Chapter 10 Determining How Costs Behave

Chapter 10 Determining How Costs Behave

Objective 10.1

1) Which of the following statements related to assumptions about estimating linear cost functions is
FALSE?
A) Variations in a single cost driver explain variations in total costs.
B) A cost object is anything for which a separate measurement of costs is desired.
C) A linear function approximates cost behavior within the relevant range of the cost driver.
D) A high correlation between two variables ensures that a cause-and-effect relationship exists.
Answer: D
Diff: 2
Terms: cost estimation, linear cost function
Objective: 1
AACSB: Reflective thinking

2) A high correlation between two variables s and t indicates that:
A) s may cause t, or t may cause s
B) both may be affected by a third variable
C) the correlation may be due to random chance
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: cost function
Objective: 1
AACSB: Reflective thinking

3) Which of the following does NOT represent a cause-and-effect relationship?
A) Material costs increase as the number of units produced increases.
B) A company is charged 40 cents for each brochure printed and mailed.
C) Utility costs increase at the same time that insurance costs increase.
D) It makes sense that if a complex product has a large number of parts it will take longer to assemble
than a simple product with fewer parts.
Answer: C
Diff: 3
Terms: cost function
Objective: 1
AACSB: Reflective thinking




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,4) Bennet Company employs 30 individuals. Eighteen employees are paid $14 per hour and the rest are
salaried employees paid $4,000 a month. How would total costs of personnel be classified?
A) variable
B) mixed
C) a variable cost within a relevant range
D) a fixed cost within a relevant range
Answer: B
Diff: 2
Terms: mixed cost
Objective: 1
AACSB: Analytical skills

5) McGuinness Company employs 8 individuals. They are all paid $14.50 per hour. How would total
costs of personnel be classified?
A) variable
B) mixed
C) a variable cost within a relevant range
D) a fixed cost within a relevant range
Answer: A
Diff: 2
Terms: variable cost
Objective: 1
AACSB: Analytical skills

6) For February, the cost components of a picture frame include $0.25 for the glass, $.65 for the wooden
frame, and $0.80 for assembly. The assembly desk and tools cost $400. 1,000 frames are expected to be
produced in the coming year. What cost function best represents these costs?
A) y = 1.70 + 400X
B) y = 400 +1.70X
C) y = 2.10 + 1,000X
D) y = .90 + 400X
Answer: B
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

7) The cost components of a heater include $35 for the compressor, $12 for the sheet molded compound
frame, and $80 per unit for assembly. The factory machines and tools cost is $55,000. The company
expects to produce 1,500 heaters in the coming year. What cost function best represents these costs?
A) y = 1,500 + 127X
B) y = 1,500 +55,000X
C) y = 55,000 + 1,500X
D) y = 55,000 +127X
Answer: D
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

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,8) A linear cost function can represent:
A) mixed cost behaviors
B) fixed cost behaviors
C) variable cost behaviors
D) All of these answers are correct.
Answer: D
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Reflective thinking

9) The cost function y = 2,000 + 6X:
A) has a slope coefficient of 2,000
B) has an intercept of 6
C) is a straight line
D) represents a fixed cost
Answer: C
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

10) The cost function y = 150 + 10X:
A) has a slope coefficient of 150
B) has an intercept of 150
C) is a nonlinear
D) represents a fixed cost
Answer: B
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

11) The cost function y = 10,000 + 3X:
A) represents a mixed cost
B) will intersect the y-axis at 3
C) has a slope coefficient of 10,000
D) is a curved line
Answer: A
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills




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, 12) The cost function y = 90 + 8X:
A) has a slope coefficient of -8
B) will intersect the y-axis at 8
C) has a slope coefficient of 8
D) is a curved line
Answer: C
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

13) Which of the following is an equation of a fixed cost function?
A) y = bX + a
B) y = a + bX
C) y = bX
D) y = a
Answer: D
Diff: 2
Terms: linear cost function
Objective: 1
AACSB: Analytical skills

14) 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.
Answer: TRUE
Diff: 1
Terms: cost estimation
Objective: 1
AACSB: Analytical skills

15) 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: TRUE
Diff: 1
Terms: cost function
Objective: 1
AACSB: Reflective thinking

16) All cost functions are linear.
Answer: FALSE
Explanation: All cost functions are not linear, but for cost-behavior estimation we assume some are
linear within a relevant range.
Diff: 1
Terms: cost function
Objective: 1
AACSB: Reflective thinking




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