Chapter 3: Cost Behavior: Answer: True

CHAPTER 3: COST BEHAVIOR
1. Costs can display variable, fixed, or mixed behavior, and it important that they are classified accurately.
a. True
b. False
ANSWER: True
2. A cost that does not change as output changes is a variable cost, and one that changes is a fixed cost.
a. True
b. False
ANSWER: False
3. A cost object is the item for which managers want cost information, so the first step is to determine
appropriate cost objects.
a. True
b. False
ANSWER: True
4. Fixed costs are costs that, in total, are constant within the relevant range as the level of the associated driver varies.
a. True
b. False
ANSWER: True
5. Variable costs are defined as costs that, in total, are constant regardless of change in an activity driver.
a. True
b. False
ANSWER: False
6. Mixed costs are costs that have both a fixed and a variable component.
a. True
b. False
ANSWER: True
7. Resources, such as direct materials, direct labor, electricity, equipment, and so on, are economic elements
that enable one to perform activities.
a. True
b. False
ANSWER: True
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3: Cost Behavior
8. The level of activity performance where the amount of activity capacity needed corresponds to the level
of efficiency required is called the activity capacity.
a. True
b. False
ANSWER: False
9. Resources are categorized as flexible, which are supplied as needed, and committed, which are supplied in advance
of usage.
a. True
b. False
ANSWER: True
10. Activity-based use of resources can improve both managerial control and decision making because it
encourages managers to pay more attention to controlling resource usage and spending.
a. True
b. False
ANSWER: True
11. Methods of estimating costs used by companies include the industrial engineering method, the account analysis
method, and the instant decision method.
a. True
b. False
ANSWER: False
12. The industrial engineering method is used to determine which activities, and in what amounts, are necessary
to complete a process.
a. True
b. False
ANSWER: True
13. The account analysis method can be used to estimate costs by classifying accounts in the general ledger
as variable.
a. True
b. False
ANSWER: False
14. The three widely used quantitative methods of separating a mixed cost into its fixed and variable components
are the high-low method, the scatter plot method, and the method of least squares.
a. True
b. False
ANSWER: True
15. The high-low method preselects the two points that are used to compute the parameters F and X in the
expression Y = F + VX
a. True
b. False
ANSWER: False
16. The plot of data points showing the relationship between materials handling costs and activity output is called a
scattergraph.
a. True
b. False
ANSWER: True
17. In the method of least squares, each single measure of closeness is first squared. Squaring the deviations avoids
problems caused by a mix of positive and negative numbers.
a. True
b. False
ANSWER: True
18. A feature of regression routines, not provided by the scatter plot of high-low methods, is to provide information to
and in the assessment of reliability of the estimated costs formula.
a. True
b. False
ANSWER: True
19. The percentage of variability in the dependent variable explained by an independent variable (i.e. measure of
activity output) is called the coefficient of correlation.
a. True
b. False
ANSWER: False
20. An alternative measure of goodness of fit is the coefficient of determination.

a. True
b. False
ANSWER: False
21. Finding a strong statistical association between an activity cost and an activity driver can provide evidence
to managers about the correctness of a driver selection.
a. True
b. False
ANSWER: True
22. Whenever least squares is used to fit an equation involving two or more independent variables, the method is
called multiple regression.
a. True
b. False
ANSWER: True
23. When Multiple regression is used, the user has a choice of using manual computation or using regression programs.
a. True
b. False
ANSWER: False
24. Multiple regression is a dependable tool for identifying the behavior of activity costs.
a. True
b. False
ANSWER: True
25. Multiple regression can be useful to assess cost behavior when dependent variable is affected by only one
independent variable.
a. True
b. False
ANSWER: False
26. A number of cost behavior patterns do not follow a linear pattern, instead, they follow a nonlinear cost curve called
the learning curve.
a. True
b. False
ANSWER: True
27. Managers agree that the ideas behind the learning curve can extend to the service industry only.
a. True
b. False
ANSWER: False
28. The basis of the learning curve is that as we perform an action over and over, we improve, and each additional
performance takes less time than the preceding ones.
a. True
b. False
ANSWER: True
29. The experience curve relates cost to increased efficiency, such that the more a task is performed, the lower the
cost of doing will be.
a. True
b. False
ANSWER: True
30. The cumulative average-time learning curve model states that the cumulative average time per unit increases by a
constant percentage.
a. True
b. False
ANSWER: False
31. The most widely used method to determine cost behavior is managerial judgement.
a. True
b. False
ANSWER: True
32. Managerial judgement includes the possibility of mixed costs.

a. True
b. False
ANSWER: False
33. Before opting to use managerial judgment, management should make sure that each cost is predominantly fixed or
variable.
a. True
b. False
ANSWER: True
34. Based on managerial judgement, the best predictor of manufacturing costs is the units available.
a. True
b. False
ANSWER: False
35. If a company changes from skilled labor to robots, the previous data are of little value in predicting future costs.
a. True
b. False
ANSWER: True
36. explain changes in costs as units produced change.
ANSWER: Unit level drivers
37. explain changes in cost factors other than changes in units produced.
ANSWER: Non-unit-based costs drivers
38. analysis focuses on how costs react to changes in activity levels.
ANSWER: Cost behavior
39. are assumed to be the sole drivers of a traditional cost management system.
ANSWER: Unit based cost drivers
40. result when organizations acquire many multiperiod service capacities by paying cash up front.
ANSWER: Committed fixed expenses
41. are those acquired from outside sources where the terms of acquisition do not require any long-term
commitments.
ANSWER: Flexible resources
42. are costs incurred that provide long-term activity capacity.
ANSWER: Committed resources
43. A function displays a constant level of cost for a range of output and then jumps to a higher level.
ANSWER: step-cost
44. Costs that follow a step-cost behavior are defined as costs.
ANSWER: step-fixed
45. The analysis method is a method of determining cost behavior.
ANSWER: account
46. The method may be used to determine the activities and amounts for cost behavior.
ANSWER: industrial engineering
47. and studies may be used in conjunction with the industrial engineering method.
ANSWER: Time; motion
48. The three quantitative methods of separating a mixed cost into its fixed and variable components are: the high-low
method, the scatter plot method and the method of .
ANSWER: least squares
49. The method of least squares requires a in order to be utilized.
ANSWER: regression
50. The Y in the equation Y = F + VX represents the , the dependent variable
ANSWER: total cost
51. The parameter is the point at which the mixed cost line intercepts the cost (vertical) axis.
ANSWER: intercept
52. The graph showing the relationship between activity costs and drivers/outputs is
called the __________ .
ANSWER: scattergraph
53. The hypothesis test of cost parameters indicates whether the parameters are different
from __________ .
ANSWER: zero
54. A interval provides a range of values for the actual cost with a prespecified degree of confidence.
ANSWER: confidence
55. A correlation coefficient near +1 means that two variables are moving in the direction.
ANSWER: same
56. A correlation coefficient near 0 means that two variables are .
ANSWER: unrelated
57. A correlation coefficient near -1 means that two variables are moving in the direction
ANSWER: opposite
58. The method is used whenever least squares is used to fit an equation involving two or more
independent variables.
ANSWER: multiple regression
59. Multiple regression has or independent variables.
ANSWER: two; more
60. is useful when the dependent variable is affected by more than one independent variable.
ANSWER: Multiple regression
61. When a cost behavior pattern does not follow a linear pattern, a non linear cost curve is used called the
__________ curve.
ANSWER: learning
62. Each time cumulative volume doubles, fall by a constant and predictable percentage.
ANSWER: costs
63. Costs in marketing, distribution, and service after the sale as number of units produced and sold
__________ .
ANSWER: decrease; increases
64. Cumulative average-time curve assumes the cumulative average time per unit decreases by a
constant percentage each time the cumulative quantity of units produced doubles.
ANSWER: learning
65. Knowledge of cost and activity-level relationship is used by experienced .
ANSWER: managers
66. Cost behavior analysis focuses on how costs

a. react to changes in profit.
b. react to changes in activity level.
c. change over time.
d. both a and c.
ANSWER: b
67. The drivers that explain changes in costs as units produced change are called:
a. Non-unit-level drivers
b. Activity based cost drivers
c. Unit-level drivers
d. All of these
ANSWER: c
68. Drivers that explain changes in costs as factors other than changes in units produced are called:
a. Functional based cost drivers
b. Non-unit-based cost drivers
c. Unit-based cost drivers
d. None of these
ANSWER: b
69. In a traditional cost management system, cost behavior is assumed to be driven only by
a. unit based cost drivers.
b. non-unit level cost drivers.
c. activity-based cost drivers.
d. none of these.
ANSWER: a
70. Which of the following would be an example of a unit-based cost driver?

a. engineering orders
b. material moves
c. inspection hours
d. direct labor hours
ANSWER: d
71. A $4,000 per month salary paid to a supervisor is an example of a:

a. fixed cost.
b. variable cost.
c. step cost.
d. mixed cost.
ANSWER: a
72. When the volume of activity increases within the relevant range, the fixed cost per unit
a. decreases at first, then increases.
b. remains the same.
c. decreases.
d. increases.
ANSWER: c
73. Fixed cost per unit is $7 when 25,000 units are produced and $5 when 35,000 units are produced. What is the
total fixed cost when nothing is produced?
a.
$130,000 b.
$200,000
c. $12
d. $175,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $7 × 25,000 = $175,000
74. The range of activity within which a linear cost function is valid is called the
a. normal range.
b. relevant range.
c. activity range.
d. none of these.
ANSWER: b
75. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the
following costs would be represented by a line that is parallel to the horizontal axis?
a. total direct material costs
b. a consultant paid $75 per hour with a maximum fee of $1,200
c. employees who are paid $10 per hour and guaranteed a minimum weekly wage of $200
d. rent on exhibit space at a convention
ANSWER: d
76. Given the following graphs, which graph represents fixed costs?
I II III
a. I
b. II
c. III
d. none of these
ANSWER: b
77. As the volume of activity increases within the relevant range, the variable cost per unit
a. decreases.
b. decreases at first, then increases.
c. remains the same.
d. increases.
ANSWER: c
78. A manufacturing company pays an assembly line worker $12 per hour. What is the proper classification of this
labor cost?
a. variable cost
b. semivariable cost
c. fixed cost
d. mixed cost
ANSWER: a
79. The direct material cost is $20,000 when 2,000 units are produced. What is the direct material cost for 2,500 units
produced?
a. $15,000
b. $ 5,000
c. $20,000
d. $25,000
ANSWER: d
RATIONALE:
SUPPORTING CALCULATIONS: $20,000/2,000 × 2,500 = $25,000
80. Sandusky Corporation has the following costs for 1,000 units:
Total Cost Cost per Unit

Direct materials $1,500 $1.50
Direct labor 7,500 7.50
Depreciation on building 30,000 30.00
What is the total cost of direct materials for 100 units?
a. $1.50
b. $ 3.00
c. $150.00
d. $225.00
ANSWER: c
RATIONALE:
SUPPORTING CALCULATIONS: 100 × $1.50 = $150
81. Which of the following costs is a variable cost?

a. materials used in production
b. research and development
c. supervisors' salaries
d. rent
ANSWER: a
82. Direct materials are an example of a

a. fixed cost.
b. variable cost.
c. step cost.
d. mixed cost.
ANSWER: b
83. Which of the following statements is TRUE about fixed and variable costs?
a. Variable costs are constant in total and fixed costs are constant per unit.
b. Both costs are constant when considered on a total basis.
c. Both costs are constant when considered on a per-unit basis.
d. Fixed costs are constant in total and variable costs are constant per unit.
ANSWER: d
84. Which of the following statements is TRUE about relevant range?

a. When costs reach a level above the relevant range, they are considered appropriate for analysis.
b. Linear estimates of an economist's curvilinear cost function is only valid within the relevant range.
c. When costs reach a level below the relevant range, they are considered appropriate for analysis.
d. The nonlinear relevant range is ignored, and only those costs outside of this range may be considered.
ANSWER: b
85. Which of the following is NOT a correct statement concerning cost behavior?
a. According to economics, in the long run, all costs are variable.
b. Variable costs increase in total in relation to the activity driver.
c. Unit fixed costs increase or decrease inversely in relation to the activity driver.
d. None of the above
ANSWER: d
86. The following is an example of a mixed cost:

a. direct materials
b. materials used in production
c. salary plus commission on sales
d. supervisors’ salaries
ANSWER: c
87. The linearity assumption is most likely to be a close approximation for an underlying nonlinear cost function
a. within a relevant range of activity.
b. over the long run.
c. for short-run periods.
d. both a and c.
ANSWER: a
88. Mixed costs, by definition, contain both

a. product and period costs.
b. fixed and variable costs.
c. direct and indirect costs.
d. Controllable and no controllable costs.
ANSWER: b
89. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the
following costs would be represented by a line that starts at the origin and reaches a maximum value beyond
which the line is parallel to the horizontal axis?
a. total direct material costs
b. a consultant paid $100 per hour with a maximum fee of $2,000
c. employees who are paid $15 per hour and guaranteed a minimum weekly wage of $300
d. rent on exhibit space at a convention
ANSWER: b
90. Longhorn Enterprises rents a truck for a flat fee plus an additional charge per mile. What type of cost is the rent?
a. step cost
b. fixed cost
c. variable cost
d. mixed cost
ANSWER: d
91. If production volume increases from 16,000 to 20,000 units,

a. total costs will increase by 20 percent.
b. total costs will increase by 25 percent.
c. total variable costs will increase by 25 percent.
d. mixed and variable costs will increase by 25 percent.
ANSWER: c
92. Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $250 per month plus
$0.40 per mile. Management is evaluating the desirability of switching to a modern, fuel-efficient truck, which
can be leased from Goliath, Inc., for a fee of $600 per month plus $0.05 per mile. All operating costs and fuel
are included in the rental fees. In general, a lease from
a. Goliath, Inc., is economically preferable to a lease from Burton Enterprises regardless of the monthly use.
b. Burton Enterprises is economically preferable below 1,000 miles per month.
c. Burton Enterprises is economically preferable to a lease from Goliath, Inc., regardless of the monthly use.
d. Burton Enterprises is economically preferable above 1,000 miles per month.
ANSWER: b
93. An equipment lease that specifies a payment of $8,000 per month plus $7 per machine hour used is an
example of a
a. fixed cost.
b. variable cost.
c. step cost.
d. mixed cost.
ANSWER: d
Figure 3-1
Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year
and operating cost is $2 per machine hour. Last year 275,000 machine hours were used to produce 100,000 units.
94. See Figure 3-1. Develop a cost equation for the total machine maintenance cost.
a. Y= $275,000
b. Y = $20,000
c. Y = $20,000 + $2 MHR
d. Y = $2 MHR
ANSWER: c
RATIONALE: Y = $20,000 + 2 MHR
95. Refer to Figure 3-1. Compute the total variable machine maintenance cost last year.
a. $275,000
b. $240,000
c. $220,000
d. $550,000
ANSWER: d
RATIONALE: TVC = $2 (275,000) = $550,000
96. See Figure 3-1. Compute the total machine maintenance cost for last year.
a. $570,000
b. $550,000
c. $420,000
d. $20,000
ANSWER: a
RATIONALE: Y = $20,000 + $2 (275,000) = $570,000
97. See Figure 3-1. What is the total maintenance cost per unit produced?
a. $0.55
b. $4.20
c. $5.50
d. $5.70
ANSWER: d
RATIONALE: Y = $20,000 + $2(275,000)/ 100,000 = $5.70 per unit
98. See Figure 3-1. If 300,000 machine hours had been worked last year, what would be the total machine
maintenance cost?
a. $600,000
b. $620,000
c. $420,000
d. $220,000
ANSWER: b
RATIONALE: Y = $20,000 + $2(300,000) = $620,000
99. The efficient level of activity performance is called

a. practical capacity.
b. activity capacity.
c. unused capacity.
d. acquired capacity.
ANSWER: a
100. If all the activity capacity acquired is not used, this is an example of
b. activity capacity.
c. unused capacity.
d. ideal capacity.
ANSWER: c
101. Flexible resources

a. are supplied as needed.
b. are acquired from outside sources, not requiring a long-term commitment.
c. have no unused capacity.
d. all of the above.
ANSWER: d
102. Committed resources

a. are supplied as needed.
b. are acquired by a contract for the exact amount of their usage.
c. may exceed the demand for their usage.
ANSWER: c
103. Which of the following is an example of a committed fixed expense?

a. depreciation on a factory building
b. supervisor's salary
c. direct labor
d. insurance on a building
ANSWER: a
104. The expenses that result when organizations acquire many multiperiod service capacities by paying cash up front
or by entering into an explicit contract that requires periodic cash payments are called:
a. Managed fixed expenses
b. Committed fixed expenses
c. Discretionary fixed expenses
d. Period expenses
ANSWER: b
105. The type of resources that are acquired from outside sources, where the terms of acquisition do NOT require
any long-term commitment for any given amount of the resource are called:
a. Flexible resources
b. Committed resources
c. Discretionary fixed expenses
d. Committed fixed expenses
ANSWER: a
106. The costs incurred that provide long-term activity capacity, usually as the result of strategic planning are called:
a. Discretionary fixed expenses
c. Mixed costs
d. Step-variable costs
ANSWER: b
107. Which of the following is an example of a discretionary fixed expense?

a. contract workers
b. property taxes on a factory building
c. depreciation on a factory building
d. insurance on a building
ANSWER: a
108. The costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly planning
are called:
a. Discretionary fixed expenses
c. Mixed costs
d. Step-variable costs
ANSWER: a
109. When a firm acquires the resources needed to perform an activity, it is obtaining
b. resource usage.
c. activity capacity.
d. unused capacity.
ANSWER: c
110. The activity-based resource usage model allows managers to better calculate the changes in resource supply and
demand resulting from decisions such as:
a. to make or buy production components.
b. maximization of individual unit performance.
c. increasing the allocation of costs.
d. focusing on managing costs rather than activities.
ANSWER: a
111. A nursing home requires one nurse for each six patients. This is an example of a
a. fixed cost.
b. variable cost.
c. step cost.
d. mixed cost.
ANSWER: c
112. Which of the following is an example of a step-fixed cost?

a. cost of disposable gowns used by patients in a hospital
b. cost of soaking solution to clean jewelry (Each jar can soak 50 rings before losing effectiveness.)
c. cost of tuition at $300 per credit hour up to 15 credit hours (Hours taken in excess of 15 hours are free.)
d. cost of disposable surgical scissors, which are purchased in increments of 100
ANSWER: d
113. Salaries paid to shift supervisors are an example of a

a. step-variable cost.
b. mixed cost.
c. step-fixed cost.
d. variable cost.
ANSWER: c
Figure 3-2
A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders were
processed.
114. Refer to Figure 3-2. What is the cost of unused activity?

a. $300,000
b. $240,000
c. $30
d. $60,000
ANSWER: d
RATIONALE:
SUPPORTING CALCULATIONS: ($300,000/20,000) × 4,000 = $60,000
115. Refer to Figure 3-2. What is the cost of resource usage?

a. $300,000
b. $240,000
c. $30
d. $60,000
ANSWER: b
RATIONALE:
SUPPORTING CALCULATIONS: ($300,000/20,000) × $16,000 = $240,000
Figure 3-3
The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year
5,250 design changes were produced by the four engineers. Each engineer is paid $60,000 per year
116. Refer to Figure 3-3. Calculate the activity rate per change order.
a. $4 per change order

b. $10 per change order
c. $40 per change order
d. $15 per change order
ANSWER: c
RATIONALE: activity rate = (4 × 60,000)/(4 × 1,500) = $40 per change order
117. Refer to Figure 3-3. Calculate the unused capacity.

a. 750 change orders
b. 1,375 change orders
c. 4,000 change orders
d. 2,000 change orders
ANSWER: a
RATIONALE: Total capacity availability - actual activity = unused capacity (4 × 1,500) - 5,250 = 750 change
orders
118. Refer to Figure 3-3. What is the unused capacity in dollars?

a. $60,000
b. $30,000
c. $240,000
d. $15,000
ANSWER: b
RATIONALE: unused capacity × activity rate = unused capacity in dollars 750 × $40 = $30,000
119. Which of the following is NOT a method of determining cost behavior?

a. industrial engineering method
b. account analysis method
c. statistical and quantitative methods
d. confidence interval model
ANSWER: d
120. The method for analyzing cost behavior that generally classifies general ledger accounts is
a. account analysis method.
b. multiple regression method.
c. industrial engineering method.
d. learning curve method.
ANSWER: a
121. The cost behavior method that may use time and motion studies to determine the activities and amounts for
cost behavior analysis is
a. account analysis method.
b. industrial engineering method.
c. regression analysis.
d. high-low method.
ANSWER: b
122. Which of the following decision-making tools would NOT be useful in determining the slope and intercept
of a mixed cost?
a. scattergraphs
b. least-squares method
c. high-low method
d. account analysis method
ANSWER: d
123. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as
follows:
a. (Total costs - Fixed costs)/Unit volume
b. (Total costs/Unit volume) - Fixed costs
c. (Total costs × Unit volume) - (Fixed costs/Unit volume)
d. Total costs - (Fixed costs/Unit volume)
ANSWER: a
124. In the formula Y = F + VX, VX refers to the

a. total variable costs.
b. intercept.
c. dependent variable.
d. independent variable.
ANSWER: a
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
125. In the formula Y = F + VX, V refers to the

a. dependent variable.
b. intercept.
c. slope.
d. total variable costs.
ANSWER: c
126. In the formula Y = F + VX, F refers to the

a. slope.
b. intercept.
ANSWER: b
127. In the formula Y = F + VX, Y refers to the

a. slope.
b. intercept.
ANSWER: c
128. In the formula Y = F + VX, X refers to the

a. slope.
b. intercept.
ANSWER: d
129. Total costs may be computed as follows:

a. Fixed costs + (Variable costs per unit × Unit volume)
b. (Fixed costs per unit × Unit volume) + Variable costs
c. Fixed costs per unit + (Variable costs per unit × Unit volume)
d. (Fixed costs per unit × Unit volume) + Variable costs per unit
ANSWER: a
part.
130. Amigos Industries analyzed the relationship between total factory overhead and changes in direct labor hours.
It found the following: Y = $6,000 + $6X
The Y in the equation is an estimate of
a. total variable costs.
b. total direct labor hours.
c. total factory overhead.
d. total fixed costs.
ANSWER: c
131. Assume the following information:
Volume Total Cost

90 units $1,200
98 units $1,300
106 units $1,400
What is the variable cost per unit?

a. $15.00
b. $12.50
c. $13.75
d. $14.78
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($1,400 - $1,300)/(106 - 98) = $12.50
part.
132. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function

Electricity $200 + $20 per direct labor hour
Maintenance $400 + $30 per direct labor hour
Supervisors' salaries $20,000 per month
Indirect materials $16 per direct labor hour
If January production is expected to be 2,000 units requiring 3,000 direct labor hours, estimated manufacturing
overhead costs would be
a. $20,733.
b. $198,000.
c. $152,600.
d. $218,600.
ANSWER: d
RATIONALE:
SUPPORTING CALCULATIONS:
Electricity [$200 + ($20 × 3,000)]
$ 60,200
Maintenance [$400 + ($30 × 3,000)] 90,400
Supervisors' salaries 20,000
Indirect materials ($16 × 3,000) 48,000
Overhead $218,600
part.
133. Advantages of the method of least squares over the high-low method include all of the following EXCEPT
a. a statistical method is used to mathematically derive the cost function.
b. only two points are used to develop the cost function.
c. the squared differences between actual observations and the line (cost function) are minimized.
d. all the observations have an effect on the cost function.
ANSWER: b
134. Weaknesses of the high-low method include all of the following EXCEPT
a. only two observations are used to develop the cost function.
b. the high and low activity levels may not be representative.
c. the method does not detect if the cost behavior is nonlinear.
d. the method is relatively complex and difficult to apply.
ANSWER: d
135. The high-low method may give unsatisfactory results if

a. the points are unrepresentative.
b. volume of activity is heavy.
c. volume of activity is light.
d. the data points all fall on a line.
ANSWER: a
Figure 3-4
The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs

January 1,400 $2,200
February 2,800 5,400
March 3,200 5,700
April 1,750 3,900
May 1,200 2,400
June 2,100 4,050
136. Refer to Figure 3-4. Using the high-low method, estimated variable cost per unit of production is
a. $1.75
b. $1.65
c. $1.53
d. $1.26
ANSWER: b
RATIONALE:
SUPPORTING CALCULATIONS: ($5,700 - $2,400)/(3,200 - 1,200) = $1.65
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
137. Refer to Figure 3-4. What are the fixed costs?

a. $420
b. $100
c. $200
d. none of these
ANSWER: a
RATIONALE: $2,400 = FC + $1.65(1,200)
FC = $2,400 - $1,980 = $420
138. The following information was available about supplies cost for the second quarter of the year:
Month Production Volume Supplies Cost

July 700 $3,185
August 1,600 7,100
September 600 2,700
Using the high-low method, the estimate of supplies cost at 1,000 units of production is
a. $2,700.
b. $4,460.
c. $4,900.
d. $7,100.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: Variable cost = ($7,100 - $2,700)/(1,600 - 600) = $4.40 Fixed
cost = $7,100 - (1,600 × $4.40) = $60 Total cost = $60 + $4.40X = $60 + ($4.40 × 1,000) = $4,460
139. Stanfil Corporation developed a cost function for manufacturing overhead costs of
Y = $8,000 + $1.60X. Estimated manufacturing overhead costs at 10,000 units of production are
a. $16,000.
b. $17,600.
c. $24,000.
d. $26,000.
ANSWER: c
RATIONALE:
SUPPORTING CALCULATIONS: Y = $8,000 + ($1.60 × 10,000) = $24,000
140. Barron Enterprises has the following information about its truck fleet miles and operating costs:
Year Miles Operating Costs

2016 400,000 $256,000
2017 480,000 280,000
2018 560,000 320,000
What is the best estimate of total costs using the high-low method if the expected fleet mileage for 2018 is 500,000
miles?
a. $288,000
b. $296,000
c. $256,000
d. $320,000
ANSWER: b
RATIONALE:
SUPPORTING CALCULATIONS: ($320,000 - $256,000)/(560,000 - 400,000) = $0.40 per mile
Fixed costs = $320,000 - (560,000 × $0.40) = $96,000 Total costs = $96,000 + ($0.40 × 500,000)
=$296,000
141. The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the
following data:
Month Cost of Electricity Direct Labor Hours

February $ 8,100 750
May 9,000 850
August 10,200 1,000
November 8,700 800
Using the high-low method, which of the following is the best equation?
a. Y = $900 + $12.00X
b. Y = $900 + $8.40X
c. Y = $1,800 + $8.40X
d. Y = $2,400 + $8.40X
ANSWER: c
RATIONALE:
SUPPORTING CALCULATIONS: ($10,200 - $8,100)/(1,000 - 750) = $8.40 Fixed costs = $10,200
- (1,000 × $8.40) = $1,800
Figure 3-5
Longberry Corporation manufactures and sells party items. The following representative direct labor hours and
production costs are provided for a four-month period:
Month Direct Labor Hours Production Costs

May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000
Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation
142. Refer to Figure 3-5. The monthly production cost can be expressed as
a. X = aY + b
b. X = a + bY
c. Y = a + bX
d. Y = b + aX
ANSWER: c
143. Refer to Figure 3-5. Using the high-low method, what is the cost formula for estimating costs?
a. Total cost = $20,000 + $2.08X
b. Total cost = $7,500 + $2.08X
c. Total cost = $5,000 + 2.08X
d. Total cost = $2.08X
ANSWER: b
RATIONALE: ($20,000 - $15,000)/(6,000 - 3,600) = 2.0833 $20,000 = FC + (6,000 × 2.08)=
$7,500
144. Refer to Figure 3-5. Predict a cost for 5,000 labor hours.
a. $17,900
b. $17,700
c. $16,667
d. $30,400
ANSWER: a
RATIONALE: Y = $7,500 + 2.08(5,000) = $17,900
145. The cost function derived by the least-squares cost estimation method
a. is linear.
b. must be tested for minima and maxima.
c. is parabolic.
d. is quadratic.
ANSWER: a
146. The scatterplot method of cost estimation

a. is influenced by extreme observations.
b. requires the use of judgment.
c. uses the least-squares method.
d. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.
ANSWER: b
147. The following information was taken from a computer printout generated with the least-squares method for use in
estimating overhead costs:
Slope 45
Intercept 5,700
Correlation coefficient .72
Activity variable Direct labor hours
The cost formula is

a. Overhead = $5,700 - $45X
b. Overhead = $5,700 + $45X
c. Overhead = $5,700 + ($45 × 0.72)
d. Overhead = $5,700 × 0.72
ANSWER: b
148. Which of the following is an advantage of using the scatterplot method over the high-low method to estimate costs?
a. It is a statistical method to determine the “best fit.”
b. A cost analyst can review the data visually and eliminate outliers.
c. The quality of the cost formula relies on the objective judgment of the analyst.
d. The cost formula can be determined simply by looking at two points of data.
ANSWER: b
149. Spokane Corporation found its maintenance cost and sales dollars to be somewhat correlated. Last year's high and
low observations were as follows:
Maintenance Cost Sales

$46,000 $600,000
$52,000 $800,000
What is the fixed portion of the maintenance cost?
a.
$28,000 b.
$52,000 c.
$60,000 d.
$14,000
ANSWER:
a
RATIONALE:
SUPPORTING CALCULATIONS: ($52,000 - $46,000)/($800,000 - $600,000) = 0.03 Fixed costs =
$52,000 - (0.03 × $800,000) = $28,000
150. In the method of least squares, the deviation is the difference between the
a. predicted and estimated costs.
b. predicted and average costs.
c. average and actual costs.
d. predicted and actual costs.
ANSWER: d
Figure 3-6
The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs

June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355
151. Refer to Figure 3-6. Using a computer or calculator, compute the estimate of variable cost per unit of production
using the method of least squares. Rounded to two decimal places, this value would be
a. $3.21.
b. $2.70.
c. $1.31.
d. $1.23.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:

Month X y XY x2
June 75 $250 $18,750 5,625
July 115 310 35,650 13,225
August 190 400 76,000 36,100
September 60 240 14,400 3,600
October 135 355 47,925 18,225
Totals 575 1,555 $192,725 76,775
V=
= [$192,725 - (575 $1,555/5)]/[76,775 - (575)2/5]

= ($192,725 - $178,825)/(76,775 - 66,125)
= $13,900/10,650
= $1.31
152. Refer to Figure 3-6. Using a computer or calculator, compute the estimate of the fixed portion of
maintenance costs using the method of least squares. Rounded to dollars, this value would be
a. $575
b. $166
c. $160
d. $66
ANSWER: c
RATIONALE:
F= (∑ Y/n-v∑ X/n)
= [$1,555/5- ($1.31 X 575/5)]
= $311-$150.65 = $160.35 or $160 (rounded)
153. Refer to Figure 3-6. Using a computer or calculator, compute the estimate of maintenance costs at
100 units of production using the method of least squares. This value would be
a. $291.
b. $321.
c. $336.
d. $698.
ANSWER: a
RATIONALE:
y = $160 + $1.31X = $160 + ($1.31 ×100) = $291
154. The hypothesis test of cost parameters

a. is not tested by the t-statistic.
b. indicates whether the parameters are different from zero.
c. tells the t-value of the significance achieved.
ANSWER: b
155. The coefficient of determination is

a. a measure of the variability of actual costs around the cost-estimating equation.
b. used to construct probability intervals for cost estimates.
c. a standardized measure of the degree to which two variables move together.
d. a measure of the percent variation in the dependent variable that is explained by an independent
variable.
ANSWER: d
Figure 3-7
The following computer printout estimated overhead costs using regression:
t for H(0) Std. error

Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07
R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17
Please find the following statistical table
degrees degrees of
of freedom 90% 95% 99% freedom 90% 95% 99%
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845
During the last accounting period 10,000 DLH were worked

.
156. Refer to Figure 3-7. What is the model?
a. Overhead = 4.81 + 6.78 DLH
b. Overhead = 100.41 + 14.05 DLH
c. Overhead = 14.05 + 100.41 DLH
d. DLH = 4.81 + 6.78 Overhead
ANSWER: b
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
157. Refer to Figure 3-7. The coefficient of determination in this model tells us that
a. the slope is 14.05.
b. the intercept is 100.41.
c. 80 percent of the variation in the overhead variable is explained by DLH.
d. the slope is significant.
ANSWER: c
158. Refer to Figure 3-7. The hypothesis tests of the cost parameters indicate(s) that
a. the slope is significantly different from zero.
b. the intercept is significantly different from zero.
c. both the slope and intercept are not significant.
d. both the slope and intercept are significant.
ANSWER: b
159. Refer to Figure 3-7. Find the t-value for a 90 percent

confidence level. a. 1.740
b. 1.753
c. 6.314
d. 2.920
ANSWER: b
RATIONALE: degrees of freedom = # of observations - # of variables 15 = 17 - 2 the t-value for 15
degrees of freedom at 90% = 1.753
160. Refer to Figure 3-7. What is the confidence interval for the predicted overhead cost rounded to the
nearest whole number for a 90 percent confidence level?
a. predicted value between 140,557 and 140,644
b. predicted value between 140,644 and 140,731
c. predicted value between 87,000 and 130,500
d. none of these
ANSWER: a
RATIONALE: the t-value for 15 degrees of freedom at 90% = 1.753 predicted cost = Y = 100.41 +
(14.05 × 10,000 DLH) = 140,600.41 confidence interval = predicted cost ± (t-value
× standard error) = 140,600.41 ± (1.753 × 25.03) = 140,600.41 ± 43.88 140,557 ≤
predicted value ≤ 140,644
161. A coefficient of determination of 0.91 means

a. the two variables move together in the same direction and have a strong relationship.
b. the parameter is not significant.
c. the model is significant 91 percent of the time.
d. that the independent variable explains 91 percent of the cost.
ANSWER: d
or in part.
162. What is the difference between a correlation equal to -1 and a correlation equal to 0?
a. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a
correlation of 0 means they are moving in opposite directions.
b. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a
correlation of 0 means they are unrelated.
c. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a
correlation of 0 means they are moving in the same direction.
d. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a
correlation of 0 means they are unrelated.
ANSWER: d
163. A managerial accountant has determined the following relationships between overhead and several
possible bases:
Basis Correlation with Total

Overhead
Direct labor hours 0.842
Direct labor dollars 0.279
Machine hours -0.837
Employee minutes in coffee breaks -0.243
The best basis for overhead application is

a. direct labor hours.
b. coffee breaks.
c. direct labor dollars.
d. machine hours.
ANSWER: a
164. What is the difference between a correlation equal to -1 and a correlation equal to +1?
a. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a
correlation of
+1 means they are moving in opposite directions.
b. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a
correlation of
+1 means they are unrelated.
c. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a
correlation of
+1 means they are moving in the same direction.
d. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a
correlation of
+1 means they are unrelated.
ANSWER: c
or in part.
165. What does a correlation coefficient near +1 mean?

a. Two variables are moving in the opposite direction.
b. Two variables are moving in the same direction.
c. Two variables are unrelated.
d. One variable is not a good predictor of the other.
ANSWER: b
166. The appropriate range for the coefficient of

correlation (r) is
a. 0 ≤ r ≤ 1.
b. -% ≤ r ≤ +%.
c. -1 ≤ r ≤ 1.
d. -1 ≤ r ≤ +%.
ANSWER: c
167. What does a correlation coefficient near 0 mean?

d. One variable is a good predictor of the other.
ANSWER: c
168. Which of the following statements is NOT true?

a. In selecting an independent variable for cost behavior analysis, it is important to determine the activity
that causes the cost being analyzed to occur.
b. Professional judgment is very important in selecting an activity measure for a particular cost.
c. A low correlation between two variables proves that one causes the other.
d. The least-squares cost estimation method can be used to measure the linear function.
ANSWER: c
169. What does a correlation coefficient near -1 mean?

d. One variable is not a good predictor of the other.
ANSWER: a
or in part.
170. The confidence interval for the predicted value of Y

a. is a measure of the likelihood that the prediction interval will not contain the actual cost.
b. is constructed by multiplying the t-statistic times the standard error.
c. can only be computed with 95 percent confidence.
ANSWER: b
171. The following data is available of estimated overhead costs using linear regression:

Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07
R Square (R 2) 0.80
Observations 17
Table of Selected Values: t Distribution
Degrees of
90% 95% 99%
Freedom
15 1.753 2.131 2.947
16 1.746 2.120 2.921
17 1.740 2.110 2.898
18 1.734 2.101 2.878
19 1.729 2.093 2.861
What is the interval around Y if 95 percent confidence is desired?

a. Y ± 20.024
b. Y ± 43.87759
c. Y ± 52.8133
d. Y ± 53.33893
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 2.131 × 25.03 = 53.33893
or in part.
Figure 3-8
The following computer printout estimated overhead costs using multiple regression:

1000 1.96 0.0250 510.204
Intercept
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527
R Square (R2) 0.94

Observations 160
During the year the company used 1,000 setup hours and 500 parts.
172. Refer to Figure 3-8. The degrees of freedom for the model is
a. 158
b. 157
c. 159
d. 160
ANSWER: b
173. Refer to Figure 3-8. Which slope and intercept parameters are significant at the 0.05 level?
a. intercept
b. setup hours
c. number of parts
d. all of the above
ANSWER: d
174. Refer to Figure 3-8. The model being measured is

a. Overhead = 1,000 + 25(Setup hours) + 100(# of parts)
b. Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts)
c. Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts)
d. Overhead = 1,000 + 25(Setup hours)
ANSWER: a
or in part.
175. Refer to Figure 3-8. What is the predicted overhead cost?

a. $2,500
b. $75,000
c. $76,000
d. none of these
ANSWER: c
RATIONALE: overhead = $25(1,000) + $100 (500) + $1,000= $76,000
176. Which of the following equations uses multiple regression?

a. Overhead = a + b(MH)
b. Overhead = a + b(DLH)
c. DL Costs = a + b(MH)
d. Overhead = a + b(DLH) + c(MH)
ANSWER: d
177. Which of the following statements is TRUE about the learning curve?
a. The curve decreases at an increasing rate.
b. The learning effect will eventually disappear as the number of units produced increases.
c. Failure to recognize learning curve effects will cause units produced later in a new production process to
receive less cost than they should.
d. All of these.
ANSWER: b
178. Wonder Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for
production for batches of 1,000 units. The variable labor costs are $30 per unit for the first 1,000-unit batch. Each
batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. What is the cumulative total time
(labor hours) to produce 2,000 units?
a. 180 hours
b. 160 hours
c. 100 hours
d. 80 hours
ANSWER: a
RATIONALE:
SUPPORTING CALCULATIONS: (100 × 0.80) + 100 = 180 hours
Figure 3-9
Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for
batches of 1,000 units. The variable labor costs are $30 per unit for the first 1,000-unit batch. Each batch requires
100 hours. There are $10,000 in fixed costs not subject to learning.
179. Refer to Figure 3-9. What is the cumulative total time (labor hours) to produce 2,000 units based on the cumulative
average-time learning curve?
a. 20 hours
b. 80 hours
c. 100 hours
d. 160 hours
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: (100 × 0.80) × 2 = 160 hours
180. Refer to Figure 3-9. What is the batch unit time (labor hours) to produce 2,000 units based on the cumulative
average time learning curve?
a. 20 hours
b. 60 hours
c. 100 hours
d. 80 hours
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: (100 × 0.80) × 2 = 160 hours - 100 = 60 hours
181. Refer to Figure 3-9. What is the cumulative total time using the incremental unit-time learning curve to produce
2,000 units?
a. 180
b. 100
c. 90
d. 80
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 0.80 × 100 = 80 + 100 = 180
182. Refer to Figure 3-9. What is the cumulative average time per batch using the incremental unit-time learning curve
for 2,000 units?
a. 180
b. 100
c. 90
d. 80
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: [(0.80 × 100) + 100] / 2 = 90
183. The learning curve that decreases by a constant percentage each time the cumulative quantity doubles is known as
the
a. cumulative average-time model.
b. cumulative total-time model.
c. incremental unit-time model.
d. decremental average-time model.
ANSWER: c
184. Apparent Corp. has developed the following information on product costs and inventories for a three-month period:
April May June

Finished goods inventory, units:
Beginning 20 25 30
Manufactured 25 40 35
Available 45 65 65
Sold 25 40 50
Ending 20 25 15
Manufacturing costs $4,000 $6,000 $5,5,500
Based on managerial judgment, the best predictor of manufacturing costs is

a. beginning inventory.
b. units manufactured.
c. ending inventory.
d. units available.
ANSWER: b
185. If a motorcycle manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data
a. are of little or no value in predicting future costs.
b. are useful in predicting future costs.
c. are representative of future costs.
d. should be used without adjustments to predict future costs.
ANSWER: a
186. Tornado Enterprises has the following information available regarding costs at various levels of monthly production:
Production volume 7,000 10,000
Direct materials $70,000 $100,000

Direct labor 56,000 80,000
Indirect materials 21,000 30,000
Supervisors' salaries 12,000 12,000
Depreciation on plant and equipment 10,000 10,000
Maintenance 32,000 44,000
Utilities 15,000 21,000
Insurance on plant and equipment 1,600 1,600
Property taxes on plant and equipment 2,000 2,000
Total $219,600 $300,600
Required:
a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one
of the following headings: Variable Costs Fixed Costs Mixed Costs
b. Develop an equation for total monthly production costs.
c. Predict total costs for a monthly production volume of 8,000 units.
ANSWER:
a. Variable Costs Fixed Costs Mixed Costs
Direct materials Supervisors' salaries Maintenance
Direct labor Depreciation Utilities
Indirect materials Insurance
Property taxes
b. Variable costs = ($300,600 - $219,600)/(10,000 - 7,000) = $27.00

Fixed costs = $300,600 - ($27.00 × 10,000) = $30,600 per month
Total monthly production costs = $30,600 + $27.00(monthly production units)
c. Total costs = $30,600 + ($27.00 × 8,000) = $246,600
187. For each of the following situations, draw a graph that best describes the cost behavior pattern. The vertical axis
represents costs, and the horizontal axis represents volume.
a. Direct materials per unit

b. Depreciation expense on a building per unit
c. An employee paid $50 per hour with a guaranteed salary of $1,000 per week
d. A consultant paid $100 per hour with a maximum fee of $2,000
e. Salaries of teachers where each teacher can handle a maximum of 15 students
ANSWER:
188. The Hamilton Mills Company cost accountant wants to determine the cost behavior for overhead. Based on
observation and discussion with the plant workers, the following accounts have been identified as the most relevant:
Supervisor salaries and depreciation are believed to be generally fixed; Indirect labor, Utilities, and Purchasing are
generally believed to be variable; Indirect labor primarily is responsible for moving materials; Utility cost is primarily
caused by the electricity to run machinery; and Purchasing costs are driven by the number of purchase orders.
These accounts and their balances are given below:
Depreciation
Indirect Supervisory on Plant and
Labor Utilities Purchasing Salaries Equipment
January $ 28,500 $ 24,000 $ 76,400 $ 40,000 $ 13,000
February 31,600 21,200 70,800 46,000 13,000
March 33,600 25,000 75,200 64,000 13,000
April 41,400 25,000 80,400 55,600 13,000
May 40,000 25,000 79,800 50,800 13,000
June 34,000 25,000 79,400 34,000 13,000
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000
Information on the activities is given below:
machine purchase
# of moves hours orders
January 340 5,400 250
February 380 5,200 300
March 400 5,800 450
April 500 6,200 380
May 480 6,000 340
June 420 5,600 200
Total 2,520 4,200 1,920
Required:
1. Why did the cost accountant decide that salaries and depreciation were fixed?
2. Calculate the average account balance for each of the 5 accounts and calculate the average monthly amount for
each of the three drivers.
3. Calculate the fixed overhead and variable rates for each of the costs. Write an equation for the total overhead
cost.
4. In January, 490 moves; 4,375 machine hours, and 220 purchase orders were expected. What is the amount of
overhead predicted?
ANSWER: 1. Depreciation is fixed. Salaries is fixed because it does not vary with the drivers.
2.
Indirect Utilities Purchasing Supervisory Depreciation on
labor Salaries Plant and Equipment
Total $209,100 $145,200 $462,000 $290,400 $78,000

# of months 6 6 6 6 6
AVG $34,850 $24,200 $77,000 $48,400 $13,000
# of moves machine hours purchase orders

Total 2,520 34,200 1,920
# of months 6 6 6
avg 420 5,700 320
3. FOH = $48,400 + $13,000 = $61,400

VC = IL $34,850/420 =$82.98
Utilities = $24,200/5,700 = $4.246
Purchasing = $77,000/320 = $240.625
Total OH = $61,400 + $82.98(moves) + $4.246(MHR) + $240.625(PO)
4.Total OH = $61,400 + $82.98(490) + $4.246(4,375) + $240.625(220) = $173,573.95
189. The average unit cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of
22,500 units is $2.10.
Required:
Develop an equation for total monthly costs.
ANSWER: Volume × Average Unit Cost = Total Costs

9,000 $3.00 = $27,000
22,500 2.10 = 47,250
Variable cost per unit = ($47,250 - $27,000)/(22,500 - 9,000) = $1.50

Fixed costs per month = $27,000 - ($1.50 × 9,000) = $13,500
Total monthly costs = $13,500 + $1.50(# of units)
190. Lowell & Company has the following cost data pertaining to the production of small desks:
Units Produced Direct Labor Costs Overhead Costs

150 $1,600 $2,800
120 1,500 2,570
210 1,750 2,910
190 1,700 2,850
140 1,600 2,600
Required:
a. Plot the preceding direct labor costs and overhead costs using the scatterplot method. Overhead
costs should be on the vertical axis.
b. Compute the fixed and variable components of the overhead costs using the high-low method.
ANSWER: a.
b. b = ($2,910 - $2,570)/(1,750 - 1,500) = 136% of DL Costs

a = $2,910 - ($1,750 × 1.36) = $530
Factory overhead costs = $530 + 1.36(DL Costs)
191. The following data were obtained from the books of Thomas Company:
Month Overhead Costs Direct Labor Hours

1 $14 3
2 18 5
3 25 7
4 12 4
5 26 8
6 8 2
The normal equations are ΣXY = aΣX + bΣX2

ΣY = an + bΣX
Required:
Use a computer or calculator to prepare the following:

a. Plot the data for overhead cost as a function of direct labor hours using the scatterplot method.
b. Compute the fixed and variable components of the overhead costs using the high-low method.
c. Compute the fixed and variable components of the overhead costs using the least-squares method.
d. Discuss the strengths and weaknesses of the three different cost estimation techniques used in parts a,
b, and c.
ANSWER:
a.
b. b = ($26 - $8)/(8 - 2) = $3 per DLH

a = $26 - (8 × $3) = $2
Overhead costs = $2 + $3(DLH)
c.
X Y XY X2
3 14 42 9
5 18 90 25
7 25 175 49
4 12 48 16
8 26 208 64
2 8 16 4
29 103 579 167
Normal equations:
(1) 579 = 29a + 167b

(2) 103 = 6a + 29b
Multiplying (1) by 6 and (2) by 29, we get:
3,474 = 174a + 1,002b

-2,987 = 174a + 841b
487 = 161b
b = $3.0248
Substituting 3.0248 into the first equation for b, we get:
579 = 29a + (167 × 3.0248)

a = $2.5468
The least-squares cost estimation
equation is Overhead costs =
$2.5468 + $3.0248(DLH)
d. Scatterplot Method: Scattergraphs help identify representative high and low volumes. They also
are useful in determining if costs can be reasonably approximated by a straight line. Scatter
graphs are simple to use, but professional judgment is required to draw a representative straight
line through the plot of historical data. This method is subjective in nature and probability
intervals cannot be developed.
High-Low Method: This method uses data from two time periods to estimate fixed and variable
costs. This is a good method to use when data is limited. It is a subjective method and
probability intervals cannot be developed. It is very important that the high and low volumes
represent the normal operating conditions of all observations. Again, professional judgment is
required to select the appropriate data.
Least-Squares Method: This method uses all available data. It uses a mathematical criterion,
which provides for an objective approach to cost estimation. In addition, this method can provide
information on how good the cost estimating equation fits the historical cost data and information
needed to construct probability intervals for cost estimates. It also can be used to develop
equations that are not linear in nature. This method requires more data points than the high-low
or scatterplot methods.
192. Machine hours and electricity costs for Lindbergh Industries for the year 2016 are as follows:
Month Machine Hours Electricity Costs

January 2,000 $ 9,200
February 2,320 10,500
March 1,520 6,750
April 2,480 11,500
May 3,040 14,125
June 2,640 11,000
July 3,280 12,375
August 2,800 11,375
September 1,600 7,750
October 2,960 13,000
November 3,760 15,500
December 3,360 13,875
Required:
a. Using the high-low method, develop an estimate of variable electricity costs per machine hour.
b. Using the high-low method, develop an estimate of fixed electricity costs per month.
c. Using the high-low method, develop a cost function for monthly electricity costs.
d. Estimate electricity costs for a month in which 3,000 machine hours are worked.
ANSWER: a. $3.91 [($15,500 - $6,750)/(3,760 - 1,520)]

b. $798.40 [$15,500 - ($3.91 × 3,760)]
c. Y = $798.40 + $3.91X, or
Electricity costs = $798.40 + ($3.91 × Machine hours)
d. $12,528.40 [$798.40 + ($3.91 ×3,000)]
or in part.
193. Given the following information:
Month HR Dept Costs # new hires # terminations

January $785,000 444 137
February $569,000 276 250
March $603,000 219 138
April $445,000 343 99
May $463,000 355 75
June $489,000 298 83
July $400,000 196 47
August $423,000 258 92
September $469,000 307 101
October $538,000 389 175
November $667,000 402 23
December $403,000 361 10
Required:
a. Calculate an estimate of HR department costs using the hi-low method using # of new
hires as the variable parameter
b. Calculate an estimate of HR department costs using the hi-low method using #
termination as the variable parameter
c. Which parameter do you feel is a better driver of HR cost?
ANSWER: Solution:
a. Variable using New Hires = ($785,000 - 400,000) / (444 -196) = $1,552.42

b. Variable using Terminations = ($569,000 - 403,000) / (250 - 10) = $691.67
a. Fixed using new hires = $785,000 - (137 × $4,277.78) = $198,944.14

b. Fixed using terminations = $569,000 - (250 × $691.67) = $396,082.50
c. There is no good way to determine which driver is a better predictor of HR

costs in a given period. Using a regression analysis is the best way to determine
if your parameters correlate to the prediction of overall cost.
or in part.
194. The plant manager requested information to assist in estimating maintenance costs. The following computer
printout was generated using the least-squares method:
Intercept 2550
Slope 1.85
Correlation coefficient 0.84
Activity variable Units of production volume
Required:
a. Using the information from the computer printout, develop a cost function that can be
used to estimate maintenance costs at different volume levels.
b. Estimate maintenance costs if expected production for next month is 10,000 units.
ANSWER:
a. Total maintenance costs = $2,550 + $1.85X

b. Total maintenance costs = $2,550 + ($1.85 × 10,000) = $21,050
part.
195. The following excel printout provides information to estimate overhead costs using linear regression:
Standard
Coefficients Error t Stat P-value Lower 95% Upper 95%
Intercept 6035.987027 1411.05464 4.277642 0.002696 2782.0871 9289.88697
DLH 4.558482698 1.609683731 2.831912 0.022085 0.846543 8.27042244
# setups 771.1028938 54.93418317 14.03685 6.44E-07 644.42436 897.781429
# moves 29.9411124 2.874675342 10.41548 6.26E-06 23.312095 36.5701299
Regression
Statistics
Multiple R 0.996584412
R Square 0.99318049
Adjusted R Square 0.990623174
Standard Error 347.9563597
Observations 12
Required:
a. Write the multiple regression model (round to nearest cent).
b. What does the ‘t Stat’ measure?
c. What is the estimate of overhead if the department has 1,205 DLH, 55 setups
and 125 moves?
ANSWER: a. Overhead = $6,035.99 + $4.56 (DLH) + $771.10 (#setups) + $29.94 (#moves)

b. There is a tStat for each parameter. These t-statistics are used to test the hypothesis that the
parameters are significantly different from zero. The column labeled “Pvalue” measures the level of
significance achieved for each t-statistic.
c. Overhead = $6,035.99 + $4.56 (DLH) + $771.10 (#setups) + $29.94
(#moves) Overhead = $6,035.99 + $4.56(1,205) + $771.10(55) + $29.94(125)
= $57,683.79
part.
196. The Johnson Company is trying to find an appropriate allocation base for factory overhead. Presented are
five months of data:
Month Direct Labor Hours Machine Hours Factory Overhead

June 10 3 $45
July 20 5 75
August 15 4 70
September 30 5 130
October 25 3 80
r=
Required:
a. Calculate the correlation coefficient between factory overhead and direct labor hours.
b. Calculate the correlation coefficient between factory overhead and machine hours.
c. Should Johnson Company use direct labor hours or machine hours for their allocation base
for factory overhead? Why?
a.
X (X - X) (X - X) 2 Y (Y - Y) (Y - Y)2 (X - X)(Y - Y)
10 -10 100 45 -35 1,225 350
20 0 0 75 -5 25 0
15 -5 25 70 -10 100 50
30 10 100 130 50 2,500 500
25 5 25 80 0 0 0
100 250 400 3,850 900
X = 20 Y = 80
r = (900)/(250 x 3,850) .5 = 0.91736
b.
X (X - X) (X - X)2 Y (Y - Y) (Y - Y)2 (X - X)(Y - Y)
3 -1 1 45 -35 1,225 35
5 1 1 75 -5 25 -5
4 0 0 70 -10 100 0
5 1 1 130 50 2,500 50
3 -1 1 80 0 0 0
20 4 400 3,850 80
X=4 Y = 80
r = (80)/(4 × 3,850) .5 = 0.64466
c. Use direct labor hours because the correlation is 0.91736. The higher correlation indicates
that the overhead is more closely related to direct labor hours than machine hours.
part.
197. The following computer printout estimated overhead costs using linear regression:

Intercept 75 2.25 0.0250 33.33
Setup hours 13 5.10 0.0001 2.45
# of parts 50 1.65 0.0500 30.30
R Square (R2) 0.83

Observations 70
Required:
a. Write the multiple regression model.
b. What does R Square mean?
c. Provide a 95 percent confidence interval around the number of parts parameter.
ANSWER: a. Overhead costs = $75 + $13(setup hours) + $50(# of parts)

b. Eighty-three percent of the variation in overhead costs is explained by setup hours and number
of parts.
c. df = 70 - 3 = 67
t is 1.65
$50 ± 1.65(30.30) = [$(.005), $99.995]
198. Alamo, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be
required to complete the new unit. An 80 percent incremental unit-time learning curve model for direct labor
hours is assumed to be valid. Assume the q = -0.3219. Data on costs are as follows:
Direct materials $50,000 per unit

Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour
Required:
a. Set up a table with columns for cumulative number of units showing the cumulative total time
in hours using the incremental unit-time learning curve. Complete the table for 1, 2, 3, and 4
units given the individual unit time for the nth unit as 500, 400, 351, and 320 for 1 to 4 units
respectively.
b. Set up a similar table assuming a 90 percent with the incremental unit-time learning curve
with the individual unit time for the nth unit as 500, 450, 430, 405 for 1 to 4 units
respectively.
c. What is the difference in variable cost of producing four units?
ANSWER:
a. Units 80% Total Hrs.

1 500 500
2 400 900
3 351 1,251
4 320 1,571
b. Units 90% Total Hrs.

1 500 500
2 450 950
3 430 1,380
4 405 1,785
c. 0.80 model = $200,000 + (50 × 1,571) = $278,550/4 =

$69,637.50 0.90 model = $200,000 + (50 × 1,785) = $289,250/4
= $72,312.50
The difference is $2,675.00
199. The Knapp Company needs to predict the labor cost in producing small ceramic dolls. The following
production information is available:
Year Dolls Produced Labor Hours Labor Dollars

2011 1,150 850 $17,000
2012 1,600 975 23,400
2013 1,100 800 25,600
2014 2,100 1,150 36,800
2015 1,500 950 34,200
2016 1,300 875 35,000
Wage rates have steadily increased since 2011; however, management expects no
further increases in 2017.
Required:
a. Select the appropriate independent variable for predicting labor cost. Explain the reason for your
selection.
b. Develop an equation to predict for 2017 the labor cost of producing ceramic dolls. Use the high-
low method.
ANSWER:
a. In periods of changing prices, unadjusted cost data should not be used as the dependent
variable. Assuming that the technology has not changed, labor hours used in doll production can
be substituted for labor dollars in developing the cost-estimating equation:
Y = a + bX
Total labor hours = a constant + (b × # of dolls produced)
After solving for total labor hours, the dependent variable can be restated in terms of labor
dollars since wage rates in 2017 have not increased over wage rates in 2016, and for 2017:
Total labor dollars/Total labor hours = Labor rate per hour
This labor rate per hour applied to 2017 estimates will give total labor dollars for 2017.
b. Using labor hours:
b = (1,150 - 800)/($2,100 - 1,100)

= 0.35 variable labor hours per doll
a = 1,150 - (0.35 × 2,100)

= 415 fixed labor hours per year
Total labor hours = 415 + 0.35 (# of dolls produced)

The wage rate for 2017 is the same as in 2016.
For 2017, $35,000/875 = $40 per labor hour.
Total labor costs = Total labor hours × $40
= 415($40) + 0.35($40)(# of dolls produced)
= $16,600 + $14.00(# of dolls produced)
200. Highestec, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be
required to complete the new unit. A 90 percent cumulative average-time learning curve model for direct labor
hours is assumed to be valid. Data on costs are as follows:
Direct materials $50,000 per unit

Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour
Required:
a. Set up a table with columns for cumulative number of units, cumulative average time per unit
in hours, and cumulative total time in hours using the cumulative average-time learning curve.
Complete the table for 1, 2, 4, and 8 units.
b. Set up a similar table assuming an 80 percent cumulative average-time learning curve.
c. What is the difference in variable cost of producing four units?
ANSWER:
a.
Units 90% Total Hrs.
1 500 500
2 450 900
4 405 1,620
8 364.5 2,916
b. Units 80% Total Hrs.

1 500 500
2 400 800
4 320 1,280
8 256 2,048
c. 0.90 model = $200,000 + 50(1,620) = $281,000 /4 = $70,250

0.80 model = $200,000 + 50(1,280) = $264,000/4 = $66,000
The difference is $4,250.

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CHAPTER 3: COST BEHAVIOR

20. An alternative measure of goodness of fit is the coefficient of determination.

32. Managerial judgement includes the possibility of mixed costs.

36. explain changes in costs as units produced change.

ANSWER: Unit level drivers

ANSWER: Non-unit-based costs drivers

38. analysis focuses on how costs react to changes in activity levels.

ANSWER: Cost behavior

ANSWER: Unit based cost drivers

ANSWER: Committed fixed expenses

ANSWER: Flexible resources

42. are costs incurred that provide long-term activity capacity.

ANSWER: Committed resources

44. Costs that follow a step-cost behavior are defined as costs.

45. The analysis method is a method of determining cost behavior.

ANSWER: industrial engineering

ANSWER: Time; motion

ANSWER: least squares

49. The method of least squares requires a in order to be utilized.

50. The Y in the equation Y = F + VX represents the , the dependent variable

ANSWER: total cost

56. A correlation coefficient near 0 means that two variables are .

ANSWER: multiple regression

59. Multiple regression has or independent variables.

ANSWER: two; more

ANSWER: Multiple regression

ANSWER: decrease; increases

65. Knowledge of cost and activity-level relationship is used by experienced .

66. Cost behavior analysis focuses on how costs

70. Which of the following would be an example of a unit-based cost driver?

71. A $4,000 per month salary paid to a supervisor is an example of a:

Total Cost Cost per Unit

81. Which of the following costs is a variable cost?

82. Direct materials are an example of a

84. Which of the following statements is TRUE about relevant range?

86. The following is an example of a mixed cost:

88. Mixed costs, by definition, contain both

91. If production volume increases from 16,000 to 20,000 units,

99. The efficient level of activity performance is called

101. Flexible resources

102. Committed resources

103. Which of the following is an example of a committed fixed expense?

107. Which of the following is an example of a discretionary fixed expense?

112. Which of the following is an example of a step-fixed cost?

113. Salaries paid to shift supervisors are an example of a

114. Refer to Figure 3-2. What is the cost of unused activity?

115. Refer to Figure 3-2. What is the cost of resource usage?

a. $4 per change order

117. Refer to Figure 3-3. Calculate the unused capacity.

118. Refer to Figure 3-3. What is the unused capacity in dollars?

119. Which of the following is NOT a method of determining cost behavior?

124. In the formula Y = F + VX, VX refers to the

125. In the formula Y = F + VX, V refers to the

126. In the formula Y = F + VX, F refers to the

127. In the formula Y = F + VX, Y refers to the

128. In the formula Y = F + VX, X refers to the

129. Total costs may be computed as follows:

131. Assume the following information:

Volume Total Cost