Module 14
Cost Behavior, Activity Analysis, and
Cost Estimation
Learning Objectives – coverage by question
True/False Multiple Choice Exercises Problems Essays
LO1 – Identify basic patterns
of how costs respond to 1-6, 1-4,
1-3
changes in activity cost 30-41, 58, 59 8, 9, 11
drivers.
LO2 – Determine a linear 7-16, 5, 6, 10,
4-7 1, 2
cost estimating equation. 42-57 12-16
LO3 – Identify and discuss
17-22,
problems encountered in cost 8, 9 3, 4
60, 61
estimation.
LO4 – Describe and develop
23-29,
alternative classifications for 10-12 7 5, 6
62-79
activity cost drivers.
©Cambridge Business Publishers, 2015
Test Bank, Module 14 14-1
,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
LO: 1
2. The wheels on an automobile are 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: 2
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 is not as effective as the scatter
diagram method in identifying outliers, but it is very convenient.
©Cambridge Business Publishers, 2015
14-2 Financial & Managerial Accounting for MBAs, 4th Edition
,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
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.
©Cambridge Business Publishers, 2015
Test Bank, Module 14 14-3
, 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.
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, 2015
14-4 Financial & Managerial Accounting for MBAs, 4th Edition
Cost Behavior, Activity Analysis, and
Cost Estimation
Learning Objectives – coverage by question
True/False Multiple Choice Exercises Problems Essays
LO1 – Identify basic patterns
of how costs respond to 1-6, 1-4,
1-3
changes in activity cost 30-41, 58, 59 8, 9, 11
drivers.
LO2 – Determine a linear 7-16, 5, 6, 10,
4-7 1, 2
cost estimating equation. 42-57 12-16
LO3 – Identify and discuss
17-22,
problems encountered in cost 8, 9 3, 4
60, 61
estimation.
LO4 – Describe and develop
23-29,
alternative classifications for 10-12 7 5, 6
62-79
activity cost drivers.
©Cambridge Business Publishers, 2015
Test Bank, Module 14 14-1
,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
LO: 1
2. The wheels on an automobile are 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: 2
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 is not as effective as the scatter
diagram method in identifying outliers, but it is very convenient.
©Cambridge Business Publishers, 2015
14-2 Financial & Managerial Accounting for MBAs, 4th Edition
,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
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.
©Cambridge Business Publishers, 2015
Test Bank, Module 14 14-3
, 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.
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, 2015
14-4 Financial & Managerial Accounting for MBAs, 4th Edition
