Deck 23: Cost Estimation and Cost Behaviour

Question 1

In the method of least squares, the deviation is the difference between the

A)predicted and estimated costs.
B)predicted and average costs.
C)average and actual costs.
D)predicted and actual costs.

Answer 1

D

Question 2

Greene Enterprises has the following information about its truck fleet miles and operating costs: $$\begin{array} { c c c } \text { Year } & \text { Miles } & \text { Operating Costs } \\2005 & 400,000 & £ 256,000 \\2006 & 480,000 & 280,000 \\2007 & 560,000 & 320,000\end{array}$$ What is the best estimate of total costs using the high-low method if the expected fleet mileage for 2008 is 500,000 miles?

A)£288,000
B)£296,000
C)£256,000
D)£320,000

Answer 2

£296,000

Question 3

The following information was available about supplies cost for the second quarter of the year: $\begin{array}{ccc}\text { Month } & \text { Production Volume } & \text { Supplies Cost } \\\text { April } & 700 & £ 3,185 \\\text { May } & 1,600 & 7,100 \\\text { June } & 600 & 2,700\end{array}$ Using the high-low method, the estimate of supplies cost at 1,000 units of production is

A)£2,700.
B)£4,460.
C)£4,900.
D)£7,100.

Answer 3

£4,460.

Question 4

Figure 23-2
The following information is available for maintenance costs: $$\begin{array} { l c c } \text { Month } & \text { Production Volume } & \text { Maintenance Costs } \\\text { January } & 75 & £ 250 \\\text { February } & 115 & 310 \\\text { March } & 190 & 400 \\\text { April } & 60 & 240 \\\text { May } & 135 & 355\end{array}$$

-Refer to Figure 23.2. Using a computer or calculator, compute the estimate of variable cost per unit of production using the method of least squares. Rounded to two decimal places, this value would be
a.£3.21.
b.£2.70.
c.£1.31.
d.£1.23.

Question 5

The following information was taken from a computer printout generated with the least-squares method for use in estimating overhead costs: $\begin{array}{lr}\text { Slope } & 45 \\\text { Intercept } & 5,700 \\\text { Correl ation coefficient } & 72 \\\text { Activity variable } & \text { Direct labour hours }\end{array}$

A)Overhead = £5,700 - £45X.
B)Overhead = £5,700 + £45X.
C)Overhead = £5,700 + (£45 *0.72).
D)Overhead = £5,700 * 0.72.

Question 6

Assume the following information: $$\begin{array} { l c } \text { Volume } & \text { Total Cost } \\80 \text { units } & £ 1,200 \\88 \text { units } & £ 1,300 \\96 \text { units } & £ 1,400\end{array}$$ What is the variable cost per unit?

A)£15.00
B)£14.78
C)£13.75
D)£12.50

Question 7

Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year's high and low observations were as follows: $$\begin{array} { c c } \text { Maintenance Cost } & \text { Sales } \\£ 36,000 & £ 400,000 \\£ 42,000 & £ 600,000\end{array}$$ What is the fixed portion of the maintenance cost?

A)£24,000
B)£42,000
C)£30,000
D)£12,000

Question 8

In the formula Y = a + bx, a refers to the

A)slope.
B)intercept.
C)dependent variable.
D)independent variable.

Question 9

In the formula Y = a + bx, Y refers to the

A)slope.
B)intercept.
C)dependent variable.
D)independent variable.

Question 10

In the formula Y = a + bx, x refers to the

A)slope.
B)intercept.
C)dependent variable.
D)independent variable.

Question 11

The scatterplot method of cost estimation

A)is influenced by extreme observations.
B)requires the use of judgment.
C)uses the least-squares method.
D)is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.

Question 12

The high-low method may give unsatisfactory results if

A)the data points all fall on a line.
B)volume of activity is heavy.
C)volume of activity is light.
D)the points are unrepresentative.

Question 13

Which of the following decision-making tools would NOT be useful in determining the slope and intercept of a mixed cost?

A)linear programming
B)least-squares method
C)high-low method
D)scatter diagrams

Question 14

Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: $$\begin{array} { c c c } \text { Month } & \text { Cost of Electricity } & \text { Direct labour Hours } \\\text { January } & £ 8,100 & 750 \\\text { April } & 9,000 & 850 \\\text { July } & 10,200 & 1,000 \\\text { October } & 8,700 & 800\end{array}$$ Using the high-low method, which of the following is the best equation?

A)Y = £900 + £12.00X
B)Y = £900 + £8.40X
C)Y = £1,800 + £8.40X
D)Y = £2,400 + £8.40X

Question 15

The following information is available for electricity costs for the last six months of the year: $\begin{array}{lll}\text { Month }& \text { Production Volume } &\text { Electricity Costs }\\\text { July } & 1,400 & £ 3,150 \\\text { August } & 2,800 & 5,400 \\\text { September } & 3,200 & 5,700 \\\text { October } & 1,750 & 3,900 \\\text { November } & 1,200 & 2,400 \\\text { December } & 2,100 & 4,050\end{array}$ Using the high-low method, estimated variable cost per unit of production is

A)£1.26.
B)£1.53.
C)£1.65.
D)£1.77.

Question 16

Weaknesses of the high-low method include all of the following EXCEPT

A)only two observations are used to develop the cost function.
B)the high and low activity levels may not be representative.
C)the method does not detect if the cost behaviour is nonlinear.
D)the method is relatively complex and difficult to apply.

Question 17

Advantages of the method of least squares over the high-low method include all of the following EXCEPT

A)a statistical method is used to mathematically derive the cost function.
B)only two points are used to develop the cost function.
C)the squared differences between actual observations and the line (cost function) are minimized.
D)all the observations have an effect on the cost function.

Question 18

In the formula Y = a + bx, b refers to the

A)slope.
B)intercept.
C)dependent variable.
D)total variable costs.

Question 19

Baker Enterprises developed a cost function for manufacturing overhead costs of Y = £8,000 + £1.60X. Estimated manufacturing overhead costs at 10,000 units of production are

A)£16,000.
B)£17,600.
C)£24,000.
D)£26,000.

Question 20

In the formula Y = a + bx, bx refers to the

A)total variable costs.
B)intercept.
C)dependent variable.
D)independent variable.

Question 21

Which of the following statements is NOT true?

A)In selecting an independent variable for cost behaviour analysis, it is important to determine the activity that causes the cost being analyzed to occur.
B)Professional judgment is very important in selecting an activity measure for a particular cost.
C)A high correlation between two variables proves that one causes the other.
D)The least-squares cost estimation method can be used to measure the linear function.

Question 22

The appropriate range for the coefficient of correlation (r) is

A)0 $\le$ r $\le$ 1.
B)-% $\le$ r $\le$ +%.
C)-1 $\le$ r $\le$ 1.
D)-1 $\le$ r $\le$ +%.

Question 23

Figure 23-3
Abboud Company is planning to introduce a new product with an 80 percent cumulative learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning.
Refer to Figure 23-3. What is the cumulative total time (labour hours) to produce 2,000 units?

A)100 hours
B)80 hours
C)160 hours
D)20 hours

Question 24

Figure 23-3
Abboud Company is planning to introduce a new product with an 80 percent cumulative learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning.
Refer to Figure 23-3. What is the individual unit time (labour hours) to produce 2,000 units?

A)100 hours
B)80 hours
C)20 hours
D)60 hours

Question 25

The following computer printout estimated overhead costs using multiple regression: $\begin{array}{lrrrr}&&\text { t for H(0) }&&\text {Std. error}\\\text {Parameter}&\text { Estimate } &\text { Parameter }=0 & \text { P r}>t & \text { of parameter }\\\hline\text { Intercept } & 1000 & 1.96 & 0.0250 & 510.204 \\\text { Setup hours } & 25 & 81.96 & 0.0001 & 0.305 \\\text { \# of parts } & 100 & 9.50 & 0.0001 & 10.527\end{array}$


$\begin{array}{lc}\text { R Square }\left(\mathrm{R}^{2}\right) & 0.94 \\\text { Standard Error }\left(\mathrm{S}_{\mathrm{e}}\right) & 75.00 \\\text { Observations } & 160\end{array}$
The model being measured is

A)Overhead = 1,000 + 25(Setup hours) + 100(# of parts).
B)Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts).
C)Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts).
D)Overhead = 1,000 + 25(Setup hours).

Question 26

Abboud Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning. What is the cumulative total time (labour hours) to produce 2,000 units?

A)100 hours
B)80 hours
C)160 hours
D)180 hours

Question 27

The following computer printout estimated overhead costs using linear regression: $\begin{array}{lcccc} &&\text { t for H(0) }&&\text {Std. error}\\\text {Parameter}&\text { Estimate } &\text { Parameter }=0 & \text { P r}>t & \text { of parameter }\\\hline\text { Intercept}& 100.41 & 4.81 & 0.0003 & 20.88 \\\text { DLH } & 14.05 & 6.78 & 0.0001 & 2.07\end{array}$


$\begin{array}{lc}\text { R Square }\left(\mathrm{R}^{2}\right) & 0.80 \\\text { Standard Error }\left(\mathrm{S}_{\mathrm{e}}\right) & 25.03 \\\text { Observations } & 17\end{array}$ Table of Selected Values: t Distribution $$\begin{array} { c c c c } \text { Degrees of Freedom } & 90 \% & 95 \% & 99 \% \\15 & 1.753 & 2.131 & 2.947 \\16 & 1.746 & 2.120 & 2.921 \\17 & 1.740 & 2.110 & 2.898 \\18 & 1.734 & 2.101 & 2.878 \\19 & 1.729 & 2.093 & 2.861\end{array}$$ What is the interval around Y if 95 percent confidence is desired?

A)Y ± 20.024
B)Y ± 43.87759
C)Y ± 52.8133
D)Y ± 53.33893

Question 28

What does a correlation coefficient near -1 mean?

A)Two variables are moving in the opposite direction.
B)Two variables are moving in the same direction.
C)Two variables are unrelated.
D)One variable is not a good predictor of the other.

Question 29

What does a correlation coefficient near +1 mean?

A)Two variables are moving in the opposite direction.
B)Two variables are moving in the same direction.
C)Two variables are unrelated.
D)One variable is not a good predictor of the other.

Question 30

Figure 23-2
The following information is available for maintenance costs: $$\begin{array} { l c c } \text { Month } & \text { Production Volume } & \text { Maintenance Costs } \\\text { January } & 75 & £ 250 \\\text { February } & 115 & 310 \\\text { March } & 190 & 400 \\\text { April } & 60 & 240 \\\text { May } & 135 & 355\end{array}$$

-Refer to Figure 23.2 in the above question. Using a computer or calculator, compute the estimate of maintenance costs at 100 units of production using the method of least squares. This value would be
a.£291.
b.£321.
c.£336.
d.£698.

Question 31

What is the difference between a correlation equal to -1 and a correlation equal to 0?

A)A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are moving in opposite directions.
B)A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are unrelated.
C)A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are moving in the same direction.
D)A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are unrelated.

Question 32

The following computer printout estimated overhead costs using multiple regression: $\begin{array}{lrrrr}&&\text { t for H(0) }&&\text {Std. error}\\\text {Parameter}&\text { Estimate } &\text { Parameter }=0 & \text { P r}>t & \text { of parameter }\\\hline\text { Intercept } & 1000 & 1.96 & 0.0250 & 510.204 \\\text { Setup hours } & 25 & 81.96 & 0.0001 & 0.305 \\\text { \# of parts } & 100 & 9.50 & 0.0001 & 10.527\end{array}$


$\begin{array}{lc}\text { R Square }\left(\mathrm{R}^{2}\right) & 0.94 \\\text { Standard Error }\left(\mathrm{S}_{\mathrm{e}}\right) & 75.00 \\\text { Observations } & 160\end{array}$ Which slope and intercept parameters are significant at the 0.05 level?

A)intercept
B)setup hours
C)number of parts
D)All of the above are significant

Question 33

A managerial accountant has determined the following relationships between overhead and several possible bases: $\begin{array}{lr}\text { Basis } & \text { Correl ation with Total Overhead } \\\text { Direct labour hours } & 0.842 \\\text { Direct labour (£) } & 0.279 \\\text { Machine hours } & -0.837 \\\text { Empl oyee minutes in coffee breaks } & -0.243\end{array}$ The best basis for overhead application is

A)direct labour hours.
B)coffee breaks.
C)direct labour (£)
D)machine hours.

Question 34

The following computer printout estimated overhead costs using regression: $\begin{array}{lcccc} &&\text { t for H(0) }&&\text {Std. error}\\\text {Parameter}&\text { Estimate } &\text { Parameter }=0 & \text { P r}>t & \text { of parameter }\\\hline\text { Intercept}& 100.41 & 4.81 & 0.0003 & 20.88 \\\text { DLH } & 14.05 & 6.78 & 0.0001 & 2.07\end{array}$


$\begin{array}{lc}\text { R Square }\left(\mathrm{R}^{2}\right) & 0.80 \\\text { Standard Error }\left(\mathrm{S}_{\mathrm{e}}\right) & 25.03 \\\text { Observations } & 17\end{array}$ What is the 95 percent confidence interval around the slope estimate?

A)11.98 to 16.13
B)10.67 to 17.45
C)9.57 to 18.54
D)9.63 to 18.48

Question 35

What does a correlation coefficient near 0 mean?

A)Two variables are moving in the opposite direction.
B)Two variables are moving in the same direction.
C)Two variables are unrelated.
D)One variable is a good predictor of the other.

Question 36

A coefficient of determination of 0.91 means

A)the two variables move together in the same direction and have a strong relationship.
B)the parameter is not significant.
C)the model is significant 91 percent of the time.
D)that the independent variable explains 91 percent of the cost.

Question 37

Which of the following statements is TRUE about the learning curve?

A)The curve decreases at an increasing rate.
B)The learning effect will eventually disappear as the number of units produced increases.
C)Failure to recognize learning curve effects will cause units produced later in a new production process to receive less cost than they should.
D)All of the above are true.

Question 38

What is the difference between a correlation equal to -1 and a correlation equal to +1?

A)A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are moving in opposite directions.
B)A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are unrelated.
C)A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are moving in the same direction.
D)A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are unrelated.

Question 39

The coefficient of determination is

A)a measure of the variability of actual costs around the cost-estimating equation.
B)used to construct probability intervals for cost estimates.
C)a standardized measure of the degree to which two variables move together.
D)a measure of the percent variation in the dependent variable that is explained by the cost estimating equation.

Question 40

Which method can be used to estimate the cost function?

A)high-low method
B)scatterplot method
C)method of least squares
D)all of the above can be used to estimate the cost function

Question 41

The percentage change in the dependent variable that is explained by the change in the independent variable is measured by the

A)intercept.
B)slope.
C)coefficient of determination.
D)correlation coefficient.

Question 42

The following information was available about supplies cost for the first three months of the year: $$\begin{array} { l c c } \text { Month } & \text { Production Volume } & \text { Supplies Cost } \\\text { January } & 4,800 & £ 21,700 \\\text { February } & 5,000 & 20,900 \\\text { March } & 3,400 & 16,100\end{array}$$ Using the high-low method, an estimate of supplies cost at 4,500 units of production would be

A)£19,400.
B)£20,500.
C)£19,950.
D)none of the above.

Question 43

In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the constant in the regression output would represent:

A)the estimated monthly total costs of the sales department.
B)the estimated monthly fixed costs of the sales department.
C)the estimated monthly variable costs per unit of the sales department.
D)the percent of variation in Y that is explained by X.

Question 44

In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the value of X in the regression output would represent:

A)the estimated monthly total costs of the sales department.
B)the estimated monthly fixed costs of the sales department.
C)the estimated monthly variable costs per unit of the sales department.
D)the percent of variation in Y that is explained by X.

Question 45

Which of the following is a weakness of the high-low method?

A)The method is easy to apply because only two observations are required to develop the cost function.
B)The data points used may represent atypical cost-activity relationships.
C)Any two observers will arrive at the same conclusion.
D)The method is quick to use and easy to understand.

Question 46

When the method of least squares is used to fit an equation involving two or more explanatory or independent variables, the method is called

A)simple regression.
B)multiple regression.
C)variable regression.
D)none of the above.

Question 47

Given the cost function, Y = £10,000 + £4X, at what level of the activity cost drivers will total cost be £22,000?

A)3,000 units
B)5,500 units
C)10,000 units
D)3,250 units

Question 48

Silversleeves, SA., shipped 18,000 tons of silver for £450,000 in January and 22,000 tons for £549,000 in February. Shipping costs for 21,000 tons to be shipped in March would be expected to be

A)£548,111.
B)£499,500.
C)£524,250.
D)none of the above.

Question 49

Advantages of the method of least squares over the high-low method include all the following EXCEPT

A)a statistical method is used to mathematically derive the cost function.
B)only two points are used to develop the cost function.
C)the squared differences between actual observations and the line (cost function) are minimized.
D)all the observations have an effect on the cost function.

Question 50

If the coefficient of correlation between machine hours and utilities cost is equal to 0.98 (r = 0.98), the correlation is

A)positive.
B)negative.
C)not related.
D)none of the above.

Question 51

If the independent variable is production volume and the dependent variable is total manufacturing cost, a coefficient of determination of .90 indicates

A)90 percent of the change in manufacturing cost can be explained by the change in the production volume.
B)90 percent of the change in volume is caused by changes in manufacturing cost.
C)10 percent of the change in volume is caused by changes in manufacturing cost.
D)costs will change by 90 percent of the change in volume.

Question 52

The following cost functions were developed for manufacturing overhead costs: $$\begin{array} { l l } \text { Manufacturing Overhead Cost } & \text { Cost Function } \\\text { Electricity } & £ 400 + £ 140 \text { per direct labour hour } \\\text { Maintenance } & £ 800 + £ 40 \text { per direct labour hour } \\\text { Supervisors' salaries } & £ 16,000 \text { per month } \\\text { Indirect materials } & £ 50 \text { per direct labour hour }\end{array}$$ If July production is expected to be 200 units that require 300 direct labour hours, estimated manufacturing overhead costs would be

A)£17,430.
B)£55,200.
C)£63,200.
D)£86,200.

Question 53

SeyChy collected the following data on manufacturing costs and activity cost drivers for two months: $\begin{array}{lcc}&\text { November }& \text { December }\\\text { Activity level in units } & 3,000 & 7,500 \\\\\text { Variable costs } & £ 7,500 & £ ? \\\text { Fixed costs } & 25,000 & ? \\\text { Mixed costs } & 11,500& 13,750\\\text { Total manufacturing costs } &? &?\end{array}$

a.What is total variable cost per unit?
b.What is the total fixed cost?
c.What is the estimated total manufacturing cost for January if the budgeted activity in January is 6,000 units?

Question 54

____ is a measure of the percent of variation in the dependent variable (such as total cost) that is explained by variations in the independent variable (such as total shipments) when the least-squares estimation equation is used.

A)The constant
B)The standard error of Y estimate
C)The coefficient of determination
D)The standard error of X estimate

Question 55

In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the R-squared in the regression output would represent:

A)the estimated monthly total costs of the sales department.
B)the estimated monthly fixed costs of the sales department.
C)the estimated monthly variable costs per unit of the sales department.
D)the percent of variation in Y that is explained by X.

Question 56

Innova, SA., is beginning the production of a new product. Management believes that 500 labour hours will be required to complete the new unit. An 80 percent incremental unit-time learning curve model for direct labour hours is assumed to be valid. Assume that the exponent b = -0.3219. Data on costs are as follows: $\begin{array}{ll}\text { Direct materials } & £ 50,000 \text { per unit } \\\text { Direct labour } & £ 20 \text { per direct labour hour } \\\text { Variable manufacturing overhead } & £ 30 \text { per direct labour hour }\end{array}$
a.Set up a table with columns for cumulative number of units showing the cumulative total time in hours using the incremental unit-time learning curve. Complete the table for 1, 2, 3, and 4 units given the individual unit time for the nth unit as 500, 400, 351, and 320 for 1 to 4 units respectively.
b.Set up a similar table assuming a 90 percent with the incremental unit-time learning curve with the individual unit time for the nth unit as 500, 450, 430, 405 for 1 to 4 units respectively.
c.What is the difference in variable cost of producing four units?

Question 57

Which of the following is a strength of the high-low advantage method?

A)Only two observations are used to develop the cost function.
B)The high and low activity levels may not be representative.
C)The method does not detect if the cost behaviour is nonlinear.
D)The method is easy to apply.

Question 58

Rush Company is trying to find an appropriate allocation base for factory overhead. Presented are five months of data: $$\begin{array} { l c c c } \text { Month } & \text { Direct labour Hours } & \text { Machine Hours } & \text { Factory Overhead } \\\text { January } & 10 & 3 & £ 45 \\\text { February } & 20 & 5 & 75 \\\text { March } & 15 & 4 & 70 \\\text { Apri1 } & 30 & 5 & 130 \\\text { May } & 25 & 3 & 80\end{array}$$ r = $$\frac { \sum ( X - X ) ( Y - Y ) } { \left( \sum ( X - X ) ^ { 2 } \sum ( Y - Y ) ^ { 2 } \right) ^ { 5 } }$$
a.Calculate the correlation coefficient between factory overhead and direct labour hours.
b.Calculate the correlation coefficient between factory overhead and machine hours.
c.Should Rush Company use direct labour hours or machine hours for their allocation base for factory overhead? Why?

Question 59

Innova, SA., is beginning the production of a new product. Management believes that 500 labour hours will be required to complete the new unit. A 90 percent cumulative average-time learning curve model for direct labour hours is assumed to be valid. Data on costs are as follows: $\begin{array}{ll}\text { Direct materials } & £ 50,000 \text { per unit } \\\text { Direct labour } & £ 20 \text { per direct labour hour } \\\text { Variable manufacturing overhead } & £ 30 \text { per direct labour hour }\end{array}$
a.Set up a table with columns for cumulative number of units, cumulative average time per unit in hours, and cumulative total time in hours using the cumulative average-time learning curve. Complete the table for 1, 2, 4, and 8 units.
b.Set up a similar table assuming an 80 percent with the cumulative average-time learning curve.
c.What is the difference in variable cost of producing four units?