Module 14
Cost Behavior, Activity Analysis, and
Cost Estimation
Learning Objectives – coverage by question
True / False
Multiple Exercises Problems Essays
Choice
LO1– Identify basic patterns
of how costs respond to 1-4 1-6, 1-4,
changes in activity cost 30-41, 59 8, 9
drivers.
LO2– Determine a linear cost5-7 7-16, 5, 6, 10, 1, 2
estimating 42-58 12-16
equation.
LO3– Identify and discuss
problems encountered in cost
8, 9 17-22
, 60 6, 11 3, 4
estimation
.
LO4– Describe and develop 32-29
,
alternative classifications for10-12 61-79 7 5, 6
activity cost
drivers.
Module 14: Cost Behavior, Activity Analysis, and Cost Estimation
True False
Topic: Cost Behavior Pattern
LO: 1
1. Mixed cost behavior pattern is unrelated to unit activity level.
Answer: False
Rationale: The variable portion of a mixed cost is related to the unit activity level, because this portion of the
mixed cost will increase as activity level increases. The fixed portion of the mixed cost, however, does not vary
with the activity level.
Topic: Variable Costs
©Cambridge Business Publishers, 2013
Test Bank, Module 14 14-1
,LO: 1
2. The wheels on an automobile is classified as a variable cost with respect to the volume of cars produced in an
automobile assembly plant.
Answer: True
Rationale: Wheels represent direct materials in the production of automobiles; therefore, they represent a
variable cost.
Topic: Committed Fixed Cost
LO: 1
3. The depreciation cost for a manufacturing building is an example of a committed fixed cost:
Answer: True
Rationale: Depreciation on the building for a manufacturing company is a committed fixed cost because it
cannot be readily eliminated in the short term, and it does not vary with production.
Topic: Cost Estimation LO: 1
4. The number of units sold is a better independent variable than square feet of all manufacturing facilities in
estimating the cost function of a headphone manufacturer.
Answer: True
Rationale: The independent variable in a cost estimation equation should be the variable that relates as closely
as possible to the dependent variable (which is total cost). When manufacturing headphones, it is more likely
that the number of units produced is more closely related than square footage to total cost.
Topic: High-Low Method
LO: 2
5. The primary advantage of the high-low method of cost estimation over the least-squares regression method is
its Limited data requirements.
Answer: True
Rationale: The high-low method is used primarily because of the ease of data collection that it requires. It is
not as precise mathematically as other methods, and it does not as effective as the scatter diagram method in
identifying outliers, but it is very convenient.
Topic: High-Low Method
LO: 2
6. The high-low method is likely to produce an inaccurate cost estimating equation when the organization has
mixed costs.
Answer: False
Rationale: The purpose of the high-low method is to estimate the variable and fixed cost components of mixed
costs.
Topic: Scatter Diagram LO: 2
7. Periods of highest and lowest activity in a scatter diagram are always assumed to be representative of all cost
observations.
Answer: False
©Cambridge Business Publishers, 2013
14-2 Financial & Managerial Accounting for MBAs, 3rd Edition
, Rationale: One of the major benefits of the scatter diagram method over the high-low method is that it allows
one to readily identify outliers through visual observation. Any significant outliers would be removed from the
data set (or ignored) in developing the cost estimation equation.
Topic: Cost Estimation Difficulties
LO: 3
8. Changes in technology during the period of cost observations should not be a concern in estimating cost.
Answer: False
Rationale: Unless all cost observations were collected under the same conditions regarding the technology
employed, the estimation equation is likely to be inaccurate in estimating future costs. For the best results, all
cost observations should be collected under conditions that are as uniform as possible, except for the level of
operations.
Topic: Cost Estimation Difficulties
LO: 3
9. The longer the time period of each observation, the higher the probability of error in matching costs and
activity,
Answer: False
Rationale: Just the opposite is true: The shorter the time period of each observation, the higher the
probability of error in matching costs and activity, because most matching problems occur either at the
beginning or end of the period. By having a longer period for each cost observation, the impact of mismatches
at the beginning and end of the period are diluted.
Topic: Changes in Cost Structures
LO: 4
10. Over the past century cost structures in the typical company have shifted significantly as a consequence of
breakthroughs in technology, resulting in a major downward shift in direct labor as a percentage of total
manufacturing costs.
Answer: True
Rationale: With the increase in automation resulting from new technologies, the percentage of manufacturing
costs represented by direct labor has decreased, and the percentage represented by factory overhead has
increased.
Topic: Batch Level Cost LO: 4
11. Preparing the engineering design and preparing tools to make a new product added to a company’s product
line would be a good example of a batch level activity.
Answer: False
Rationale: Preparing the engineering design and tools to make a new product is an example of a product level
activity, not a batch level activity. An example of a batch level activity would be moving a batch of units from
one location to another in the manufacturing facility.
Topic: Product Level Cost
LO: 4
12. Advertising a new health beverage is an example of a product-level activity.
©Cambridge Business Publishers, 2013
Test Bank, Module 14 14-3
, Answer: True
Rationale: The activity of advertising a new product creates costs that are driven by the number of new
products, not by the number of units produced or the number of batches of product produced.
©Cambridge Business Publishers, 2013
14-4 Financial & Managerial Accounting for MBAs, 3rd Edition
Cost Behavior, Activity Analysis, and
Cost Estimation
Learning Objectives – coverage by question
True / False
Multiple Exercises Problems Essays
Choice
LO1– Identify basic patterns
of how costs respond to 1-4 1-6, 1-4,
changes in activity cost 30-41, 59 8, 9
drivers.
LO2– Determine a linear cost5-7 7-16, 5, 6, 10, 1, 2
estimating 42-58 12-16
equation.
LO3– Identify and discuss
problems encountered in cost
8, 9 17-22
, 60 6, 11 3, 4
estimation
.
LO4– Describe and develop 32-29
,
alternative classifications for10-12 61-79 7 5, 6
activity cost
drivers.
Module 14: Cost Behavior, Activity Analysis, and Cost Estimation
True False
Topic: Cost Behavior Pattern
LO: 1
1. Mixed cost behavior pattern is unrelated to unit activity level.
Answer: False
Rationale: The variable portion of a mixed cost is related to the unit activity level, because this portion of the
mixed cost will increase as activity level increases. The fixed portion of the mixed cost, however, does not vary
with the activity level.
Topic: Variable Costs
©Cambridge Business Publishers, 2013
Test Bank, Module 14 14-1
,LO: 1
2. The wheels on an automobile is classified as a variable cost with respect to the volume of cars produced in an
automobile assembly plant.
Answer: True
Rationale: Wheels represent direct materials in the production of automobiles; therefore, they represent a
variable cost.
Topic: Committed Fixed Cost
LO: 1
3. The depreciation cost for a manufacturing building is an example of a committed fixed cost:
Answer: True
Rationale: Depreciation on the building for a manufacturing company is a committed fixed cost because it
cannot be readily eliminated in the short term, and it does not vary with production.
Topic: Cost Estimation LO: 1
4. The number of units sold is a better independent variable than square feet of all manufacturing facilities in
estimating the cost function of a headphone manufacturer.
Answer: True
Rationale: The independent variable in a cost estimation equation should be the variable that relates as closely
as possible to the dependent variable (which is total cost). When manufacturing headphones, it is more likely
that the number of units produced is more closely related than square footage to total cost.
Topic: High-Low Method
LO: 2
5. The primary advantage of the high-low method of cost estimation over the least-squares regression method is
its Limited data requirements.
Answer: True
Rationale: The high-low method is used primarily because of the ease of data collection that it requires. It is
not as precise mathematically as other methods, and it does not as effective as the scatter diagram method in
identifying outliers, but it is very convenient.
Topic: High-Low Method
LO: 2
6. The high-low method is likely to produce an inaccurate cost estimating equation when the organization has
mixed costs.
Answer: False
Rationale: The purpose of the high-low method is to estimate the variable and fixed cost components of mixed
costs.
Topic: Scatter Diagram LO: 2
7. Periods of highest and lowest activity in a scatter diagram are always assumed to be representative of all cost
observations.
Answer: False
©Cambridge Business Publishers, 2013
14-2 Financial & Managerial Accounting for MBAs, 3rd Edition
, Rationale: One of the major benefits of the scatter diagram method over the high-low method is that it allows
one to readily identify outliers through visual observation. Any significant outliers would be removed from the
data set (or ignored) in developing the cost estimation equation.
Topic: Cost Estimation Difficulties
LO: 3
8. Changes in technology during the period of cost observations should not be a concern in estimating cost.
Answer: False
Rationale: Unless all cost observations were collected under the same conditions regarding the technology
employed, the estimation equation is likely to be inaccurate in estimating future costs. For the best results, all
cost observations should be collected under conditions that are as uniform as possible, except for the level of
operations.
Topic: Cost Estimation Difficulties
LO: 3
9. The longer the time period of each observation, the higher the probability of error in matching costs and
activity,
Answer: False
Rationale: Just the opposite is true: The shorter the time period of each observation, the higher the
probability of error in matching costs and activity, because most matching problems occur either at the
beginning or end of the period. By having a longer period for each cost observation, the impact of mismatches
at the beginning and end of the period are diluted.
Topic: Changes in Cost Structures
LO: 4
10. Over the past century cost structures in the typical company have shifted significantly as a consequence of
breakthroughs in technology, resulting in a major downward shift in direct labor as a percentage of total
manufacturing costs.
Answer: True
Rationale: With the increase in automation resulting from new technologies, the percentage of manufacturing
costs represented by direct labor has decreased, and the percentage represented by factory overhead has
increased.
Topic: Batch Level Cost LO: 4
11. Preparing the engineering design and preparing tools to make a new product added to a company’s product
line would be a good example of a batch level activity.
Answer: False
Rationale: Preparing the engineering design and tools to make a new product is an example of a product level
activity, not a batch level activity. An example of a batch level activity would be moving a batch of units from
one location to another in the manufacturing facility.
Topic: Product Level Cost
LO: 4
12. Advertising a new health beverage is an example of a product-level activity.
©Cambridge Business Publishers, 2013
Test Bank, Module 14 14-3
, Answer: True
Rationale: The activity of advertising a new product creates costs that are driven by the number of new
products, not by the number of units produced or the number of batches of product produced.
©Cambridge Business Publishers, 2013
14-4 Financial & Managerial Accounting for MBAs, 3rd Edition
