INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION BY HORNGREN - TEST BANK

Introduction to Management Accounting, 16e (Horngren) Chapter 3 Measurement of Cost Behavior 3.1 Questions 1) Managers can influence the amount of fixed and variable costs in a firm through decisions about ________. A) product attributes B) capacity level C) amount of high technology equipment used for manufacturing products D) all of the above Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 2) The use of high technology equipment to manufacture products instead of highly skilled labor usually results in ________. A) higher discretionary fixed costs B) higher discretionary variable costs C) lower risk D) higher operating leverage Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3) Which of the following costs can be canceled in the short run? A) salary of CEO of company B) mortgage payment on factory building C) lease payments on two-year lease for leased equipment in factory D) management consulting services engaged to change company logo Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 4) A hospital adds a new addition and needs to acquire some new equipment for the addition. The cost driver for the equipment is patient-days per month. The new addition increases the patient-days per month outside the relevant range. What type of equipment costs will change as a result of the addition? A) discretionary fixed costs B) discretionary variable costs C) committed fixed costs D) committed variable costs Answer: C Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 5) Managers can eliminate ________ costs entirely for a given year in dire times such as a major recession. However, managers cannot eliminate ________ costs. A) discretionary variable costs; committed variable costs B) discretionary fixed costs; committed fixed costs C) discretionary variable costs; committed fixed costs D) committed fixed costs; committed variable costs Answer: B Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 6) If a company eliminates all discretionary costs due to a severe recession, this could ________. A) ensure that the company reports a net loss B) ensure that the company reports a net profit C) reestablish a company's competitive position in an industry D) impair a company's competitive position in an industry Answer: D Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) Many organizations use a linear relationship with a single cost driver to describe a cost even though the cost may have multiple cost drivers. Why? A) This approach is easier and less expensive. B) The cost of developing a more complex function is greater than the benefit. C) Cost estimates from the simple function are accurate enough for most decisions. D) All of the above Answer: D Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 8) It may be difficult to trace costs to products or services if the costs are ________. A) volume-driven B) driven by activities directly related to volume C) driven by multiple cost drivers D) none of the above Answer: C Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) Simon Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Simon Inc. expects to produce 115,000 units. Simon's relevant range for production is 100,000 to 120,000 units. If 115,000 units are produced next year, what is the expected variable cost? A) $420,000 B) $430,000 C) $440,000 D) $460,000 Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 10) Donahue currently produces 120,000 units at a cost of $400,000. Of the $400,000 cost, $200,000 is a fixed cost. Next year Donahue expects to produce 145,000 units. Donahue's relevant range for production activities is 100,000 to 150,000 units. If 145,000 units are produced next year, what is the expected fixed cost for next year? A) $200,000 B) $241,667 C) $441,667 D) $483,333 Answer: A Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 11) The following data points are available. This is an example of a ________ cost. Units Costs 600 $560 650 $565 800 $580 900 $590 A) variable B) fixed C) mixed D) none of the above Answer: C Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 12) A car lease payment is computed based solely on the number of miles driven. This is an example of a ________. A) variable cost B) mixed cost C) step cost D) stair cost Answer: A Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 13) Knowledge about the behavior of different costs in a service department such as maintenance can be used to ________. A) plan costs B) provide feedback to managers C) make decisions about the most efficient use of resources D) all of the above Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 14) The fixed costs required to achieve a desired level of production or to provide a desired level of service, while maintaining product or service attributes, are ________. A) discretionary fixed costs B) committed fixed costs C) capacity costs D) step costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 15) ________ arise as a result of strategic decisions about the scale and scope of an organization's activities. A) Capacity costs B) Discretionary fixed costs C) Mixed costs D) Committed fixed costs Answer: A Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 16) In a corporate setting, property taxes are an example of a(n) ________. A) mixed cost B) committed fixed cost C) discretionary fixed cost D) engineering cost Answer: B Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 17) Costs arising from the possession of facilities, equipment and a basic organizational structure are ________. A) capacity costs B) discretionary costs C) committed fixed costs D) engineered costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 18) ________ have no obvious relationship to levels of output activity, but are determined as part of the periodic planning process. A) Discretionary fixed costs B) Committed fixed costs C) Capacity costs D) Engineered costs Answer: A Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 19) Due to the economic downturn, a company has reduced charitable donations to community groups. This is an example of a ________. A) variable cost B) committed fixed cost C) capacity cost D) discretionary fixed cost Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 20) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________. A) lease payment B) salaries of key personnel C) employee training program D) insurance on corporate offices Answer: C Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 21) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________. A) property taxes on factory building B) insurance on factory building C) lease payments on computers in corporate headquarters D) public relations department Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 22) Only major changes in the scale or scope of operations can change ________ in future periods. Managers can vary spending levels for ________ in the short run. A) committed fixed costs; capacity costs B) committed fixed costs; discretionary fixed costs C) discretionary fixed costs; capacity costs D) capacity costs; committed fixed costs Answer: B Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 23) Costs that may be essential to the long-run achievement of the organization's goals, but that managers can almost reduce to zero in the short-run, are called ________. A) capacity costs B) committed fixed costs C) discretionary fixed costs D) mixed costs Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 24) In a corporate setting, a mortgage payment would be identified as a ________. A) purely variable cost B) discretionary fixed cost C) committed fixed cost D) mixed cost Answer: C Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 25) In an economic downturn, a company could temporarily reduce or eliminate ________. A) depreciation expense on corporate building B) bond interest payment C) property taxes on corporate building D) advertising and promotion Answer: D Diff: 1 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 26) In an economic recession, a company could NOT eliminate ________. A) employee training program B) research and development projects C) public relations department D) depreciation expense on factory machines Answer: D Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 27) Which statement regarding fixed costs is TRUE? A) Discretionary fixed costs preserve management's flexibility. B) Committed fixed costs preserve management's flexibility. C) Both discretionary and committed fixed costs preserve management's flexibility. D) Discretionary fixed costs limit management's flexibility. Answer: A Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 28) Most companies make capacity decisions frequently. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 29) Capacity costs are variable costs related to a desired level of production or service. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 30) Committed fixed costs usually arise from the possession of facilities, equipment and a basic organizational structure. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 31) Companies can reduce or eliminate committed fixed costs when demand falls during an economic downturn. Answer: FALSE Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 32) Volume-driven costs can be easily traced to products or services. Answer: TRUE Diff: 1 LO: 3-1 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 33) Managers cannot eliminate discretionary fixed costs. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 34) The use of high-technology methods rather than labor in manufacturing products usually means a much greater fixed-cost component to total costs. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3.2 Questions 1) A mixed-cost function is graphed as a ________. A) nonlinear line B) curved line C) line with a break for fixed costs D) straight-line Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 2) In a linear cost function, the slope measures the ________. A) total fixed cost B) total variable cost C) variable cost per unit of cost driver D) fixed cost per unit of cost driver Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3) In a graph of a mixed cost function, the y-axis is ________ and the x-axis is ________. A) fixed cost; cost driver activity B) fixed cost; variable cost per unit C) mixed cost; volume in units D) cost; cost driver activity Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 4) When estimating the cost of the maintenance department in a hospital for a month, what cost driver should be used? A) number of patients per month B) number of nurses working per month C) number of operations per month D) number of patients per month times the length of stay per patient Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 5) When estimating the total cost of a one-way flight from New York to Los Angeles, what cost driver should be used? A) number of miles on flight B) number of passengers on flight C) number of pounds of baggage on flight D) number of passengers on flight times the number of miles on flight Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 6) In a linear cost function, the fixed cost is ________. A) dependent on the cost driver B) dependent on the independent variable C) independent of the cost driver D) independent of the intercept Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 7) When estimating a cost function, we assess reliability using ________. A) visual inspection B) plausible relationships C) goodness of fit D) intuition Answer: C Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 8) A linear cost function is estimated over the relevant range of 0 to 1,000 orders. The equation estimated is: Y = $25,000 + $89X where Y equals the total order-processing cost and X equals the number of orders. If the number of orders increases to 1,800, what is the predicted total order-processing cost? A) $25,000 B) $160,200 C) $185,200 D) cannot be determined Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 9) When estimating the cost of the laundry department in a hospital, which of the following cost drivers should be used? A) number of patients B) number of patients times the length of stay per patient C) number of patients in intensive care and critical care D) number of pounds of laundry Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 10) When managers graph a linear cost function with one cost driver, the intercept represents the ________ cost and the slope represents the ________ cost. A) variable; fixed B) fixed; variable C) fixed; mixed D) variable; mixed Answer: B Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 11) A cause and effect relationship between a ________ and a ________ is desirable in order to obtain accurate and useful cost functions. A) cost driver; cost function B) cost function; resource cost C) cost driver; resource cost D) step cost; capacity cost Answer: C Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 12) When developing cost functions, which of the following statements is FALSE? A) The cost function must be believable. B) The cost function should explain past cost behavior. C) Personal observations of costs and activities provide the best evidence of a plausible relationship between a cost and its cost driver. D) The cost function does not have to be plausible. Answer: D Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 13) Sunrise Motel's cost function is given as: Y = $75,000 + $9.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sunrise Motel has 8,000 guest days. In the next year, Sunrise Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected fixed custodial cost for next year? A) $7.50 B) $50,000 C) $62,500 D) $75,000 Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 14) Sunset Motel's cost function is given as: Y = $75,000 + $9.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sunset Motel has 8,000 guest days. In the next year, Sunset Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total variable custodial cost for next year? A) $60,000 B) $75,000 C) $95,000 D) $170,000 Answer: C Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 15) Sheboygan Motel's cost function is given as: Y = $120,000 + $2.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sheboygan Motel has 8,000 guest days. In the next year, Sheboygan Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total custodial cost for next year? A) $37,000 B) $120,000 C) $125,000 D) $145,000 Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 16) In a mixed-cost linear function with one cost driver, the intercept is the ________ and the slope is the ________. A) fixed cost; step cost B) fixed cost; variable cost C) variable cost; fixed cost D) variable cost; step cost Answer: B Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 17) Consider the following linear mixed-cost function: Y = $120,000 + $2.70X Where: Y = total annual maintenance cost X = number of patient-days What does the $120,000 represent? A) variable cost per patient-day B) total variable cost C) fixed cost per patient-day D) total fixed cost Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 18) Consider the following linear mixed-cost function: Y = $110,000 + $5.50X Where: Y = total annual custodial cost X = number of patient-days What does the $5.50 represent? A) total fixed cost B) total variable cost C) fixed cost per patient-day D) variable cost per patient-day Answer: D Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 19) Managers apply two criteria to obtain accurate and useful cost functions. These criteria are ________. A) plausibility and believability B) plausibility and reliability C) reliability and validity D) validity and plausibility Answer: B Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 20) In relation to a cost function, the term reliability means ________. A) whether the costs and activities can be easily observed B) whether the cost function conforms to a given mathematical model C) how well the cost function predicts future costs D) how well the cost function explains past cost behavior Answer: D Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 21) A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s). Answer: TRUE Diff: 1 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 22) Managers should apply plausibility and reliability to obtain accurate and useful cost functions. Answer: TRUE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 23) When referring to a cost function, plausibility refers to whether you can rely upon the cost function for predicting the future. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 24) In a linear mixed cost function, the slope of the function is the fixed cost per unit of the cost driver. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 25) Goodness of fit pertains to how well a cost function predicts cost behavior. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective thinking skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 26) Atlanta Senior Center is planning its annual fundraiser. The event committee has developed the following budget for the event. Ballroom rental $3,000 Entertainment $2,500 Printing $600 plus $9 per person Food $30 per person Decorations $700 plus $5 per person Required: A) Determine the cost function. B) If Atlanta Senior Center charges $100 per person, and 1,000 people attend, how much profit will be derived by this event? Answer: A) Fixed cost = $3,000 + $2,500 + $600 + $700 = $6,800 Variable cost = $9 + $30 + $5 = $44 per person Y = $6,800 + $44X Where: Y = Total cost of fundraiser X = Number of attendees B) ($100 × 1,000) - [$6,800 + ($44 × 1,000)] = $49,200 Diff: 2 LO: 3-2 AACSB: Analytic skills Learning Outcome: Define and distinguish between variable, fixed and mixed costs 3.3 Questions 1) An activity analysis has shown that the number of components added to Product X and Product Y is the cost driver for support costs. Support costs are $20 per component. Product X has 4 components and Product Y has 8 components. What amounts of support costs should be assigned to Product X and Product Y? Product X Product Y A) $6.67 $13.33 B) $20 $20 C) $80 $160 D) $80 $320 Answer: C Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 2) Direct labor cost is the primary cost driver of support costs for two products. Product One has direct labor costs of $8.50 per unit and Product Two has direct labor costs of $130 per unit. The support costs assigned to each product is the direct labor cost times five. What is the support cost assigned to Product One and Product Two? Product One Product Two A) $8.50 $130 B) $5.00 $76.47 C) $42.50 $650 D) $5.00 $26.00 Answer: C Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 3) The greatest benefit of activity analysis is that it directs management accountants to the ________. A) relevant costs for decision making B) most accurate product cost C) appropriate cost driver for each cost D) most accurate product price Answer: C Diff: 1 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 4) The process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service is called ________. A) account analysis B) activity analysis C) cost analysis D) product analysis Answer: B Diff: 1 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 5) Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 6) The cost of the Maintenance Department at Forest Manufacturing has always been charged to the production departments based on the number of employees. Recently, an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each production department. The Maintenance Department cost is $500,000. The following data is available: Production Departments Dept. A Dept. B Dept. C Number of Employees 300 25 50 Square Feet of Space 5,000 10,000 25,000 Required: 1. Determine the amount of the maintenance department cost that should be allocated to Department A and Department B if the cost driver used is: (A) number of employees and (B) square feet of space. 2. Does the choice of the cost driver affect the costs assigned to each department? Answer: 1. Department A: A) 300/375 × $500,000 = $400,000 B) 5/40 × $500,000 = $62,500 Department B: A) 25/375 × $500,000 = $33,333 B) 10/40 × $500,000 = $125,000 2. Yes, the cost driver does change the cost assigned to each department. Diff: 2 LO: 3-3 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 3.4 Questions 1) When estimating cost functions, engineering analysis based on observations of employee behavior has the following disadvantage: ________. A) the employees may have altered their normal work habits because they are being observed B) it is less expensive than account analysis C) it does not use all of the data points D) the coefficient of determination is not reliable Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 2) To approximate cost functions for a particular manufacturing process, engineering analysis relies on ________. A) statistical analysis B) mathematical analysis C) graphs D) actual observations of the ongoing process Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 3) To estimate cost functions using account analysis, each account is classified as a ________ cost or ________ cost with respect to ________. A) mixed; fixed; sales volume in units B) mixed; variable: sales volume in units C) variable; fixed; a cost driver D) mixed; fixed; production in units Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 4) To estimate the monthly maintenance cost for the maintenance department in a hospital, the following monthly costs are available: Monthly Expense Costs Supervisor Salary Expense $3,000 Depreciation Expense—Maintenance Equipment $5,000 Repairs Expense—Maintenance Equipment $5,000 Supplies Expense $7,000 Wages Expense—Maintenance Workers $10,000 The Supervisor Salary Expense and the Depreciation Expense are fixed costs. The remaining expenses are variable costs. There are 1,000 patient days in a month, which is the cost driver for maintenance costs. Estimate the cost function where Y is the monthly maintenance cost and X is the variable cost per patient day. A) Y = $8 + $22X B) Y = $8,000 + $22,000X C) Y = $8,000 + $22X D) Y = $30,000 + $22,000X Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 5) Three cost drivers are used to estimate the cost of processing insurance claims. The cost drivers are: (1) claim amount, (2) age of vehicle in accident and (3) age of driver in accident. The percentages attributable to the cost drivers are 50% for claim amount, and 15% for each of the other two cost drivers. What is the cost to process Claim #101? The claim amount is $1,000. The age of the vehicle is 5 years. The age of the driver is 20 years. A) $3.00 B) $3.75 C) $500 D) $503.75 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 6) The high-low, visual-fit and least squares regression methods are more objective methods to estimate cost functions than ________ and ________. A) activity analysis; account analysis B) activity analysis; engineering analysis C) account analysis; engineering analysis D) capacity analysis; activity analysis Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 7) Companies may be forced to use engineering analysis or account analysis to estimate cost functions because ________. A) engineering analysis is the least costly method B) historical data are too subjective C) the other estimation methods are too difficult to use D) historical data are not available Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 8) A disadvantage of the high-low method to estimate a cost function is ________. A) historical data may hide past inefficiencies B) historical data may be obsolete C) historical data may not reflect changes made in the organization D) all of the above Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 9) With the high-low method, the most accurate way to measure the intercept and slope for a cost function is to ________. A) plot the data points and draw a line B) plot the data points, identify the high and low points and draw a line between the high and low points C) plot the data points and draw a straight line through the points as close as possible to all the points D) use algebra using the two data points with the highest and lowest activity levels Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 10) When using the visual-fit method to estimate a cost function, we can estimate the fixed cost by ________. A) the point where the sketched line (through all or most of the data points) intersects the x-axis B) the point where the sketched line (through all or most of the data points) intersects the y-axis C) calculating the variable cost per unit of the cost driver D) subtracting the variable cost at any cost driver level from the total cost Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 11) When using the visual-fit method to estimate a cost function, the variable cost per unit of the cost driver is equal to the ________. A) the point where the sketched line (through all or most of the data points) intersects the x-axis B) the point where the sketched line (through all or most of the data points) intersects the y-axis C) slope of the sketched line (through all or most of the data points) D) any point on the sketched line divided by the fixed cost Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 12) Due to the use of statistics, least squares regression analysis estimates a cost function more ________ than other cost measurement methods. A) easily B) rapidly C) reliably D) subjectively Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 13) When examining the output from regression analysis, the fixed cost measure is labeled the ________ by most computer programs. A) coefficient of determination B) X coefficient C) standard error of estimate D) constant or intercept Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 14) When examining the output from regression analysis, with one independent variable, the variable cost measure is labeled the ________ by most computer programs. A) coefficient of determination B) X coefficient C) standard error of estimate D) constant or intercept Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 15) When examining the output from regression analysis, the goodness of fit measure is labeled ________ by most computer programs. A) X coefficient B) constant C) standard error of estimate D) R2 Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 16) To assess the ________ of estimates from regression analysis, we use the ________. A) plausibility; standard error of coefficient B) objectivity; standard error of coefficient C) reliability; coefficient of determination D) plausibility; coefficient of determination Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 17) To assess the ________ of estimates from regression analysis, we use the ________. A) objectivity; coefficient of determination B) plausibility; sign on the intercept C) reliability; sign on the coefficient of determination D) plausibility; sign of the variable cost estimate Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 18) A cost function estimated with least squares regression has a coefficient of determination of 0.95. This statistic indicates that the cost function is ________. A) highly plausible B) highly reliable C) not predictable D) not accurate Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 19) A cost function with one independent variable is estimated with least squares regression. The coefficient of determination for the equation is 0.50. This statistic indicates that ________. A) the independent variable does not explain changes in the dependent variable very well B) the dependent variable does not explain changes in the independent variable very well C) the cost estimates are correct 50 percent of the time D) the cost estimates are not correct 50 percent of the time Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 20) A company has identified the appropriate cost driver for a resource cost. To estimate or approximate the cost function, the company manager has a broad selection of methods that will NOT include ________. A) least squares regression analysis B) activity analysis C) high-low method D) engineering method Answer: B Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 21) Which methods to approximate cost functions rely on a logical analysis of the cost environment instead of an explicit analysis of prior cost data? A) engineering analysis; account analysis B) activity analysis; account analysis C) visual fit method; high low method D) least-squares regression analysis; activity analysis Answer: A Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 22) The methods to approximate cost functions are not ________; managers frequently use two or more together to avoid ________ in measuring cost behavior. A) the same; duplication B) mutually exclusive; errors C) complementary; errors D) similar; duplication Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 23) In engineering analysis, cost analysts estimate cost functions using ________. A) past experience and experiments with prototypes B) accounting and industrial engineering literature C) advice of management consultants D) all of the above Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 24) A disadvantage of engineering analysis which is used to estimate cost functions is ________. A) it fails to produce a cost function B) it is a costly process C) it is not acceptable under Generally Accepted Accounting Principles D) it cannot be used with mixed costs Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 25) In order to estimate cost functions using account analysis, users rely on the ________ for information about cost behavior. A) management audit B) performance report C) value chain D) accounting system Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 26) Account analysis ________. A) is less expensive than engineering analysis B) is more expensive than engineering analysis C) cannot be used for mixed costs D) does not require accounts from the accounting system Answer: A Diff: 1 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 27) Engineering analysis and account analysis are similar because ________. A) both provide timely results B) both do not develop a cost function C) both provide more objective results than the high-low method D) both require the subjective judgment of the analyst Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 28) Account analysis and engineering analysis will remain the ________ methods of measuring cost behavior because the other methods ________. A) unused; are more objective B) unused; are more accurate C) popular; require more past cost data D) popular; are too difficult to work with Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 29) Which statement is TRUE regarding the high-low method to approximate a linear cost function? A) The second step in the high-low method is to plot the historical data points on a graph. B) Outliers should not be removed from the analysis. C) Draw a line through all the data points using judgment to fit the line as close as possible to all the plotted points. D) The point at which the line intersects the Y-axis is the estimate of fixed costs. Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 30) Presented below is the production data for the first six months of the year showing the mixed costs incurred by Eunice Company. Month Cost Units January $7,500 4,000 February 13,000 7,500 March 11,500 9,000 April 11,700 11,500 May 13,500 12,000 June 11,850 6,000 Eunice Company uses the high-low method to analyze mixed costs. The variable cost per unit is ________. A) $0.625 B) $0.75 C) $1.25 D) $1.31 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 31) The following data has been assembled for Mildred Company. Use the high-low method. Month Cost Hours January $18,000 2,000 February $39,000 3,500 March $39,280 3,450 April $43,400 3,200 May $40,000 4,000 The variable cost per hour is ________. A) $9.00 B) $10.00 C) $10.40 D) $11.00 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 32) Presented below is the production data for six months of the year showing the mixed costs incurred by Kennedy Company. Month Cost Units July $6,000 4,000 August $10,250 6,500 September $10,500 8,000 October $12,700 10,500 November $14,000 12,000 December $10,850 9,000 Kennedy Company uses the high-low method to analyze mixed costs. The total fixed cost is ________. A) $2,000 B) $4,500 C) $10,417 D) $10,500 Answer: A Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 33) The following data has been assembled for Arnold Company. Use the high-low method. Month Cost Hours January $24,000 2,000 February $39,000 2,200 March $35,280 2,750 April $36,400 3,500 May $40,000 4,000 The total fixed cost is ________. A) $3,600 B) $8,000 C) $21,360 D) $26,672 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 34) The following data has been assembled for Robert Company. Use the high-low method. Month Cost Hours January $24,400 2,000 February $39,000 2,200 March $35,280 2,750 April $36,400 3,500 May $40,000 4,000 The cost function is ________ where Y = Total cost and X = Number of hours. A) Y = $3,600 + $10.40X B) Y = $8,800 + $7.80X C) Y = $21,360 + $1.52X D) Y = $26,672 + $1.84X Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 35) The following data has been assembled for John Company. Use the high-low method. Month Cost Hours January $24,400 2,000 February $39,000 2,200 March $35,280 2,750 April $36,400 3,500 May $40,000 4,000 The expected total cost at an operating level of 1,900 hours is ________. A) $23,180 B) $23,620 C) $24,000 D) $24,400 Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 36) Presented below is the production data for six months showing the mixed costs incurred by Anderson Company. Month Cost Units July $5,890 4,100 August $4,012 3,200 September $7,480 6,300 October $9,000 7,500 November $5,800 5,800 December $7,336 6,600 Anderson Company uses the high-low method to analyze mixed costs. The cost function is ________ where Y= Total Cost and X= Number of units. A) Y = $440 + $1.12X B) Y = $300 + $1.16X C) Y = $440 + $1.20X D) Y = $7,850 + $0.132X Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 37) Presented below is the production data for six months of the year showing the mixed costs incurred by Madeline Company. Month Cost Units July $6,000 4,000 August $11,250 9,500 September $11,500 9,000 October $11,700 10,500 November $14,000 12,000 December $12,850 10,000 Madeline Company uses the high-low method to analyze mixed costs. The predicted total cost at an operating level of 10,000 units is ________. A) $11,725 B) $11,800 C) $12,000 D) $12,850 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 38) The high-low method can be used to approximate a cost function. A disadvantage of this method is ________. A) it is difficult to apply due to rigorous calculations B) it is very costly to use C) it takes a long time to measure a cost function D) it makes inefficient use of information because it does not use all the available data Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 39) A disadvantage of the visual-fit method to approximate a cost function is ________. A) it does not use all the available data B) it is costly to apply C) it does not capture the general tendency of the data D) the placement of the line is subjective Answer: D Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 40) The least-squares regression method can be used to approximate a cost function. A disadvantage of this method is ________. A) it does not use all the available data points B) it requires a lot of prior cost data C) it requires subjective placement of the line D) it is more subjective than engineering analysis Answer: B Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 41) A measure of how much of the fluctuation of a cost is explained by changes in the cost driver is ________. A) least squares regression analysis B) standard error of coefficient C) standard error of constant D) coefficient of determination Answer: D Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 42) Regression analysis uses ________ to fit a cost function to all the historical data. A) visual placement B) engineering analysis C) statistical analysis D) activity analysis Answer: C Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 43) The first step in regression analysis is to plot the cost data against each potential cost driver because the plots may show ________. A) nonlinear trends in the data only B) outliers only C) nonlinear trends in the data and outliers D) missing cost data Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 44) In the linear cost function derived from regression analysis, the cost driver is the ________ variable and the cost to be explained is the ________ variable. A) dependent; independent B) independent; dependent C) intercept; dependent D) constant; independent Answer: B Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 45) The Rumler Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 4,500 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 5.04 Standard error of coefficient 0.92 The total fixed cost is ________. A) $5.04 times number of direct labor hours B) $595 C) $4,500 D) none of the above Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 46) The Anthony Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 4,500 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 5.02 Standard error of coefficient 0.92 The variable cost per direct labor hour is ________. A) $0.87 B) $0.92 C) $5.02 D) $4,500 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 47) The Lindsey Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 5,000 Standard error of Y estimate 595 R-Squared 0.87 No. of observations 30 Degrees of freedom 28 X Coefficient 4.02 Standard error of coefficient 0.81 The linear cost function is ________ where Y = Total utilities cost and X = Number of direct labor hours. A) Y = $5,000 + $0.87X B) Y = $5,000 + $0.81X C) Y = $595 + $0.81X D) Y = $5,000 + $4.02X Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 48) The Joseph Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 0.7 R-Squared 0.85 No. of observations 30 Degrees of freedom 28 X Coefficient 0.84 Standard error of coefficient 0.92 The coefficient of determination is ________. A) 0.70 B) 0.84 C) 0.85 D) 0.92 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 49) The Dorkin Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 4,200 Standard error of Y estimate 2,300 R-Squared 0.78 No. of observations 22 Degrees of freedom 20 X Coefficient 250.25 Standard error of coefficient 22.25 The total fixed cost is ________. A) $22.25 B) $250.25 C) $2,300 D) $4,200 Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 50) Noonan Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 4,200 Standard error of Y estimate 2,300 R-Squared 0.84 No. of observations 22 Degrees of freedom 20 X Coefficient 2.30 Standard error of coefficient 2.70 The variable cost per unit of product is ________. A) $0.84 B) $1.00 C) $2.30 D) $2.70 Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 51) Leno Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20 X Coefficient 11.75 Standard error of coefficient 2.1876 The linear cost function is ________ where Y = Total indirect materials cost and X = Number of units produced. A) Y = $2.1876 + $9,960X B) Y = $11.75 + $14,885X C) Y= $9,960 + $14,885X D) Y = $14,885 + 11.75X Answer: D Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 52) Jayson Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 0.90 R-Squared 0.60 No. of observations 22 Degrees of freedom 20 X Coefficient 0.70 Standard error of coefficient 2.1876 The coefficient of determination is ________. A) 0.60 B) 0.70 C) 0.90 D) 1.10 Answer: A Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 53) When evaluating a cost function estimated by least squares regression, it is important to see if the estimated cost function makes economic sense. This is assessed by ________. A) examining the sign of the coefficient of determination B) examining the sign of the fixed cost estimate C) examining the sign of the variable cost estimate D) examining the standard deviation of the cost driver Answer: C Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 54) Sandler Company manufactures electronic devices. The company is considering three cost drivers for measuring maintenance costs in the factory. The following cost functions have been estimated using each cost driver: Cost Driver Cost Function R2 1. X = number of parts Y = $20,000 + $5X R2 = 0.40 2. X = number of labor hours Y = $13,000 + $10X R2 = 0.95 3. X = number of machine hours Y = $15,000 + $7X R2 = 0.30 Which cost driver should be chosen? A) number of parts B) number of labor hours C) number of machine hours D) none of the above Answer: B Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 55) Biden Company manufactures small jewelry boxes. The company is considering three cost drivers for measuring support costs in the factory. The following cost functions have been estimated using each cost driver: Cost Driver Cost Function R2 1. X = gluing time in hours Y = $20,000 + $5X R2 = 0.20 2. X = labor hours Y = $13,000 + $10X R2 = 0.55 3. X = machine hours Y = $15,000 + $7X R2 = 0.90 Which cost driver should be chosen? A) gluing time in hours B) labor hours C) machine hours D) labor hours x gluing time in hours Answer: C Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 56) An engineering analysis is often not timely in measuring the cost function. Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 57) During an engineering analysis, knowledge about new costs may be obtained from experiments with prototypes. Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 58) Account analysis is one method of approximating cost functions. Answer: TRUE Diff: 1 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 59) When performing an engineering analysis, one must consider that the observed time period may be abnormal. Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 60) The account analysis method of measuring cost behavior does not rely on subjective assessments. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 61) The high-low method uses estimated cost data to approximate the cost function. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 62) Least-squares regression provides statistical information about the reliability of its cost estimates. Answer: TRUE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 63) In a regression analysis, the constant from the linear cost function is a measure of reliability. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 64) If regression analysis is used when measuring cost behavior, plotting the cost against each of the potential cost drivers is not necessary. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 65) In a linear cost function estimated by regression analysis, the constant or intercept measures variable cost per unit of the cost driver. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 66) In regression analysis, a lower coefficient of determination is better than a higher one. Answer: FALSE Diff: 2 LO: 3-4 AACSB: Reflective thinking skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 67) The Penquin Company has obtained the following data: Month Indirect Production Costs Direct Labor Hours July $92,095 4,900 August $105,056 5,480 September $80,000 3,000 October $99,400 4,400 November $110,000 6,000 December $97,404 3,900 Required: A) Using the high-low method, determine the cost function for the above data. Round to two decimal places. B) If direct labor hours equal 10,000, what are the total expected indirect production costs? Answer: A) ($110,000 - $80,000) / (6,000 - 3,000) = $10.00 = Variable cost Fixed cost = $110,000 - ($10.00 × 6,000) = $50,000 Cost Function: Y = $50,000 + $10.00X Where: Y= Total indirect production cost and X = Number of direct labor hours B) Y = $50,000 + $10.00(10,000) = $150,000 Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 68) Jorgensen Company used least squares regression analysis to obtain the following output: Maintenance Department Cost Explained by Number of Labor Hours Constant 8,200 Standard error of Y estimate 630 R2 0.94 No. of observations 20 Degrees of freedom 18 X coefficient 2.21 Standard error of coefficient 0.0966 Required: A) What is the total fixed cost of the maintenance department? B) What is the variable cost per labor hour for the maintenance department? C) What is the linear cost function? D) What is the coefficient of determination? Comment on the goodness of fit. Answer: A) $8,200 B) $2.21 C) Y = $8,200 + $2.21X Where: Y = Total Maintenance Department Cost and X = Number of labor hours D) The coefficient of determination is 0.94. This is very close to one and indicates that 94% of the fluctuation in the maintenance department cost can be explained by changes in the number of labor hours. The cost estimates in the linear function are very reliable. Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 69) Using activity analysis, Arnoldson Company has identified the appropriate cost driver for maintenance costs in a factory as the number of machine hours. The maintenance costs have been observed as follows within the relevant range of 5,000 to 8,000 machine-hours. Month Maintenance Cost Machine Hours January $7,900 5,600 February $8,500 7,100 March $7,400 5,000 April $8,200 6,500 May $9,100 7,300 June $9,800 8,000 July $7,800 6,200 Required: 1. Estimate the cost function using the high-low method. 2. If you were going to use the visual-fit method to estimate the cost function, what steps will you take? Answer: 1. Variable cost per machine hour = ($9,800 - $7,400) / (8,000 - 5,000) = $0.80 per machine hour Fixed cost = $9,800 - ($0.80 × 8,000) = $3,400 Y = $3,400 + $0.80X Where: Y = Total maintenance cost for a month X = number of machine hours 2. We plot all the data points on a graph. The y-axis is cost and the x-axis is number of machine hours. We then draw a line through all the points, using judgment to fit the line as close as possible to all the plotted points. We extend the line until it intersects the y-axis of the graph. The monthly fixed cost is equal to the point where the line intersects the y-axis or cost axis. To find the variable cost per machine hour, select any activity level and find the total cost at that activity level from the line. Then, subtract the fixed cost from the total cost, to yield variable cost. Finally, divide the variable cost by the units of activity to get the variable cost per unit of cost driver. Diff: 2 LO: 3-4 AACSB: Analytic skills Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of a mixed cost 70) The facilities housekeeping department at St. Luke's Hospital has determined that the appropriate cost driver for housekeeping costs is patient-days. There are 10,000 patient-days per month. The department has collected the following accounts for the past month: Monthly Housekeeping Expenses Amount Supervisors' Salaries Expense $10,000 Depreciation Expense—Scrubbing Machines $5,000 Cleaning Supplies Expense $7,000 Hourly Workers' Wages Expense $100,000 Insurance Expense—Scrubbing Machines $2,000 Required: Estimate the cost function using the account analysis method. Answer: Fixed Costs: Supervisors' Salaries Expense $10,000 Depreciation Expense—Scrubbing Machines $5,000 Insurance Expense