledge

9) As a result of learning curve, ________.
A) unit costs increase as productivity increases and the unit-cost function behaves nonlinearly
B) unit costs decrease as productivity increases and the unit-cost function behaves nonlinearly
C) unit costs increase as productivity increases and the unit-cost function behaves linearly
D) unit costs decrease as productivity increases and the unit-cost function behaves linearly
Answer: B
Diff: 2
Objective: 6
AACSB: Analytical thinking

10) The learning-curve models presented in the text examine ________.
A) how quality increases over time
B) how efficiency increases as more units are produced
C) how setup costs decline as more workers are added
D) the change in variable costs when quantity discounts are available
Answer: B
Diff: 2
Objective: 6
AACSB: Analytical thinking
11) Which of the following is a learning-curve model?
A) the cumulative average-time learning model and the incremental unit-time learning model
B) the simple regression model and the multiple regression model
C) the multicollinearity learning model and the goodness of fit learning model
D) the account analysis learning model and the conference learning method model
Answer: A
Diff: 2
Objective: 6
AACSB: Analytical think

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