Deck 10: Determining How Costs Behave

Question 1

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 1

True

Question 2

When estimating a cost function,cost behavior can be approximated by a linear cost function within the relevant range.

Answer 2

True

Question 3

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 = 600 + 4.96X
B)y = 600 + 5.49X
C)y = 600 + 4.41X
D)y = 600 + 4.67X

Answer 3

C

Question 4

All cost functions are linear.

Question 5

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

Question 6

The cost function y = 300 + 2X ________.

A)has a slope coefficient of 300
B)has an intercept of 300
C)is a nonlinear
D)represents a fixed cost

Question 7

In a cost function y = 18,000,the slope coefficient is zero.

Question 8

All other things being equal,the longer the time horizon the more likely a cost will be fixed.

Question 9

If the total cost function is y = 6,500 + 9X,calculate the variable cost for 4,400 units.

A)$46,100
B)$39,600
C)$58,500
D)$6,500

Question 10

The cost components of a heater include $35 for the compressor,$11 for the sheet molded compound frame,and $74 per unit for assembly.The factory machines and tools cost is $55,000.The company expects to produce 1,300 heaters in the coming year.What cost function best represents these costs?

A)y = 55,000 + 120X
B)y = 1,300 + 55,000X
C)y = 55,000 + 1,300X
D)y = 1,300 + 120X

Question 11

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.

Question 12

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

Question 13

Which of the following functions represents the least total cost assuming the number of units is equal in each case?

A)y = 180 + 9X
B)y = 90 + 5X
C)y = 90 + 9X
D)y = 180 + 5X

Question 14

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

Question 15

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

Question 16

If a cost item is fixed for one cost object,it will be fixed for all cost objects for which it is associated.

Question 17

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.

Question 18

For February,the cost components of a picture frame include $0.40 for the glass,$0.67 for the wooden frame,and $0.83 for assembly.The assembly desk and tools cost $570.Two hundred fifty frames are expected to be produced in the coming year.What cost function best represents these costs?

A)y = 1.90 + 570X
B)y = 570 + 1.90X
C)y = 570 + 1.07X
D)y = 1.07 + 570X

Question 19

The cost function y = 13,000 + 9X ________.

A)represents a mixed cost
B)will intersect the y-axis at 9
C)has a slope coefficient of 13,000
D)is a curved line

Question 20

The cost function y = 2,700 + 8X ________.

A)has a slope coefficient of 2,700
B)has an intercept of 8
C)is a straight line
D)represents a fixed cost

Question 21

Which cost estimation method uses a formal statistical method such as regression analysis 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

Question 22

At the Spring Valley 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.


If the number of employees is considered the cost driver,what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar. )

A)$41,860
B)$7,085
C)$143,111
D)$44,874

Question 23

A particular cost item could be variable for one cost object and fixed for another cost object.

Question 24

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

Question 25

Outside of the relevant range,variable and fixed cost-behavior patterns change,causing costs to become nonlinear.

Question 26

A linear cost function can only represent fixed cost behavior.

Question 27

Variable cost per labor-hour is $0.82 Fixed cost is $18,500.Machine hours during the period are 90.Calculate the total cost for 360 labor hours.

A)$18,574
B)$18,795
C)$18,869
D)$369

Question 28

What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave?

Question 29

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

Question 30

Which cost estimation method uses time-and-motion studies to reveal that to make a high quality men's suit jacket ,it takes of 3 hours of direct labor effort per jacket and 5 minutes of a salaried manager to perform quality control?

A)the accrual accounting method
B)the high-low method
C)the industrial engineering method
D)the cash accounting method

Question 31

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.

Question 32

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 $2.70 per pound
b.Total cost is fixed at $800 per month regardless of the number of units produced.
c.Auto rental has a fixed fee of $90.00 per day plus $1.75 per mile driven.
d.Machine operating costs include $1,000 of maintenance per month,and $15.00 of coolant usage costs for each day the machinery is in operation.

Question 33

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 $15 per hour.
b.Direct materials cost $25.60 per cubic yard.
c.Utilities have a minimum charge of $500,plus a charge of $0.25 per kilowatt-hour.
d.Machine operating costs include $250,000 of machine depreciation per year,plus $100 of utility costs for each day the machinery is in operation.

Question 34

It can be inferred that when there is a high correlation between two variables,one is the cause of the other.

Question 35

A contractual agreement that specifies a fee per mile driven,such as with a rental of a truck,is not considered a cause-and-effect relationship between an activity and a cost.

Question 36

Which of the following is not true about the cause-and-effect criterion when estimating a cost function?

A)Correlation of variables proves cause-and-effect
B)Managers must be careful not to equate high correlation between two variables to mean that either variable causes the other
C)Knowledge of operations can help managers discover cause-and-effect relationships
D)Contractual arrangements may show a direct cause and effect between two variables

Question 37

An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs.

Question 38

In a graphical display of a cost function,the steepness of a line represents the total amount of fixed costs.

Question 39

Which cost estimation method would involve analyzing direct labor subsidiary accounts and classifying costs as as variable,fixed,or mixed to derive cost estimation formulas?

A)the account analysis method
B)the conference method
C)the marginal costing method
D)the incremental costing method

Question 40

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

Question 41

High Tech Manufacturing Inc. ,incurred total indirect manufacturing labor costs of $550,000.The company is labor intensive.Total labor hours during the period were 4,400.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 driver-labor-hours.They separated the total indirect manufacturing labor costs into costs that are fixed ($120,000 based on 8,700 hours of labor)and costs that are variable ($430,000)based on the number of labor-hours used.The company has estimated 6,900 labor hours during the next period.
What will be the total variable cost for the estimated 6,900 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar. )

A)$341,034
B)$674,337
C)$862,500
D)$436,207

Question 42

At the Spring Valley Company 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.


If the number of new hires is considered the cost driver,what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar. )

A)$43,759
B)$6,845
C)$109,980
D)$47,913

Question 43

At the Spring Valley 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.


Which cost estimation method is being used by Spring Valley Company?

A)the simple regression method
B)the conference method
C)the account analysis method
D)the marginal costing method

Question 44

At the Wild Cat Group 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.


If the number of employees is considered the cost driver,what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar. )

A)$42,377
B)$44,730
C)$20,286
D)$130,306

Question 45

High Tech Manufacturing Inc. ,incurred total indirect manufacturing labor costs of $480,000.The company is labor intensive.Total labor hours during the period were 4,400.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 driver-labor-hours.They separated the total indirect manufacturing labor costs into costs that are fixed ($130,000 based on 8,100 hours of labor)and costs that are variable based on the number of labor-hours used.The company has estimated 7,700 labor hours during the next period.

What will be the total cost for the estimated 7,700 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar. )

A)$462,716
B)$586,296
C)$840,000
D)$742,535

Question 46

M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

Which cost estimation method is being used by M & G 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

Question 47

M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What were total fixed costs for 2017?

A)$945,000
B)$597,000
C)$348,000
D)$330,000

Question 48

South Coast Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What was the variable cost per unit sold for 2017?

A)$32.00
B)$175
C)$207.00
D)$277.72

Question 49

South Coast Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What were the total fixed costs for 2017?

A)$1,531,320
B)$366,520
C)$335,000
D)$1,164,800

Question 50

M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What was the variable cost per unit sold for 2017?

A)$30
B)$480
C)$770
D)$450

Question 51

South Coast Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

Which cost estimation method is being used by South Coast Appliance Store?

A)the account analysis method
B)the operating costing method
C)the marginal costing method
D)the cost-volume-profit analysis method

Question 52

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.

Question 53

When management develops cost estimations,they must chose one method,such as industrial engineering,conference,account analysis,or quantitative analysis,and stay consistently with that method as each method is mutually exclusive of the others.

Question 54

At the Wild Cat Group 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.


If the number of engineers is considered the cost driver,what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations two decimal places and your final answer to the nearest dollar. )

A)$40,524
B)$45,331
C)$8,600
D)$130,813

Question 55

M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What are the estimated total costs if the company expects to sell 3,300 units next year?

A)$1,458,400
B)$2,803,700
C)$2,361,700
D)$517,900

Question 56

High Tech Manufacturing Inc. ,incurred total indirect manufacturing labor costs of $480,000.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 driver-labor-hours.They separated the total indirect manufacturing labor costs into costs that are fixed ($140,000 based on 8,500 hours of labor)and costs that are variable ($340,000)based on the number of labor-hours used.The company has estimated 7,400 labor hours during the next period.
What will be the variable cost per hour?

A)$68.00
B)$40.00
C)$56.47
D)$96.00

Question 57

South Coast Appliance Store is a small company that has hired you to perform some management advisory services.The following information pertains to 2017 operations.

What are the estimated total costs if South Coast's store expects to sell 8,900 units next year?

A)$3,567,950
B)$2,192,400
C)$4,104,950
D)$901,900

Question 58

High Tech Manufacturing Inc. ,incurred total indirect manufacturing labor costs of $490,000.The company is labor intensive.Total labor hours during the period were 4,100.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 driver-labor-hours.They separated the total indirect manufacturing labor costs into costs that are fixed ($120,000 based on 8,600 hours of labor)and costs that are variable ($370,000)based on the number of labor-hours used.The company has estimated 7,300 labor hours during the next period.
Which of the following represents the correct linear cost function?

A)y = $370,000 + $43.02X
B)y = $120,000 + $119.51X
C)y = $120,000 + $90.24X
D)y = $370,000 + $56.98X

Question 59

The account analysis method of cost estimation classifies account costs as fixed,mixed,or variable using qualitative judgments.

Question 60

At the Wild Cat Group 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.


Which cost estimation method is being used by Wild Cat Group Company?

A)the regression analysis method
B)the marginal costing method
C)the conference method
D)the operating costing method

Question 61

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

Question 62

June Lockett,controller,gathered data on overhead costs and direct labor-hours over the past 12 months.List and discuss the different approaches June can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver.

Question 63

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

Question 64

A cost driver should be measurable and have an economically plausible relationship with the dependent variable which means:

A)that the cost driver can be identified in an economically feasible way
B)that the relationship is based on correlation
C)that the relationship is based on a cause -and-effect criterion and makes economic sense to management
D)that the relationship must be based on a physical relationship

Question 65

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

Question 66

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

Question 67

The cost to be predicted and managed is referred to as the ________.

A)independent variable
B)dependent variable
C)cost driver
D)regression

Question 68

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

Question 69

A plot of cost driver data and cost data may show all but the following:

A)a strong relationship
B)cause-and-effect relationship
C)a positive relationship
D)linear relationship

Question 70

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

Question 71

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

A)D C E A B
B)C D B A E
C)A D C E B
D)E D C B A

Question 72

Time-series data analysis includes ________.

A)using a variety of time periods to measure the dependent variable of the same entity (organization,plant,or activity)
B)using the highest and lowest observation for the same entity (organization,plant,or activity)
C)observing different entities during the same time period for the same entity (organization,plant,or activity)
D)comparing information in different cost pools for the same entity (organization,plant,or activity)

Question 73

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

A)D C A B
B)C D A B
C)A D C B
D)D C B A

Question 74

Which of the following is an example of time-series data:

A)loan processing times in each of 26 similar branch offices over the last 12 months
B)Direct labor hours in the Boston,Massachusetts and the New York City facility for each of the last 12 months
C)indirect labor costs and machine-hours in a manufacturer's assembly department each month for the last 12 months
D)Store sales for each U.S.based Wal-Mart for each the last 10 years.

Question 75

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

Question 76

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

Question 77

The cost of the personnel department at the Speedy Process 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 $200.000.

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 Speedy Company?

Question 78

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

Question 79

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.

Question 80

The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations.