Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott Test Bank

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Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott Test Bank

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Cost Management Measuring, Monitoring and Motivating Performance 2nd Edition By Susan K. Wolcott Test Bank

Chapter 2:  The Cost Function

 

 

Learning Objective True / False Multiple Choice Matching Exercises Short Answer Problems
1:  What are different ways to describe cost behavior? 1-5 1-14, 60-66

S:  75-83

1, 2 6-9,13 1, 6 2, 3, 6, 8, 9
2:  What process is used to estimate future costs? 6-10, 15-22       4, 6, 8, 9, 10
3:  How are engineered estimates, account analysis, and two-point methods used to estimate cost functions? 11-14 23-31, 33, 34, 38, 39, 59

W: 104

  1-5, 7, 8 10 4, 11 3, 5
4:  How does a scatter plot assist with categorizing a cost? 15,16 35-37, 40

W: 94

    7  
5:  How is regression analysis used to estimate a mixed cost function? 17-19 32, 43-56

S:  86-90

W: 95, 96

3 11, 14 4, 11 1, 2, 6, 7
6:  How are cost estimates used in decision making? 21-23 41, 42, 57, 58

W: 105

  2, 4, 10-13, 15 2-5, 8-10 1-9

S:  Questions from the study guide

W:  Questions from web quizzes on the student web site

 

Level of Complexity* True / False Multiple Choice Matching Exercises Short Answer Problems
Foundation:  Repeat or paraphrase information; Reason to single correct solution; Perform computations; etc. All All All 1-12, 13 1-8, 11 1-7, 9
Step 1: Identify the problem, relevant information, and uncertainties       4, 10-13, 15 3, 4, 9, 10 1-4, 7-9
Step 2: Explore interpretations and connections         8 1, 5, 6, 8
Step 3: Prioritize alternatives and implement conclusions            
Step 4: Envision and direct strategic innovation            

 

*Based on level in Steps for Better Thinking (Exhibit 1.10, textbook p. 16):

Note:  Step 1, 2, 3, and 4 questions in this test bank are intentionally open-ended and subjective, giving students the opportunity to demonstrate skills such as judgment, reasoning, identification of uncertainties, identification or analysis of pros and cons, and so on.  Therefore, student answers may not exactly match those shown in the solutions.

 

True / False

  1. Steel used in the production of automobiles would generally be classified as a direct cost.
  2. Traceability can be used as a criterion to differentiate direct and indirect costs.
  3. Textbook costs are an opportunity cost of earning a college degree.
  4. Salaries and wages you could earn while in college constitute a sunk cost.
  5. Learning curves lead to greater productivity over time.
  6. Past costs are irrelevant for both decision making and predicting future costs.
  7. Past costs are relevant for decision making, but irrelevant for predicting future costs.
  8. Past costs are irrelevant for decision making, but may be relevant for predicting future costs.
  9. The first step in estimating a cost function for relevant costs is to select a cost estimation technique.
  10. Categorizing costs by their behavior is one step in estimating relevant costs for a cost object.
  11. Managers should be trained in engineering to calculate an engineered cost estimate.
  12. Reviewing the pattern of a cost over time is a critical step in determining an engineered cost estimate.
  13. The high-low method is a specific application of the two-point method of cost estimation.
  14. The high-low method frequently distorts a cost function because it uses too many data points to make an estimate.
  15. A scatter plot provides helpful information about the relationship between a cost and a potential cost driver.
  16. Preparing a scatter plot is a requirement before applying the two-point method of cost estimation.
  17. Regression analysis is classified as simple or multiple depending upon the number of dependent variables to be estimated.
  18. Simple regression analysis produces an equation of the form: Y = a + bX + e.
  19. In regression analysis, the Adjusted R-square statistic is used to evaluate how well the cost driver explains the behavior in the cost.
  20. Uncertainties and information quality are evaluated when determining relevant costs, then not considered again.
  21. Estimates of future costs are most useful in long term budgeting.
  22. Regression analysis usually provides a higher quality cost function than the high-low method.
  23. Changes in cost behavior over time are one source of uncertainty in estimating future costs.

 

 

Multiple Choice

  1. When the cost object is a unit produced, lubricating oil for production machines would be a(n)
  2. Direct cost
  3. Indirect cost
  4. Sunk cost
  5. Opportunity cost
  6. When the cost object is a unit produced, straight-line depreciation on manufacturing equipment would be a

Variable Cost     Fixed Cost       Direct Cost

  1. No Yes                  No
  2. Yes No                   No
  3. Yes No                   Yes
  4. Yes No                   Yes
  5. Fixed costs per unit
  6. Vary inversely with changes in volume
  7. Change regardless of changes in volume
  8. Will not change over the relevant range
  9. Increase with an increase in volume
  10. Mixed costs
  11. Consist of fixed and variable costs
  12. Are constant in total
  13. Consist of the variable portion of all costs
  14. Have a constant per-unit value
  15. Mixed costs
  16. Vary with production in direct proportion to volume
  17. Vary with production but not in direct proportion to volume
  18. Do not vary with production
  19. Include only different types of fixed costs
  20. The relevant range is defined as
  21. The period of time over which costs do not change
  22. The volume of production over which the cost assumptions hold
  23. The volume of production over which step-wise fixed costs increase
  24. The time period in which the level of production does not change
  25. Which of the follow is not an assumption when estimating a cost function over the relevant range of activity?
  26. Mixed costs will change in total
  27. Mixed costs will change per unit
  28. Variable costs will be constant in total
  29. Fixed costs will be constant in total.

 

Use the following data for the next 6 questions:

Janices Kennel and Pet Spa is located in a small town in central California.  The company employs three pet attendants, four pet groomers and two front office staff who book appointments and keep records.  The spa provides a range of services for dogs and cats including boarding, grooming, and obedience training.  The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys.

  1. If the cost object is cost per day of boarding, which of the following is a direct cost?
  2. Pet food
  3. Front office staff salaries
  4. Grooming supplies
  5. Depreciation on shelving and equipment used in the grooming and retail area
  6. If the cost object is the total cost of the grooming product line, which of the following is an indirect cost?
  7. Front office staff salaries
  8. Labor cost of employees who groom pets
  9. Cost of grooming supplies
  10. Depreciation on grooming tables
  11. Which of the following is a sunk cost for any cost object related to Janices Kennel and Pet Spa?
  12. Cost of the automobile Janice is planning to buy for pet transportation
  13. Cost of existing computer equipment used to keep company records
  14. Cost of annual wages for full-time employees
  15. Cost of rent for the next period
  16. Assume Janices Kennel and Pet Spa is currently boarding ten pets. The cost of food to board one more pet is best described as a
  17. Fixed cost
  18. Marginal cost
  19. Sunk cost
  20. Mixed cost
  21. Which of the following is the best example of a discretionary cost for Janices Kennel and Pet Spa?
  22. Pet food
  23. Facility rent
  24. Wages of pet groomers
  25. Professional travel for Janice
  26. Janices relevant range of activity would best be measured in terms of:
  27. The number of staff she employs
  28. The number of pets she services
  29. The maximum amount of pet food she can buy each month based on the current budget
  30. The number of parking spaces available in the parking lot
  31. Discretionary costs reflect
  32. The costs that managers incur to purchase new production machines when the old machines need replacing
  33. Decisions about the maximum amount that will be spent next period for activities such as travel and marketing
  34. Decisions about the amount of variable costs that will be incurred next period
  35. The costs that managers incur to pay overtime when production levels are high

 

  1. Which of the following statements is true?
  2. Past costs are always relevant for decisions and are often useful in estimating future cost behavior
  3. Past costs are always relevant for decisions, but are rarely useful in estimating future cost behavior
  4. Past costs are never relevant for decisions, nor are they useful in estimating future cost behavior
  5. Past costs are never relevant for decisions, but are often useful in estimating future cost behavior
  6. The best source for determining historical costs is usually
  7. The Internet
  8. Interviews with managers
  9. The companys accounting information system
  10. Financial statements
  11. Which of the following statements is false?
  12. Information for some costs cannot easily be obtained from the accounting information system.
  13. Useful cost information is rarely available from the accounting information system.
  14. The accounting system design affects the availability of useful cost information.
  15. The nature of cost information affects its usefulness for decision making.
  16. In most accounting information systems, costs are often recorded and coded so they can be summarized based on different
  17. Cost drivers
  18. Cost objects
  19. Volumes of activity
  20. Independent variables
  21. Past cost information, although accurate in predicting future costs, may be
  22. Unavailable
  23. Irrelevant

III.    Outdated

  1. I and II only
  2. II and III only
  3. II only
  4. I, II, and III
  5. Managers go through a series of questions to decide whether to use past costs to estimate future costs. Which of the following questions is least likely to be one of them?
  6. Is the cost relevant to the decision?
  7. Is the cost highly discretionary?
  8. Is the cost an engineered estimate?
  9. Is the cost expected to change?
  10. Estimating a cost function using past cost data to help determine future costs is useful if
  11. Past costs are irrelevant and highly discretionary
  12. Past costs are irrelevant and not discretionary
  13. Past costs are relevant and highly discretionary
  14. Past costs are relevant and not discretionary
  15. After estimating a past cost function, managers
  16. May need to update it for future changes.
  17. Have all of the information they need to predict future costs

III.    May or may not use it to estimate future costs.

  1. I only
  2. II only
  3. II and III only
  4. I and III only

 

Use the following data for the next 3 questions.

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year.  The following data are available:

Direct            Maintenance

Month                Labor Hours      Costs Incurred

January                  4,000                   $   900

February                6,500                     1,325

March                    7,000                     1,500

April                      5,500                     1,150

  1. Using the high-low method, what is the variable maintenance cost per direct labor hour?
  2. $1.00
  3. $0.10
  4. $0.20
  5. $1.50
  6. Using the high-low method, what is the fixed maintenance cost?
  7. $500
  8. $300
  9. $200
  10. $100
  11. Using the high-low method, what is the cost function for maintenance costs?
  12. $500 + $1.00 per direct labor hour
  13. $300 + $1.50 per direct labor hour
  14. $100 + $0.20 per direct labor hour
  15. $200 + $0.10 per direct labor hour
  16. The major disadvantage of the high-low method is that
  17. It uses the two most extreme data points in determining a cost function
  18. It is difficult to calculate
  19. It is difficult to understand
  20. It involves more judgmental factors than do other methods

 

Use the following data for the next 3 questions.

Cosby Company is attempting to develop the cost function for repair costs.  The following past data are available:

Machine Hours        Repair Costs

4,800                   $6,385

3,400                     4,585

4,000                     5,285

5,900                     7,085

  1. Using the high-low method, what is the variable repair cost per machine hour?
  2. $0.15
  3. $1.00
  4. $4.00
  5. $5.00
  6. Using the high-low method, what is the fixed repair cost?
  7. $1,185
  8. $850
  9. $475
  10. $565
  1. Using the high-low method, what is the estimated repair cost for 4,500 machine hours?
  2. $5,785
  3. $5,585
  4. $5,685
  5. $5,985

 

Use the following data for the next 2 questions.

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25.  The company managers wish to estimate the overhead cost function.

  1. What is the variable overhead cost per machine hour?
  2. $1.00
  3. $2.00
  4. $6.00
  5. $8.00
  6. What is the fixed overhead cost?
  7. $15,750
  8. $36,750
  9. $21,000
  10. $18,000
  11. Assuming that a cost is mixed and linear, and that past cost behavior is expected to continue into the future, which of the following is mostly likely the best technique for estimating future costs?
  12. Engineered estimate of cost
  13. Two-point method
  14. Scatter plot
  15. Regression analysis
  16. Managers analyze production activities and assign costs based on the estimated amount of resources used when they use this method.
  17. A scatter plot
  18. The high-low method
  19. Regression analysis
  20. Engineered estimate of cost
  21. Reviewing cost behavior patterns over time from the accounting records and using that review to predict future costs best describes
  22. Regression analysis
  23. Scatter plots
  24. Analysis at the account level
  25. Two-point methods
  26. Which of the following techniques relies on visual analysis?
  27. Scatter plots
  28. Analysis at the account level
  29. High-low method
  30. Engineered estimate of cost
  31. A scatter plot is especially useful when managers wish to
  32. Compute a cost function
  33. Update a past cost function for future changes
  34. Study the relationship between a cost and a potential cost driver
  35. Analyze cost behavior when only one period of data is available
  1. The trend line from a scatter plot can be used to identify data points for
  2. The two-point method
  3. Analysis at the account level
  4. Engineered estimate of cost
  5. Regression analysis
  6. The high-low method is a specific application of this method of cost estimation
  7. Two-point
  8. Scatter plot
  9. Engineered estimate of cost
  10. Analysis at the account level
  11. Which of the following is the most valid criticism of the high-low method?
  12. It never produces accurate results
  13. It is mathematically too complex for most managers to comprehend
  14. It is a specialized case of the two-point method
  15. Data points might be outside the normal range of activity
  16. A manager might use this method to create a graph of cost behavior without any statistical techniques
  17. Engineered estimate of cost
  18. High-low method
  19. Scatter plot
  20. Regression analysis
  21. Which of the following cost estimation techniques makes assumptions about the data being analyzed?
  22. Analysis at the account level
  23. Two-point method

III.       Regression analysis

  1. I only
  2. I and II only
  3. II and III only
  4. I, II, and III
  5. Which cost estimation technique is useful in all situations?
  6. Analysis at the account level
  7. Regression analysis
  8. Two-point method
  9. No one method is useful in all situations
  10. An organizations accountant is estimating next periods total overhead costs. She performed two regression analyses, one based on direct labor hours and the other based upon machine hours.  The results were:

 

Total overhead = $150,000 + $4 x direct labor hours

Adjusted R-square = 0.65

 

Total overhead = $130,000 + $5 x machine hours

Adjusted R-square = 0.77

For the next period the accountant anticipates using 28,000 direct labor hours and 26,000 machine hours.  Based upon this information, what is the best estimate for overhead for the next period?

  1. $262,000
  2. $260,000
  3. $254,000
  4. $270,000
  1. (Appendix 2A) Which of the following is not an assumption of linear regression analysis
  2. The error terms have a constant variance
  3. The error terms are independent
  4. A linear relationship exists between the dependent and independent variables
  5. There is a cause and effect relationship between the dependent and independent variables
  6. Which of the following are forms of regression analysis?
  7. Quantitative and qualitative
  8. Fixed and variable
  9. Simple and multiple
  10. Financial and managerial
  11. Simple regression analysis differs from multiple regression analysis based on the number of
  12. Cost drivers used
  13. Costs predicted
  14. Data points incorporated
  15. Personnel analyzing the data
  16. Simple regression minimizes the distance from each data point to
  17. A trend line
  18. The y-intercept
  19. The error term
  20. The x-axis
  21. Which of the following is an alternative name for a cost driver in a regression analysis?
  22. Dependent variable
  23. Independent variable
  24. Beta
  25. Error term
  26. Which of the following is an alternative name for the cost being predicted in a regression analysis?
  27. Dependent variable
  28. Independent variable
  29. Beta
  30. Slope
  31. Regression analysis works best when the relationship between costs and cost drivers is
  32. Positive and linear
  33. Linear and direct
  34. Positive and indirect
  35. Positive, linear, and indirect
  36. In a regression equation, fixed costs are represented by the
  37. Slope
  38. Intercept
  39. Error term
  40. Adjusted R-square coefficient
  41. In a regression equation, variable costs are represented by the
  42. Slope
  43. Intercept
  44. Adjusted R-square coefficient
  45. t-statistic

 

Use the following graphs for the next 2 questions.

 

 

  1. Which graph shows data that are more suitable for regression analysis?
  2. Graph A
  3. Graph B
  4. Neither Graph A nor Graph B
  5. Cannot be determined
  6. Simple regression analysis output produces a variety of information and statistics. Which of the following statistics provides information for fixed costs?
  7. T-statistic and p-value for the alpha coefficient
  8. T-statistics for alpha and beta coefficients
  9. Adjusted R-square
  10. P-values for alpha and beta coefficients
  11. Simple regression analysis output produces a variety of statistics. Which of the following statistics provides information for variable costs?
  12. Adjusted R-square
  13. P-values for alpha and beta coefficients
  14. T-statistic and p-value for the beta coefficient
  15. T-statistics for alpha and beta coefficients
  16. Simple regression analysis output produces a variety of statistics. Which of the following statistics best summarizes how well the cost driver explains the behavior of the cost?
  17. T-statistics for alpha and beta coefficients
  18. T-statistic and p-value for the alpha coefficient
  19. P-values for alpha and beta coefficients
  20. Adjusted R-square
  21. When estimating future costs, information quality is higher when
  22. Costs must be allocated
  23. The accounting system can trace relevant costs to a cost object
  24. The regression Adjusted R-square is near zero
  25. Most costs are fixed, rather than variable
  26. Past cost information might be too unreliable for future cost estimation because
  27. An organization has been operating too long in a stable environment
  28. The costs are primarily mixed
  29. A company has added a new product line
  30. Managers expect no changes in the cost function
  1. This method of estimating future costs can be used when only one period of data is available.
  2. Scatter plot
  3. High-low method
  4. Analysis at the account level
  5. Regression analysis

 

 

More Difficult Multiple Choice

These multiple choice questions require more complex computations or present information differently than in the textbook.

 

Use the following information for the next 3 questions.

Consider the following cost data for the cost object, number of machine setups.  Each set of costs (A, B, and C) is from a different type of manufacturing operation and represents the cost behavior for the cost of that companys machine setups.

Number of

Machine Setups      Cost A             Cost B              Cost C

0                $    0                  $80                $    5

10                    20                    79                    37

20                    40                    82                    66

30                    60                    78                    91

40                    80                    81                  123

50                  100                    79                  154

  1. Cost A is best described as
  2. Fixed
  3. Variable
  4. Mixed
  5. Direct
  6. Cost B is best described as
  7. Fixed
  8. Variable
  9. Mixed
  10. Discretionary
  1. Cost C is best described as
  2. Fixed
  3. Variable
  4. Mixed
  5. Indirect

 

Use the following information for the next 3 questions.

Three different divisions of a toy manufacturing company are estimating costs for their human resources departments.  Each division has a cost structure that is different from the other divisions and those structures are represented by the following cost behavior patterns (A, B, and C).

Number of

Employees          Cost A             Cost B              Cost C

0                $    0                $120                $118

25                    50                  118                  180

50                  100                  123                  245

75                  125                  124                  296

100                  200                  119                  360

  1. Which cost is best described as fixed?
  2. Cost A
  3. Cost B
  4. Cost C
  5. Cost B and Cost C
  6. Which cost is best described as variable?
  7. Cost A
  8. Cost B
  9. Cost C
  10. Cost A and Cost C
  11. Which cost is best described as mixed?
  12. Cost A
  13. Cost B
  14. Cost C
  15. Cost B and Cost C
  16. A firm has the capacity to produce 3,100 units per week. At 80% capacity, the average total cost per unit is $12.50 and the average variable cost per unit is $7.50.  What is the total fixed cost per week, assuming the firm is still operating within its relevant range?
  17. $10,400
  18. $14,400
  19. $ 8,400
  20. $12,400

 

 

Multiple Choice from Study Guide

s75.      Fixed costs

  1. Do not vary in total within the relevant range
  2. Do not vary on a per-unit basis within the relevant range
  3. Vary on a per-unit basis in direct proportion to changes in the cost driver within the relevant range
  4. Vary in total as the cost driver changes within the relevant range

 

s76.      Variable costs

  1. Do not vary in total within the relevant range
  2. Do not vary on a per-unit basis within the relevant range
  3. Vary on a per-unit basis within the relevant range
  4. Both (a) and (c)

s77.      Which of the following could be defined as a cost object?

  1. A single unit of product in a manufacturing process
  2. A batch of products in a manufacturing process
  3. A business process, such as managing accounts receivable
  4. All of the above

s78.      Which of the following statements is false?

  1. A cost can be defined as a direct cost if the bookkeeping system can keep track of how much of the cost was consumed by the cost object
  2. Whether a cost is direct or indirect cannot be determined until the cost object has been defined
  3. If the cost object is a batch of 1000 units of production, then factory property taxes could be a direct cost if the bookkeeping system is detailed enough
  4. Some indirect costs might have been considered direct costs if a company had better technology for capturing information

s79.      The total cost of salaries of production supervisors, where 2 supervisors are needed for each 8-hour shift, where the relevant range is 0 units to the number of units that can be produced at full capacity using 2 8-hour shifts is a

  1. Fixed cost
  2. Variable cost
  3. Mixed cost
  4. Stepwise linear cost

s80.      The total cost of materials, where the supplier charges $9/lb if 0-1000 pounds are purchased, $8/lb if 1001-2000 pounds are purchased and $7 if 2001 or more pounds are purchased, is a

  1. Fixed cost
  2. Variable cost
  3. Mixed cost
  4. Stepwise linear cost

s81.      The rent on a store, where the landlord charges $1,200 per month plus a percentage of sales revenue, is a

  1. Fixed cost
  2. Variable cost
  3. Mixed cost
  4. Stepwise linear cost

s82.      The depreciation on a factory machine is a

  1. Fixed cost
  2. Variable cost
  3. Mixed cost
  4. Stepwise linear cost

s83.      Which of the following statements is true?

  1. Opportunity costs are never relevant for decision making
  2. Discretionary costs are never relevant for decision making
  3. Marginal costs are never relevant for decision making
  4. Sunk costs are never relevant for decision making

s84.      If firm A has a learning curve with 90% learning and firm B has a learning curve with 80% learning, then

  1. Firm A has more experienced workers
  2. Firm B will be more cost efficient over time
  3. Firm A workers learn more quickly
  4. Firm B has less experienced workers

s85.      A firms production is expected to show an 85% learning rate. The first unit took 200 hours to produce. The second unit will take

  1. 170 hours
  2. 140 hours
  3. 200 hours
  4. 289 hours

s86.      A high adjusted R-square for the regression of a cost against a cost driver indicates

  1. The predicted linear relationship between the cost and the cost driver is probably correct
  2. The relationship between the cost and the cost driver is probably linear
  3. The cost driver explains a high percentage of the variation of the cost
  4. The cost driver is statistically significant

s87.      A p-value of 1% for the intercept term in a regression of a cost driver against a cost indicates

  1. The true fixed costs are statistically significantly different from zero
  2. There is only a 1% chance the true fixed costs are zero
  3. The variable costs are immaterial in this cost function
  4. Both (a) and (b)

s88.      A p-value of 89% for the slope coefficient in a regression of a cost driver against a cost indicates

  1. The true variable costs are statistically significantly different from zero
  2. There is only an 11% chance the true variable costs are zero
  3. The relationship between the cost and the cost driver is nonlinear
  4. None of the above

s89.      The difference between simple regression and multiple regression is that

  1. Simple regression is easier to perform in Excel than multiple regression
  2. Simple regression is only performed once when estimating a cost function, whereas multiple regression is performed more than once
  3. Simple regression uses only one cost driver, whereas multiple regression uses more than one cost driver
  4. Simple regression is for estimating only one cost, and multiple regression is for estimating more than one cost

s90.      A regression of total selling expenses against number of units sold yields an intercept of 178,024 and a slope of 12.3. This indicates that

  1. Total fixed selling expenses are predicted to be $178,024.
  2. Variable selling expenses are predicted to be $12.30/unit.
  3. Total selling expenses are predicted to be $190,324 when 1000 units are sold
  4. All of the above

 

 

Multiple Choice from Web Quizzes (Available on Student Web Site)

 

w91.     If we are determining costs for a particular case at a law office, the cost of rent for the office would be

  1. A direct cost
  2. An indirect cost
  3. A mixed cost
  4. An irrelevant cost

w92.     If we want to estimate the cost of lumber for manufacturing chairs, the cost function most likely reflects

  1. Only a variable cost
  2. Only a fixed cost
  3. A mixed cost
  4. An irrelevant cost

w93.     Which one of following is not a reason to take into account the relevant range when estimating a cost?

  1. The cost function is nearly linear within a relevant range
  2. It is reasonable to assume that fixed costs remaining fixed in this range
  3. It is reasonable to assume that variable costs remain constant in this range
  4. We cannot make assumptions about linearity within a relevant range

w94.     If you create a scatter plot of a cost against a cost driver

  1. You gain information about whether there is a seeming relation between the cost and cost driver
  2. For all costs, you will have completed your analysis
  3. You gain no new information about the relationship between the cost and cost driver
  4. You will not need to perform regression analysis to estimate the cost function

w95.     In a regression analysis for estimating a cost function, t-statistics and their p-values do not provide information about

  1. Whether the cost and cost drivers are related
  2. How confident we can be that the intercept or slope coefficients are different from zero
  3. The amount of variation in cost that is explained by variation in the cost driver
  4. Whether the cost is totally fixed, totally variable, or mixed

w96.     In a regression analysis for estimating a cost function, the adjusted R-Square statistic provides information about

  1. The amount of variation in cost that is explained by variation in the cost driver
  2. The size of the slope coefficient
  3. Whether the cost is a fixed, variable, or mixed cost
  4. How confident we can be that the intercept or slope coefficients are different from zero

w97.     Marginal cost is

  1. The average cost per unit
  2. The incremental cost of the next unit
  3. Not relevant for decision making
  4. Constant even if the relevant range changes

w98.     All of the following are true about average cost per unit except

  1. Average cost equals variable cost per unit plus average fixed cost per unit
  2. Average costs are used in financial statements
  3. Average costs are usually irrelevant for decision making because they include a portion of fixed cost
  4. Average costs are usually good estimates of future costs

w99.     Opportunity costs are

  1. Benefits foregone from one project because another project is chosen
  2. Irrelevant
  3. The same as sunk costs
  4. Easy to value

w100.   Sunk costs are

  1. The same as opportunity costs
  2. Expenditures made in the past
  3. Relevant to decisions
  4. Difficult to value

w101.   Direct costs are

  1. Costs that need to be assigned but cannot be traced easily to cost objects
  2. Only variable costs
  3. Costs that can easily be traced to cost objects
  4. Only fixed costs

w102.   Indirect costs are

  1. Costs that need to be assigned but cannot easily be traced to cost objects
  2. Only variable costs
  3. Costs that can easily be traced to cost objects
  4. Only fixed costs

w103.   All of the following are examples of variable costs except

  1. The cost of tires if the cost object is the number of automobiles produced
  2. Professional labor cost when the cost object is the audit of a business
  3. The cost for wood in a baseball bat manufacturing company if the cost object is bats produced
  4. The cost to lease a manufacturing plant if the cost object is the product manufactured

w104.   All of the following are true about analysis at the account level except

  1. It is a method for separating fixed and variable costs
  2. It uses information from the general ledger
  3. It is a qualitative method for separating costs
  4. It requires very little judgment to determine cost behavior

w105.   All of the following are assumptions for developing and using a cost linear function except

  1. Past costs rarely need updating to be good predictors of future costs
  2. Operations are within the relevant range
  3. Variable costs remain constant within the relevant range
  4. Fixed costs remain fixed within the relevant range

w106.   The relevant range in cost accounting is the range over which

  1. Costs may fluctuate
  2. Cost relationships are valid
  3. Production may vary
  4. Relevant costs are incurred

w107.   (CMA) Cost drivers are

  1. Activities that cause costs to increase as the activity increases
  2. Accounting techniques used to control costs
  3. Accounting measurements used to evaluate whether or not performance is proceeding according to plan
  4. A mechanical basis, such as machine hours, computers time, size of equipment, or square footage used to assign costs to activities.

Matching

  1. ABC Manufacturing wants to determine whether its various product costs are direct or indirect, and variable or fixed. This information will be used to determine product unit costs.  All employees are guaranteed a 40 hour work-week except factory employees, who are paid an hourly wage and can be sent home when there is no work.  The following classification scheme has been developed:
  2. Direct variable cost
  3. Indirect variable cost
  4. Direct fixed cost
  5. Indirect fixed cost

Using the categories shown above, indicate how each of the following costs should be classified if the cost object is a single unit of product:

____    1.   Labor in the maintenance department

____    2.   Glue and tacks used in production

____    3.   Lubricating oil for production machines

____    4.   Salary of the plant accountant

____    5.   Oil used for monthly preventive maintenance on production machines

____    6.   Insurance on the plant machinery

____    7.   Hourly factory wages

____    8.   Wages in the materials receiving and handling department

____    9.   Taxes on plant equipment

____  10.   Shipping costs for direct materials

 

  1. Various terms are listed in the right-hand column below; several definitions are listed on the left. Match the appropriate term with each definition.  Some of the lettered terms may be used more than once, while others may not be used at all.  Each numbered definition has only one best response.
____    1.   A thing or activity for which managers measure costs

____    2.   Input or activity that causes changes in costs

____    3.   Analysis at the account level

____    4.   Cost incurred in the past

____    5.   Easily traced to individual cost objects

____    6.   Has a cause-and-effect relationship with costs

____    7.   Often estimated based on a budget established by management

____    8.   Often increase in a stepwise manner

____    9.   Benefits of the next best alternative that we forego when we make a decisions

____  10.   Represented mathematically as
TC = F + V x Q

____  11.   Scatter plots

____  12.   Span of activity for which cost behavior can be reliably predicted

A.  Cost driver

B.   Cost estimation method

C.   Cost object

D.  Direct cost

E.   Fixed cost

F.   Indirect cost

G.  Opportunity cost

H.  Mixed cost

I.    Discretionary cost

J.    R-square statistic

K.  Relevant range

L.   Sunk cost

 

  1. The steps for using regression analysis to estimate a cost function are listed below in random order. Correctly number the steps from 1 to 8.

____    Write the cost function.

____    Plot the cost for each potential cost driver.

____    Perform the regression analysis.

____    Generate a list of possible cost drivers.

____    Gather cost and cost driver data.

____    Evaluate the sign and significance of the cost functions components.

____    Discard potential cost drivers that fail to explain a high proportion of variability in the cost.

____    Consider the behavior of the cost.

 

 

Exercises

  1. The average cost of producing 200 units is $82 for Alpha Company. If production increases by 300 units, the average cost falls to $61.
  2. What is the variable cost per unit?
  3. What is the fixed cost?
  4. What is the average cost of producing 250 units?
  5. Total fixed costs are $20,000 per month and last month total variable costs were $7,000 when total revenue was $28,000.
  6. Write the algebraic expression for this flexible budget for total cost.
  7. What assumptions are made for a linear cost function like this?
  8. The average cost to produce 10,000 units is $88.00, and the average cost to produce 15,000 units is $84.00.
  9. Develop a cost function for this cost.
  10. Estimate the average cost to produce 18,000 units.
  11. Total fixed costs are $25,000 per year. The variable cost per unit is $10.00 per unit up to 5,000 units per year and $7.50 per unit thereafter.
  12. Develop a cost function for this cost.
  13. What could cause the change in variable costs shown above? Explain
  14. List three assumptions that are made when developing these types of cost functions and give one reason that each assumption might not hold
  15. Strawser Company is developing a cost function for its maintenance costs using the high-low method. The following data have been collected for the past year:

Direct Labor          Maintenance

Quarter             Hours              Costs Incurred

1                     5,000                   $   745

2                     6,500                        820

3                     7,000                        850

4                     8,000                     1,000

 

Calculate the following amounts:

  1. The variable cost per direct labor hour
  2. The fixed cost
  3. The estimated total cost for 9,000 direct labor hours
  4. The estimated total cost for 6,000 direct labor hours

 

 

  1. Chabus managerial accountant, Yi-Fan, is classifying the companys costs according to their behavior to prepare next years budget. Therefore, the cost object is the entire company.  Chabu produces and sells aluminum beverage cans, such as those used for soft drinks.  You may find the following facts about Chabus operation useful in responding to this problem:
  • Production machines must be cleaned monthly, regardless of the amount of use.
  • The more cans produced, the more lubrication is needed.
  • Chabus monthly production and sales volume is usually at least 1,000 cans, but can be as much as 5,000 cans depending on demand.
  • Material handling costs include depreciation on equipment and fuel for loaders.
  • Cans are packaged into 100-unit groups prior to sale.
  • Research and development costs vary between $10,000 and $10,500 per month
  • The factory maintenance costs vary between $6,000 and $6,500 monthly.
  • Chabus staff level is constant at 25 people, who are all paid salaries.
  • Raw materials are purchased based on expected production levels.
  • Sales commissions (based on a per-case amount) are included in marketing department costs.

Yi-Fan has classified the costs into three categories:  fixed, variable, and mixed.

Place an X in the appropriate column of the table below to indicate the most likely behavior of each cost:

 

  Fixed Variable Mixed
Oil to lubricate the machines      
Salary of the plant manager      
Annual subscription to a trade journal      
Vacation pay for salaried production employees      
Packaging materials      
Research and development      
Raw materials      
Material handling costs      
Marketing department costs      
Factory maintenance      

 

  1. The following data were obtained from the accounting information system of POC Corporation:

Production

Units         Raw Materials       Factory           Manager

Month          Produced             Used              Supplies             Salary

January              60             $1,560                $550             $3,000

February            80               2,000                  700               3,000

March                50               1,300                  475               3,000

April                  30                  775                  325               3,000

 

  1. Describe the behavior of each of the costs shown above as fixed, variable or mixed. You may wish to draw scatter plots or analyze the cost using your knowledge of costs and the actual variation in cost pattern from above (in other words, perform an informal analysis at the account level).
  2. Use the data for February and March and the two-point method to determine a cost function for any mixed cost(s).
  3. Use the high-low method to determine a cost function for any mixed cost(s).

 

  1. Consider the pairs of data presented below for 3 costs of USM Corporation:

Cost Driver A  Cost A        Cost Driver B  Cost B        Cost Driver C  Cost C

0         1,200                      0                0                      0            600

80         1,380                  130         1,735                  110            890

175         1,495                  130         1,735                  209         1,200

244         1,475                  314         5,488                  325         1,500

377         1,390                  422         6,987                  457         1,700

462         1,500                  507         8,723                  560         2,000

 

  1. Using scatter plots or other informal methods such as studying the variation in cost compared to the variation in cost driver, describe the behavior of each cost.
  2. For each cost that you described above, give one example of a cost that would behave similarly. For variable and mixed costs, also identify the cost driver.

 

  1. (Appendix 2B) The managers of Web Design Services Company hired three recent college graduates. When they began preparing simple web pages, it took about ten hours to complete the first page. The supervisor believes a 90% learning rate is typical for this type of work. Note: ln(90%) / ln(2) = 0.152.
  2. Estimate the cumulative average time per page to prepare six web pages.
  3. Estimate the total time to prepare ten web pages.

 

  1. Stacy Kuh, the manager of the Ice Cream Igloo, has been told that to earn a reasonable profit she should price her products at 200% of the cost of ingredients. Ms. Kuh has gathered the following data on the cost of ingredients used to make a banana split.
  • The distributor charges $12.00 for a dozen bananas; each banana split uses one banana.
  • Ice cream costs $3.20 per gallon; each banana split uses two cups of ice cream.
  • One gallon of ice cream equals thirty-two cups of ice cream.
  • Stacy makes her own fruit toppings at a cost of $0.25 per tablespoon; each banana split uses six tablespoons of fruit toppings.
  • Each banana split uses three tablespoons of premium chocolate sauce, which costs $0.25 per tablespoon.
  • The cost of other miscellaneous ingredients, such as whipped cream and nuts, totals $0.05 per banana split.
  1. Calculate the cost of a banana split.
  2. List two factors that could cause these estimated costs to be inaccurate.

 

  1. Following are the results from two different simple regression analyses estimating the costs of the purchasing department using number of purchase orders and number of vendors as potential cost drivers.

 

Purchasing costs vs. Number of purchase orders
Variable Coefficient t-statistic p-value
Intercept 497.25 3.39 0.04
Number of purchase orders 18.72 5.48 0.001
Adjusted R-square = 0.79  

 

Purchasing costs vs. Number of vendors
Variable Coefficient t-statistic p-value
Intercept 691.15 1.45 0.25
Number of vendors 115.88 2.75 0.15
Adjusted R-square = 0.53  

 

  1. Which independent variable explains more of the variation in purchasing costs? Explain your choice.
  2. Choose the most appropriate cost driver and write the cost function.
  3. For an upcoming month, the number of vendors is estimated to be 150, while the number of purchas

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