Multiple Choice Questions
1. The relationship between cost and activity is
termed:
A. cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.
Answer:
C LO: 1 Type: RC
2. Which of the following costs changes in
direct proportion to a change in the activity level?
A. Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Step-fixed cost.
Answer:
A LO: 2 Type: RC
3. Montgomery Company has a variable selling
cost. If sales volume increases, how
will the total variable cost and the variable cost per unit behave?
Total
Variable Cost
|
Variable
Cost Per Unit
|
|
A.
|
Increase
|
Increase
|
B.
|
Increase
|
Remain
constant
|
C.
|
Increase
|
Decrease
|
D.
|
Remain
constant
|
Decrease
|
E.
|
Decrease
|
Increase
|
Answer:
B LO: 2 Type: RC
4. What type of cost exhibits the behavior that
follows?
Manufacturing
Volume (Units)
|
Cost Per Unit
|
50,000
|
$1.95
|
70,000
|
1.95
|
A. Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Discretionary fixed cost.
E. Step-fixed cost.
Answer:
A LO: 2 Type: N
5. Plaza Corporation observed that when 25,000
units were sold, a particular cost amounted to $70,000, or $2.80 per unit. When volume increased by 15%, the cost totaled
$80,500 (i.e., $2.80 per unit). The cost
that Plaza is studying can best be described as a:
A. variable cost.
B. fixed cost.
C. semivariable cost.
D. discretionary fixed cost.
E. step-fixed cost.
Answer:
A LO: 2 Type: N
6. A company observed a decrease in the cost per
unit. All other things being equal,
which of the following is probably true?
A. The company is studying a variable cost, and
total volume has increased.
B. The company is studying a variable cost, and
total volume has decreased.
C. The company is studying a fixed cost, and
total volume has increased.
D. The company is studying a fixed cost, and
total volume has decreased.
E. The company is studying a fixed cost, and
total volume has remained constant.
Answer:
C LO: 2 Type: N
7. Webster has the following budgeted costs at
its anticipated production level (expressed in hours): variable overhead,
$150,000; fixed overhead, $240,000. If
Webster now revises its anticipated production slightly downward, it would
expect:
A. total fixed overhead of $240,000 and a lower
hourly rate for variable overhead.
B. total fixed overhead of $240,000 and the same
hourly rate for variable overhead.
C. total fixed overhead of $240,000 and a higher
hourly rate for variable overhead.
D. total variable overhead of less than $150,000
and a lower hourly rate for variable overhead.
E. total variable overhead of less than $150,000
and a higher hourly rate for variable overhead.
Answer:
B LO: 2 Type: N
8. What type of cost exhibits the behavior that
follows?
Manufacturing
Volume (Units)
|
Total
Cost
|
Cost
Per Unit
|
50,000
|
$150,000
|
$3.00
|
80,000
|
150,000
|
1.88
|
A. Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Mixed cost.
Answer:
B LO: 2 Type: N
9. When graphed, a typical variable cost appears
as:
A. a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the
right.
E. a diagonal line that slopes upward to the
right.
Answer:
E LO: 2 Type: RC
10. Norman Company pays a sales commission of 5%
on each unit sold. If a graph is
prepared, with the vertical axis representing per-unit cost and the
horizontal axis representing units sold, how would a line that depicts sales
commissions be drawn?
A. As a straight diagonal line, sloping upward
to the right.
B. As a straight diagonal line, sloping downward
to the right.
C. As a horizontal line.
D. As a vertical line.
E. As a curvilinear line.
Answer:
C LO: 2 Type: N
11. When graphed, a typical fixed cost appears
as:
A. a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the
right.
E. a diagonal line that slopes upward to the right.
Answer:
A LO: 2 Type: RC
12. Costs that remain the same over a wide range
of activity, but jump to a different amount outside that range, are termed:
A. step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
E. mixed costs.
Answer:
A LO: 2 Type: RC
13. Straight-line depreciation is a typical
example of a:
A. variable cost.
B. step-variable cost.
C. fixed cost.
D. mixed cost.
E. curvilinear cost.
Answer:
C LO: 2 Type: RC
14. Which of the following choices denotes the
typical cost behavior of advertising and sales commissions?
Advertising
|
Sales Commissions
|
||
A.
|
Variable
|
Variable
|
|
B.
|
Variable
|
Fixed
|
|
C.
|
Fixed
|
Variable
|
|
D.
|
Fixed
|
Fixed
|
|
E.
|
Semivariable
|
Variable
|
Answer:
C LO: 2 Type: N
15. Douglas Corporation recently produced and
sold 100,000 units. Fixed costs at this
level of activity amounted to $50,000; variable costs were $100,000. How much cost would the company anticipate if
during the next period it produced and sold 102,000 units?
A. $150,000.
B. $151,000.
C. $152,000.
D. $153,000.
E. Some other amount not listed above.
Answer:
C LO: 2 Type: A
16. Extron, Inc., has only variable costs and
fixed costs. A review of the company's records
disclosed that when 100,000 units were produced, fixed manufacturing costs
amounted to $200,000 and the cost per unit manufactured totaled $5. On the basis of this information, how much
cost would the firm anticipate at an activity level of 97,000 units?
A. $485,000.
B. $491,000.
C. $494,000.
D. $500,000.
E. Some other amount not listed above.
Answer:
B LO: 2 Type: A
17. A review of Parry Corporation's accounting
records found that at a volume of 90,000 units, the variable and fixed cost per
unit amounted to $8 and $4, respectively.
On the basis of this information, what amount of total cost would Parry
anticipate at a volume of 85,000 units?
A. $1,020,000.
B. $1,040,000.
C. $1,060,000.
D. $1,080,000.
E. Some other amount not listed above.
Answer: B LO: 2
Type: A
18. Each of Davidson's production managers
(annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing
activity. Thus, if the company has
50,000 hours of manufacturing activity, one manager is needed; for 75,000
hours, two managers are needed; for 125,000 hours, three managers are needed;
and so forth. Davidson's salary cost can
best be described as a:
A. variable cost.
B. semivariable cost.
C. step-variable cost.
D. fixed cost.
E. step-fixed cost.
Answer:
E LO: 2 Type: N
19. A cost that has both a fixed and variable
component is termed a:
A. step-fixed cost.
B. step-variable cost.
C. semivariable cost.
D. curvilinear cost.
E. discretionary cost.
Answer:
C LO: 2 Type: RC
20. A mixed cost is often known as a:
A. semivariable cost.
B. step-fixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.
Answer:
A LO: 2 Type: RC
21. Richard Hamilton has a fast-food franchise
and must pay a franchise fee of $35,000 plus 3% of gross sales. In terms of cost behavior, the fee is a:
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semivariable cost.
E. curvilinear cost.
Answer:
D LO: 2 Type: N
22. Which of the following are examples of a
mixed cost?
I.
A
building that is used for both manufacturing and sales activities.
II.
An
employee's compensation, which consists of a flat salary plus a commission.
III.
Depreciation
that relates to five different machines.
IV.
Maintenance
cost that must be split between sales and administrative offices.
A. I only.
B. II only.
C. I and III.
D. I, III, and IV.
E. I, II, III, and IV.
Answer:
B LO: 2 Type: N
23. Which of the following costs exhibits both
decreasing and increasing marginal costs over a specific range of activity?
A. Semivariable cost.
B. Curvilinear cost.
C. Step-fixed cost.
D. Step-variable cost.
E. Fixed cost.
Answer:
B LO: 2 Type: RC
24. The relevant range is that range of activity:
A. where a company achieves its maximum
efficiency.
B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.
Answer:
C LO: 3 Type: RC
25. Within the relevant range of activity, costs:
A. can be estimated with reasonable accuracy.
B. can be expected to change radically.
C. exhibit decreasing marginal cost patterns.
D. exhibit increasing marginal cost patterns.
E. cannot be estimated satisfactorily.
Answer:
A LO: 3 Type: RC
26. Within the relevant range, a curvilinear cost
function can sometimes be graphed as a:
A. straight line.
B. jagged line.
C. vertical line.
D. curved line.
E. horizontal line.
Answer:
A LO: 3 Type: RC
27. As a firm begins to operate outside the
relevant range, the accuracy of cost estimates for fixed and variable costs:
Fixed
|
Variable
|
|||
A.
|
increases
|
increases
|
||
B.
|
increases
|
decreases
|
||
C.
|
decreases
|
increases
|
||
D.
|
decreases
|
decreases
|
||
E.
|
decreases
|
remains unchanged
|
||
Answer:
D LO: 3 Type: N
28. A variable cost that has a definitive
physical relationship to the activity measure is called a(n):
A. discretionary cost.
B. engineered cost.
C. managed cost.
D. programmed cost.
E. committed cost.
Answer:
B LO: 4 Type: RC
29. Costs that result from an organization's
ownership or use of facilities and its basic organizational structure are
termed:
A. discretionary fixed costs.
B. committed fixed costs.
C. discretionary variable costs.
D. committed variable costs.
E. engineered costs.
Answer:
B LO: 4 Type: RC
30. Property taxes are an example of a(n):
A. committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
Answer:
A LO: 4 Type: RC
31. Which of the following is not an
example of a committed fixed cost?
A. Property taxes.
B. Depreciation on buildings.
C. Salaries of management personnel.
D. Outlays for advertising programs.
E. Equipment rental costs.
Answer:
D LO: 4 Type: RC
32. Committed fixed costs would include:
A. advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.
Answer:
C LO: 4 Type: RC
33. Amounts spent for charitable contributions
are an example of a(n):
A. committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
Answer:
C LO: 4 Type: RC
34. Which of the following would not
typically be classified as a discretionary fixed cost?
A. Equipment depreciation.
B. Employee development (education) programs.
C. Advertising.
D. Outlays for research and development.
E. Charitable contributions.
Answer:
A LO: 4 Type: RC
35. Which of the following choices correctly
classifies a committed fixed cost and a discretionary fixed cost?
Committed
|
Discretionary
|
||
A.
|
Promotion
|
Management salaries
|
|
B.
|
Building depreciation
|
Charitable contributions
|
|
C.
|
Management training
|
Property taxes
|
|
D.
|
Equipment rentals
|
Equipment depreciation
|
|
E.
|
Research and development
|
Advertising
|
|
Answer:
B LO: 4 Type: RC
36. Which type of fixed cost (1) tends to be more
long-term in nature and (2) can be cut back more easily in bad economic times
without doing serious harm to organizational goals and objectives?
Long Term in
Nature
|
Can be Cut Back More Easily In
Bad Economic Times
|
||
A.
|
Committed
|
Committed
|
|
B.
|
Committed
|
Discretionary
|
|
C.
|
Discretionary
|
Committed
|
|
D.
|
Discretionary
|
Discretionary
|
|
E.
|
Committed
|
No difference
between
|
|
committed
and discretionary
|
|||
Answer:
B LO: 4 Type: N
37. High-tech automation combined with a
downsizing of a company's hourly labor force often results in:
A. increased fixed costs and increased variable
costs.
B. increased fixed costs and reduced variable
costs.
C. reduced fixed costs and increased variable
costs.
D. reduced fixed costs and reduced variable
costs.
E. increased discretionary fixed costs and
reduced committed fixed costs.
Answer:
B LO: 4 Type: RC
38. Which of the following techniques is not
used to analyze cost behavior?
A. Least-squares regression.
B. High-low method.
C. Visual-fit method.
D. Linear programming.
E. Multiple regression.
Answer:
D LO: 5, 6 Type: RC
39. The high-low method and least-squares
regression are used by accountants to:
A. evaluate divisional managers for purposes of
raises and promotions.
B. choose among alternative courses of action.
C. maximize output.
D. estimate costs.
E. control operations.
Answer:
D LO: 5 Type: RC
40. Which of the following statements about the
visual-fit method is (are) true?
I.
The
method results in the creation of a scatter diagram.
II.
The
method is not totally objective because of the manner in which the cost
line is determined.
III.
The
method is especially helpful in the determination of outliers.
A. I only.
B. II only.
C. I and II.
D. I and III.
E. I, II, and III.
Answer:
E LO: 5 Type: RC
41. The nonstatistical method of cost estimation
that calls for the creation of a scatter diagram is the:
A. least-squares regression method.
B. high-low method.
C. visual-fit method.
D. account analysis method.
E. multiple regression method.
Answer:
C LO: 5 Type: RC
42. Which of the following methods of cost
estimation relies on only two data points?
A. Least-squares regression.
B. The high-low method.
C. The visual-fit method.
D. Account analysis.
E. Multiple regression.
Answer:
B LO: 5 Type: RC
Use the
following to answer questions 43-44:
Swanson and
Associates presently leases a copy machine under an agreement that calls for a
fixed fee each month and a charge for each copy made. Swanson made 7,000 copies and paid a total of
$360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the high-low method to
analyze costs.
43. Swanson's variable cost per copy is:
A. $0.040.
B. $0.051.
C. $0.053.
D. $0.056.
E. an amount other than those given above.
Answer:
A LO: 5 Type: A
44. Swanson's monthly fixed fee is:
A. $80.
B. $102.
C. $106.
D. $112.
E. an amount other than those given above.
Answer:
A LO: 5 Type: A
Use the
following to answer questions 45-47:
Atlanta, Inc.,
which uses the high-low method to analyze cost behavior, has determined that
machine hours best explain the company's utilities cost. The company's relevant range of activity
varies from a low of 600 machine hours to a high of 1,100 machine hours, with
the following data being available for the first six months of the year:
Month
|
Utilities
|
Machine
Hours
|
||
January
|
$8,700
|
800
|
||
February
|
8,360
|
720
|
||
March
|
8,950
|
810
|
||
April
|
9,360
|
920
|
||
May
|
9,625
|
950
|
||
June
|
9,150
|
900
|
45. The variable utilities cost per machine hour
is:
A. $0.18.
B. $4.50.
C. $5.00.
D. $5.50.
E. an amount other than those listed above.
Answer:
D LO: 5 Type: A
46. The fixed utilities cost per month is:
A. $3,764.
B. $4,400.
C. $4,760.
D. $5,100.
E. an amount other than those listed above.
Answer:
B LO: 5 Type: A
47. Using the high-low method, the utilities cost
associated with 980 machine hours would be:
A. $9,510.
B. $9,660.
C. $9,700.
D. $9,790.
E. an amount other than those listed above.
Answer:
D LO: 5 Type: A
48. Hitchcock, Inc., uses the high-low method to
analyze cost behavior. The company
observed that at 12,000 machine hours of activity, total maintenance costs
averaged $7.00 per hour. When activity
jumped to 15,000 machine hours, which was still within the relevant range, the
average cost per machine hour totaled $6.40.
On the basis of this information, the variable cost per machine hour
was:
A. $4.00.
B. $6.40.
C. $6.70.
D. $7.00.
E. an amount other than those listed above.
Answer:
A LO: 5 Type: A
49. Northridge, Inc., uses the high-low method to
analyze cost behavior. The company
observed that at 20,000 machine hours of activity, total maintenance costs
averaged $10.50 per hour. When activity
jumped to 24,000 machine hours, which was still within the relevant range, the
average cost per machine hour totaled $9.75.
On the basis of this information, the company's fixed maintenance costs
were:
A. $24,000.
B. $90,000.
C. $210,00.
D. $234,000.
E. an amount other than those listed above.
Answer: B LO: 5
Type: A
50. The following data relate to the Hodges
Company for May and August of the current year:
May
|
August
|
||
Maintenance hours
|
10,000
|
12,000
|
|
Maintenance cost
|
$260,000
|
$300,000
|
May
and August were the lowest and highest activity levels, and Hodges uses the
high-low method to analyze cost behavior.
Which of the following statements is true?
A. The variable maintenance cost is $25 per
hour.
B. The variable maintenance cost is $25.50 per
hour.
C. The variable maintenance cost is $26 per
hour.
D. The fixed maintenance cost is $60,000 per
month.
E. More than one of the above statements is
true.
Answer:
D LO: 5 Type: A
Use the
following to answer questions 51-53:
Yang
Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types
(A, B, and C) and has a relevant range of operation between 2,500 units and
10,000 units per month. Per-unit costs
at two different activity levels for each cost type are presented below.
Type A
|
Type B
|
Type C
|
Total
|
||||
5,000 units
|
$4
|
$9
|
$4
|
$17
|
|||
7,500 units
|
$4
|
$6
|
$3
|
$13
|
51. The cost types shown above are identified by
behavior as:
Type A
|
Type B
|
Type C
|
|||
A.
|
Fixed
|
Variable
|
Semivariable
|
||
B.
|
Fixed
|
Semivariable
|
Variable
|
||
C.
|
Variable
|
Semivariable
|
Fixed
|
||
D.
|
Variable
|
Fixed
|
Semivariable
|
||
E.
|
Semivariable
|
Variable
|
Fixed
|
Answer:
D LO: 2, 5 Type: A, N
52. If Yang produces 10,000 units, the total cost
would be:
A. $90,000.
B. $100,000.
C. $110,000.
D. $125,000.
E. an amount other than those given above.
Answer:
C LO: 5 Type: A, N
53. The cost formula that expresses the behavior
of Yang's total cost is:
A. Y = $0 + $17X.
B. Y = $20,000 + $13X.
C. Y = $40,000 + $9X.
D. Y = $45,000 + $4X.
E. Y = $60,000 + $5X.
Answer:
E LO: 5 Type: A
54. In regression analysis, the variable that is
being predicted is known as the:
A. independent variable.
B. dependent variable.
C. explanatory variable.
D. interdependent variable.
E. functional variable.
Answer:
B LO: 5 Type: RC
55. Mohawk Products has determined that the
number of machine hours worked (MH) drives the amount of manufacturing overhead
incurred (MOH). On the basis of this
relationship, a staff analyst has constructed the following regression
equation:
MOH
= 240,000 + 8MH
Which
of the choices correctly depicts the nature of Mohawk's variables?
Dependent
|
Independent
|
||
A.
|
MOH
|
MOH
|
|
B.
|
MOH
|
MH
|
|
C.
|
MH
|
MOH
|
|
D.
|
MH
|
MH
|
|
E.
|
8
|
240,000
|
Answer:
B LO: 5 Type: N
56. Checkers Corporation, which uses
least-squares regression analysis, has derived the following regression
equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if
the primary cost driver is machine hours?
A. Total manufacturing overhead is represented
by the variable "X."
B. The company anticipates $495,000 of fixed
manufacturing overhead.
C. "X" is commonly known as the
dependent variable.
D. "X" represents the number of machine
hours.
E. Both "B" and "D" are
true.
Answer:
E LO: 5 Type: N
57. Boulder, Inc., recently conducted a
least-squares regression analysis to predict selling expenses. The company has constructed the following
regression equation: Y = 329,000 + 7.80X.
Which of the following statements is false if the primary cost
driver is number of units sold?
A. The company anticipates $329,000 of fixed
selling expenses.
B. "Y" represents total selling
expenses.
C. The company expects both variable and fixed
selling expenses.
D. For each unit sold, total selling expenses
will increase by $7.80.
E. "X" represents the number of hours
worked during the period.
Answer:
E LO: 2, 5 Type: N
58. Tempe,
Inc., is studying marketing cost and sales volume, and has generated the
following information by use of a scatter diagram and a least-squares
regression analysis:
Scatter Diagram
|
Regression Analysis
|
|||
Variable cost per unit sold
|
$6.50
|
$6.80
|
||
Total monthly fixed cost
|
$45,000
|
$42,500
|
Tempe
is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data presented, compute
the most accurate sales forecast possible.
A.
$159,500.
B.
$162,000.
C.
$164,900.
D.
$167,400.
E.
An amount other
than those listed above.
Answer:
C LO: 5 Type: A, N
59. Waller Enterprises has determined that three
variables play a key role in determining company revenues. To arrive at an objective forecast of
revenues for the next accounting period, Waller should use:
A. simple regression.
B. multiple regression.
C. a scatter diagram.
D. complex regression.
E. the high-low method.
Answer:
B LO: 6 Type: N
60. Which of the
following tools is not associated with cost estimation?
A. Least-squares regression.
B. Multiple regression.
C. Inversion equations.
D. Time and motion (engineering) studies.
E. Learning curves.
Answer:
C LO: 5, 6 Type: RC
61. A staff
assistant at Washington Corporation recently determined that the first four
units completed in a new manufacturing process took 800 hours to complete, or
an average of 200 hours per unit. The
assistant also found that when the cumulative output produced doubles, the
average labor time declines by 20%. On
the basis of this information, how many total hours would Washington use if it
produces 16 units?
A. 128.
B. 160.
C. 1,280.
D. 2,048.
E. An amount
other than those listed above.
Answer:
D LO: 6 Type: A
62. Which of the following is not an issue
in the collection of data for cost estimation?
A. Outliers.
B. Missing data.
C. Mismatched time periods.
D. Inflation.
E. All of the above are issues in data
collection.
Answer:
E LO: 7 Type: RC
63. A high R2 measure in regression analysis is preferred
because:
A. it indicates a good fit of the regression
line through the data points.
B. it shows that a great deal of the change in
the dependent variable is explained by change in the independent variable.
C. it means that the independent variable is a
good predictor of the dependent variable.
D. it means that the cost analyst can be
relatively confident in his or her cost predictions.
E. all of the preceding statements are true.
Answer:
E LO: 8 Type: RC
EXERCISES
Cost
Behavior Patterns
64. Consider the graphs that follow (the horizontal
axis represents activity; the vertical axis represents total dollars).
Required:
For
items A-I that follow, choose the graph that best represents the cost behavior
pattern described. Note: Graphs can be
used more than once.
A. Straight-line depreciation on machinery.
B.
The
cost of chartering a private airplane.
The cost is $800 per hour for the first 6 hours of a flight; it then
drops to $600 per hour.
C.
The
wages of table service personnel in a restaurant. The employees are part-time workers who can
be called upon for as little as 4 hours at a time.
D.
Weekly
wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made
during the month.
E. The cost of tires used in the production
of trucks.
F.
Outbound
shipping charges that increase at a decreasing rate as sales rise because the
firm can use more efficient modes of transportation (e.g., full trailer loads,
full rail cars, etc.). Gradually,
however, at high levels of sales, freight costs start to increase at an
increasing rate, which reflects more transactions made to customers in far-away
locations.
G.
Equipment
leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per
month.
H.
The
monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay $20,000 plus 5% of
gross dollar sales.
I.
The
cost of electricity during peak demand periods, which is based on the following
schedule:
Up
to 20,000 kilowatt hours (KWH): $4,000
Above
20,000 kilowatt hours: $4,000 + $0.02 per KWH
LO: 2 Type: N
Answer:
A. 2 B. 4
C. 7 D. 5 E. 1
F. 8 G. 9 H. 6
I. 3
Cost Behavior Patterns
65. Resource
Consulting is studying the costs of several clients, and has found that the
accompanying graphs appear as follows:
1. A straight
line that gradually slopes upward to the right
2. A
curvilinear line that gradually slopes upward to the right
3. A straight line that is parallel to the
graph’s horizontal axis
4. A straight line that gradually slopes
downward to the right
5. A curvilinear line that gradually slopes
downward to the right
6. A straight
line that gradually slopes upward to the right and then, at a specific point,
flattens out to run parallel to the horizontal axis
7. A series of
straight lines that appear to resemble a set of steps
8. A straight
line that runs parallel to the graph’s horizontal axis and then, at a specific
point, drops to a lower level
Unless
told otherwise, assume that the horizontal axis represents total activity and
the vertical axis represents total cost.
Required:
For
items A-F, indicate the number of the graph that best represents the cost
behavior pattern described. Note: Graphs
can be used more than once, and not all graphs need be used.
A.
The salary cost
of lab technicians employed at a clinic.
One technician is needed for every 1,500 patients serviced.
B. The cost of glass used by a manufacturer of automobile
windshields.
C.
A profit-sharing
bonus that is paid to the associate director of a firm that conducts
professional-development courses for executives. The bonus is based on revenues from courses
that are being run, subject to a maximum amount each year.
D.
Flood insurance
premiums that are paid by Reliable Manufacturing, which operates a production
facility close to a river.
E.
The paper cost
that is used in the production of a textbook.
Note: Assume that for this part only, the graph’s vertical axis
represents the cost per unit rather than total cost.
F.
Tariffs that are
paid on products shipped overseas. For
one particular country, if fewer than 15,000 units are shipped, the client must
pay $4 per unit. The tariff is raised by
$1 according to the following schedule:
15,000 to 29,999 units $5
per unit
30,000 to 44,999 units $6
per unit
45,000 to 59,999 units $7
per unit
LO:
2 Type: N
Answer:
A. 7 B. 1
C. 6 D. 3 E. 3
F. 2
Cost
Classification, Cost Behavior
66. Consider the six costs that follow.
1. Advertising and
promotion costs of a do-it-yourself retailer
2. Surgical supplies used in a hospital's
operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimum-use
fee, for a small business
5. Annual business licensing fee paid by a
daycare center
6. Truck fuel consumed by a road construction
company
Required:
A.
Classify
each of these costs as variable, committed fixed, discretionary fixed, or
semivariable.
B.
Briefly
describe the behavior of a per-unit variable cost as activity changes.
C.
What
elements are present in a semivariable cost that cause it to behave in a
semivariable manner?
D.
Generally
speaking, does management have more flexibility when dealing with committed
fixed costs or discretionary fixed costs?
LO: 2,
4 Type: RC, N
Answer:
A.
|
1.
|
Discretionary fixed
|
|
2.
|
Variable
|
||
3.
|
Committed
fixed
|
||
4.
|
Semivariable
|
||
5.
|
Committed
fixed
|
||
6.
|
Variable
|
||
B.
|
Per-unit variable costs
remain constant as activity levels change.
|
||
C.
|
Semivariable, or mixed
costs, contain both a variable and fixed component.
|
||
D.
|
Discretionary fixed costs
|
||
Cost Classification,
Cost Equation
67. Sunshine Valley Meat Company produces one of
the best sausage products in Pennsylvania.
The company's controller compiled the following information by analyzing
the accounting records:
1.
Meat
costs the company $3.25 per pound of sausage produced.
2.
Compensation
of production employees is $2.25 per pound of sausage produced.
3.
Supervisory
salaries total $23,000 per month.
4. The company incurs utility costs of $9,000
per month plus $0.35 per pound of sausage produced.
5.
Insurance
and property taxes average $6,400 per month.
Required:
A.
Classify
each cost as variable, fixed, or semivariable.
B.
Write
a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the
quantity of sausage produced.)
LO: 2,
5 Type: A, N
Answer:
A.
|
1.
|
Variable
|
2.
|
Variable
|
|
3.
|
Fixed
|
|
4.
|
Semivariable
|
|
5.
|
Fixed
|
B.
|
Supervision
|
$23,000
|
Meat
|
$3.25
|
|
Fixed
utilities
|
9,000
|
Labor
|
2.25
|
||
Insurance and
|
Variable
utilities
|
0.35
|
|||
property
taxes
|
6,400
|
Total
variable
|
$5.85
|
||
Total fixed
|
$38,400
|
||||
Production
cost per month: Y = $38,400 + $5.85X
|
|||||
Cost Analysis, Behavior, and
Classification
68. Viscount Corporation has a machining capacity
of 200,000 hours per year. Utilization
of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records
revealed the following selected costs:
At a 40%
Utilization Rate
|
At a 90%
Utilization Rate
|
|||
Cost A:
|
||||
Total
|
$440,000
|
$ 440,000
|
||
Per
hour
|
$5.50
|
?
|
||
Cost B:
|
||||
Total
|
?
|
$1,944,000
|
||
Per
hour
|
$10.80
|
$10.80
|
||
Cost C:
|
||||
Total
|
$680,000
|
$1,330,000
|
||
Per
hour
|
$8.50
|
$7.39
|
||
Viscount
uses the high-low method to analyze cost behavior.
Required:
A.
Classify
each of the costs as being either variable, fixed, or semivariable.
B.
Calculate
amounts for the two unknowns in the preceding table.
C.
Calculate
the total amount that Viscount would expect at a 75% utilization rate for Cost
A, Cost B, and Cost C.
D.
Develop
an equation that Viscount can use to predict total cost for any level of hours
within its range of operation.
LO: 2,
5 Type: A, N
Answer:
A.
|
Cost A: Fixed (same total
amount at each level of activity)
|
Cost B: Variable (constant
per-hour figures)
|
|
Cost C: Semivariable
(changing total and per-hour figures)
|
|
B.
|
Cost A: $440,000 ÷ (200,000
hours x 90%) = $2.44
|
Cost B: (200,000 hours x
40%) x $10.80 = $864,000
|
C.
|
Analysis of Cost C
(variable portion):
|
||
($1,330,000
- $680,000) ÷ [(200,000 x 90%) - (200,000 x 40%)] = $6.50 per hour
|
|||
Analysis of Cost C (fixed
portion):
|
|||
Total
cost at 40% utilization
|
$680,000
|
||
Variable
cost (200,000 x 40% x $6.50)
|
520,000
|
||
Fixed
cost
|
$160,000
|
||
75% utilization: 200,000 x
75% = 150,000 hours
|
|||
Cost A
|
$ 440,000
|
||
Cost B (150,000 x $10.80)
|
1,620,000
|
||
Cost C:
|
|||
Variable
portion (150,000 x $6.50)
|
975,000
|
||
Fixed
portion
|
160,000
|
||
Total cost
|
$3,195,000
|
||
D.
|
Variable cost per hour:
$10.80 + $6.50 = $17.30
|
||
Fixed cost: $440,000 +
$160,000 = $600,000
|
|||
Equation: Y = $600,000 +
$17.30X
|
|||
where
Y = total cost and X = number of hours
|
|||
Cost
Behavior, Cost Analysis
69. Walnut Corporation operates a small medical
lab in Kansas, one that conducts minor medical procedures (including blood
tests and x-rays) for a number of doctors.
The lab consumes various medical supplies and is staffed by two
technicians, both of whom are paid a monthly salary. In addition, there is an on-site office
manager who is also paid by the month.
Required:
A.
If the
lab's patient count increases by, say, 15%, will the lab's total operating
costs increase by 15%? Explain.
B.
Walnut
is considering opening an additional lab in a new suburban medical
building. What will likely happen to the
lab's level of fixed cost incurrence?
Why?
C.
What
analysis methods would be available to the office manager and/or Walnut
management if a close look at the lab's cost behavior is desired?
LO: 2,
5 Type: RC, N
Answer:
A.
No. The lab has a mixture of both variable and
fixed costs. Variable costs (such as
supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office
manager are step-fixed in nature, meaning that a 15% hike in client load will
do nothing to these expenditures. A possibility
exists, though, that an increase in patient load could create the need for an
added technician.
B.
Fixed
costs typically do not change when activity changes. However, the opening of a new branch will
create the need for added technicians and presumably another office manager,
thus causing costs to rise. In addition,
facility rental charges will increase and there will be an added cost if the
firm leases and/or depreciates equipment.
Note: This answer assumes that the original facility will continue with
existing personnel and not implement a job-sharing arrangement through a
cutback in operating hours.
C.
Possible
methods include account classification, visual fit, high-low, and least-squares
regression.
Cost
Behavior and Analysis; High-Low Method
70. The following selected data were taken from
the accounting records of Shook Industrial Manufacturing:
Month
|
Machine
Hours
|
Manufacturing Overhead
|
|
May
|
46,000
|
$ 889,000
|
|
June
|
60,000
|
1,130,000
|
|
July
|
68,000
|
1,274,000
|
|
August
|
52,000
|
980,000
|
|
July's
costs consisted of machine supplies ($170,000), property taxes ($24,000), and
plant maintenance ($1,080,000). These
costs exhibit the following respective behavior: variable, fixed, and
semivariable.
Required:
A.
Determine
the machine supplies and property taxes for May.
B.
By
using the high-low method, analyze Shook's plant maintenance cost and calculate
the monthly fixed portion and the variable cost per machine hour.
C.
Assume
that present cost behavior patterns continue into future months. Estimate the total amount of manufacturing
overhead the company can expect in September if 56,000 machine hours are
worked.
LO: 2,
5 Type: A
Answer:
A.
|
Machine
supplies: $170,000 ÷ 68,000 hours = $2.50 per hour; 46,000 hours x $2.50
|
||
= $115,000
|
|||
Property
taxes: Fixed at $24,000
|
|||
B.
|
Plant
maintenance in May: $889,000 - $115,000 - $24,000 = $750,000
|
||
Variable
plant maintenance: ($1,080,000 - $750,000) ÷ (68,000 - 46,000) = $15 per hour
|
|||
Fixed plant
maintenance:
|
|||
Total
plant maintenance for 68,000 hours
|
$1,080,000
|
||
Less: Variable
plant maintenance (68,000 x $15)
|
1,020,000
|
||
Fixed
cost
|
$ 60,000
|
||
C.
|
Manufacturing
overhead at 56,000 hours:
|
||
Machine
supplies at $2.50 per hour
|
$ 140,000
|
||
Property
taxes
|
24,000
|
||
Plant
maintenance:
|
|||
Variable at $15 per hour
|
840,000
|
||
Fixed
|
60,000
|
||
Total
|
$1,064,000
|
||
High-Low
Method vs. Visual-Fit Method
71. Moore Company needs to determine the variable
utilities rate per direct machine hour in order to estimate cost for August. Relevant information is as follows.
Month
|
Machine Hours Worked
|
Utilities
Cost
|
April
|
4,800
|
$4,144
|
May
|
5,200
|
4,300
|
June
|
5,600
|
4,482
|
July
|
6,000
|
4,804
|
Moore
anticipates producing 3,800 units in August, with each unit requiring 1.5 hours
of machine time. The company uses the
high-low method to analyze costs.
Required:
A.
Calculate
the variable and fixed components of the utilities cost.
B.
Using
the data calculated above, estimate the utilities cost for August.
C.
Compare
the high-low method versus the visual-fit method with respect to (1) number of
data observations used in the analysis and (2) objectivity of the results.
LO: 5 Type: A, N
Answer:
A.
|
Variable
cost:
|
||||
($4,804 - $4,144) ÷ (6,000 - 4,800) = $0.55
per hour
|
|||||
Total cost
for 6,000 hours
|
$4,804
|
||||
Less: Variable
cost (6,000 x $0.55)
|
3,300
|
||||
Fixed cost
|
$1,504
|
||||
B.
|
Variable
cost (3,800 x 1.5 x $0.55)
|
$3,135
|
|||
Fixed
cost
|
1,504
|
||||
Total
cost
|
$4,639
|
||||
C.
|
The high-low
method uses only two data observations, the highest and the lowest, whereas
the visual-fit method utilizes all data points that have been gathered
(except outliers). Many analysts would
say the visual-fit method is advantageous in this regard.
However, the visual-fit method lacks total objectivity because of
the manner in which the cost line is fit through the data points (drawn by "visual
approximation"). The high-low
method is therefore said to be more objective.
|
||||
Cost Estimation, High-Low Method, Relevant
Range
72. The Southlake Medical Clinic offers a number
of specialized medical services. A
review of data for the year just ended revealed variable costs of $32 per
patient day, annual fixed costs of $480,000, and semivariable costs, which
displayed the following behavior at the "peak" and "valley"
of activity:
January (2,400 patient days): $258,400
August (2,900
patient days): $278,900
Required:
A.
Calculate
the total cost for an upcoming month (2,800 patient days) if current cost
behavior patterns continue. Southlake
uses the high-low method to analyze cost behavior.
B.
There
is a high probability that Southlake's volume will increase in forthcoming
months as patients take advantage of new scientific advances. Can the data and methodology used in part (a)
for predicting the costs of 2,800 patient days be employed to estimate the
costs for, say, 3,800 patient days? Why
or why not?
LO: 2, 3,
5 Type: A, N
Answer:
A.
|
Analysis of
semivariable cost (variable portion):
|
||
($278,900 - $258,400) ÷ (2,900 - 2,400)
= $41 per patient day
|
|||
Analysis of
semivariable cost (fixed portion):
|
|||
Total
cost for 2,900 patient days
|
$278,900
|
||
Less: Variable
cost (2,900 x $41)
|
118,900
|
||
Fixed
cost
|
$160,000
|
||
Variable
cost (2,800 x $32)
|
$ 89,600
|
||
Fixed
cost ($480,000 ÷ 12 months)
|
40,000
|
||
Semivariable
cost:
|
|||
Variable
portion (2,800 x $41)
|
114,800
|
||
Fixed
portion
|
160,000
|
||
Total
cost
|
$404,400
|
||
B.
|
No. The "peak" and "valley"
of operation were 2,900 patient days and 2,400 patient days,
respectively. The 3,800-patient-day
data point is well outside this range of observed cost relationships and
recent activity (i.e., the relevant range).
Costs can change outside of this range (e.g., fixed costs may be
higher), and the lack of past experience will likely create unknowns for the
analyst.
|
||
Cost Estimation,
High-Low Method, Analysis of Step-Fixed Cost
73. A-1 Corporation extracts ore for eight
different companies in Colorado. The
firm anticipates variable costs of $65 per ton along with annual fixed overhead
of $840,000, which is incurred evenly throughout the year. These costs exclude the following
semivariable costs, which are expected to total the amounts shown for the high
and low points of ore extraction activity:
March (850
tons): $39,900
August (1,300 tons): $46,200
A-1
uses the high-low method to analyze cost behavior.
Required:
A.
Calculate
the semivariable cost for an upcoming month when 875 tons will be extracted.
B.
Calculate
the total cost for that same month.
C.
A-1
uses Cortez Trucking to haul extracted ore.
Cortez's monthly charges are as follows:
800 - 1,099
tons
|
$ 70,000
|
1,100 tons -
1,399 tons
|
90,000
|
1,400+ tons
|
110,000
|
1. From a cost behavior perspective, what
type of cost is this?
2. If A-1 plans to extract 875 tons, is the
company being very "cost effective" with respect to Cortez's billing
rates? Briefly discuss.
LO: 2,
5 Type: A, N
Answer:
A.
|
Analysis of
semivariable cost (variable portion):
|
||||
($46,200
- $39,900) ÷ (1,300 - 850) = $14 per ton
|
|||||
Analysis of
semivariable cost (fixed portion):
|
|||||
Total
cost for 1,300 tons
|
$ 46,200
|
||||
Less: Variable
cost (1,300 x $14)
|
18,200
|
||||
Fixed
cost
|
$ 28,000
|
||||
Variable
portion (875 x $14)
|
$ 12,250
|
||||
Fixed portion
|
28,000
|
||||
Total
|
$ 40,250
|
||||
B.
|
Semivariable cost
|
$
40,250
|
|||
Variable
cost (875 x $65)
|
56,875
|
||||
Fixed
cost ($840,000 ÷ 12)
|
70,000
|
||||
Total
|
$167,125
|
||||
C.
|
1.
|
Step-fixed.
|
|||
2.
|
No. Notice that the bill will be $70,000 for
A-1's tonnage, and the firm could have Cortez haul up to 1,099 tons for the
same cost. Ideally, A-1 should try to
move to the right-hand side of the step to get a better return on its
investment.
|
||||
Cost Behavior/Estimation, High-Low Method, Working
Backward
74. Charger
Corporation has three costs: A, which is variable; B, which is fixed; and C,
which is semivariable. The company,
which uses the high-low method, extracted the following data from its
accounting records:
·
At 180,000 hours
of activity, Cost A totaled $2,610,000.
·
At 140,000 hours,
the low point during the period, Cost C totaled $1,498,000; at 200,000 hours,
the high point, Cost C’s fixed portion amounted to $1.75 per hour.
·
At 160,000 hours
of activity, the sum of Costs A, B, and C amounted to $8,162,000.
Required:
A.
Compute the
variable portion (total) of Cost C at 140,000 hours of activity.
B.
Compute Cost C
(total) at 160,000 hours of activity.
C.
Compute Cost B
(total) at 160,000 hours of activity.
LO:
2, 5 Type: A, N
Answer:
A.
Cost C’s fixed
portion will total the same amount, $350,000 (200,000 hours x $1.75), at both
200,000 hours and 140,000 hours. Thus,
the variable portion of C at 140,000 hours will be $1,148,000 ($1,498,000 -
$350,000).
B.
The variable
portion of Cost C is $8.20 per hour ($1,148,000 ÷ 140,000 hours). Cost C will therefore total $1,662,000
[(160,000 hours x $8.20) + $350,000].
C.
Cost A equals
$2,320,000 [($2,610,000 ÷ 180,000 hours) x 160,000 hours. Thus:
Total cost (A + B + C)
|
$8,162,000
|
|
Less: Cost A
|
$2,320,000
|
|
Cost
C
|
1,662,000
|
3,982,000
|
Cost B
|
$4,180,000
|
High-Low and
Regression Analysis, Interpretation
75. Managers in the Stamping Department have been
studying overhead cost and the relationship with machine hours. Data from the most recent 12 months follow.
Month
|
Overhead
|
Machine Hours
|
|||
January
|
$5,030
|
2,730
|
|||
February
|
1,600
|
600
|
|||
March
|
7,210
|
3,403
|
|||
April
|
4,560
|
2,200
|
|||
May
|
6,880
|
3,411
|
|||
June
|
6,520
|
2,586
|
|||
July
|
6,230
|
3,364
|
|||
August
|
5,570
|
2,411
|
|||
September
|
7,728
|
3,960
|
|||
October
|
5,810
|
2,897
|
|||
November
|
4,580
|
2,207
|
|||
December
|
6,010
|
2,864
|
|||
The
manager of the department has requested a regression analysis of these two
variables (labeled no. 1 below).
However, the staff person performing the analysis decided to run another
regression that excluded February (labeled no. 2). She observed that the volume of activity was
very low for that month because of two factors: a severe flu outbreak and an
electrical fire that disrupted operations for about 10 working days.
Regression No. 1
|
Regression No. 2
|
|||
Constant
|
428.00
|
Constant
|
550.00
|
|
R²
|
0.79
|
R²
|
0.74
|
|
b coefficient
|
1.86
|
b coefficient
|
1.90
|
|
Required:
A.
Prepare
an overhead cost breakdown by using the high-low method. The analysis should be useful in helping to
predict variable and fixed costs under normal operating conditions.
B.
Prepare
an estimate of overhead cost for a volume of 3,000 machine hours by using
regression no. 1.
C.
You
now have the ability to analyze three cost estimates from the high-low data in
part (a) and the two regression equations.
Which one do you feel would provide the best estimate? Explain the factors that support your
choice. Note: Do not calculate an
overhead cost estimate with regression no. 2.
LO: 5,
8 Type: A, N
Answer:
A.
|
September and April are the high and low months of volume,
respectively. February is an outlier
and has been eliminated from the analysis since the instructions call for "normal
operating conditions."
|
||
Analysis of semivariable cost (variable portion):
|
|||
($7,728
- $4,560) ÷ (3,960 - 2,200) = $1.80 per hour
|
|||
Analysis of
semivariable cost (fixed portion):
|
|||
Total
cost for 3,960 hours
|
$7,728
|
||
Less: Variable
cost (3,960 x $1.80)
|
7,128
|
||
Fixed
cost
|
$ 600
|
||
B.
|
Variable
cost (3,000 x $1.86)
|
$5,580
|
|
Fixed
cost
|
428
|
||
Total
cost
|
$6,008
|
||
C.
|
Regression
no. 2 would provide the best of the three estimates. The regression equations have substantial advantages
over the high-low method since all data are used (not just the highest and
lowest points), and quantitative measures of the strength of the relationship
are available. Regression no. 2 also
eliminates February's data, which are deemed an outlier.
The equation in regression no. 2 is plausible: overhead costs
increase as machine hours increase.
Although no. 2's R² is lower than the R² for regression no. 1, it is
still very respectable, with 74% (versus 79%) of the change in overhead being
explained by the change in machine hours.
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Cost Estimation Methods;
Cost Analysis
76. Shortly after being hired as an analyst with
Harrison Rentals, which is located in upstate New York, Luis Gomez was asked to
prepare a report that focused on the company's order processing costs—a cost
driven largely by the number of rental invoices written. Luis knew that he could use several different
tools to analyze cost behavior, including scatter diagrams, least-squares
regression, and the high-low method. In
addition, he knew that he could present the results of his analysis in the form
of algebraic equations. Those equations
follow.
Scatter
diagram: OP = $56,000 + $6.80RI
Least-squares
regression: OP = $59,000 + $6.75RI
High-low
method: OP = $53,500 + $7.25RI
where OP =
total order processing costs and RI = number of rental invoices written
Luis
had analyzed data over the past 12 months and built equations based on these
data, purposely including the slowest month of the year and the busiest month
so that things would "…tend to even out." He observed that February was especially slow
because of a paralyzing blizzard, one that forced the company to close for four
days.
Required:
A.
Will
scatter diagrams, least-squares regression, and the high-low method normally
result in the same equation? Why?
B.
Assuming
the use of least-squares regression, explain what the $59,000 and $6.75 figures
represent.
C.
Assuming
the use of a scatter diagram, predict the order processing cost of an upcoming
month when Harrison expects to write 2,500 rental invoices.
D.
Did
Luis err in constructing the equations on data of the past 12 months? Briefly discuss. If "yes," determine which of the
three tools is likely to be affected the most and explain why.
LO: 5,
7 Type: A, N
Answer:
A. No.
The three methods produce equations by different means. Scatter diagrams and least-squares regression
rely on an examination of all data points.
The scatter diagram, however, requires an analyst to fit a line through
the points by visual approximation, or "eyeballing." In contrast, least-squares regression
involves the use of statistical formulas to derive the best possible fit of the
line through the points. Finally, the
high-low method is based on an analysis of only two data points: the highest
and the lowest.
B. These amounts represent the fixed and
variable elements of the company's order processing cost. Fixed cost totals $59,000, and Harrison
incurs $6.75 of variable cost for each invoice written.
C. OP = $56,000 + $6.80RI
OP = $56,000
+ ($6.80 x 2,500)
OP =
$73,000
D. Yes, he did err by including February
data. February is not representative
because of the effects of the blizzard.
The month is an outlier and should be eliminated from the data set.
The
equation constructed by using the high-low method is likely to be affected the
most since the equation is based on only two data points. One of those two points should have been
excluded from the analysis.
Using and
Analyzing a Regression Equation
77. North Company is making plans for the
introduction of a new product, which has a target selling price of $7 per
unit. The following estimates of
manufacturing costs have been derived for 6 million units, to be produced
during the first year:
Direct material: $6,000,000
Direct labor: $2,100,000 (at $14 per hour)
Overhead
costs have not yet been estimated, but monthly data on total production and
overhead for the past 12 months have been analyzed by using least-squares
regression. The major overhead cost
driver is direct labor hours, with the following results:
Computed
values:
Fixed
overhead cost: $3,200,000
Coefficient
of independent variable: $2.25
Required:
A.
Prepare
the company's regression equation (Y = a + bX) to estimate overhead.
B.
Calculate
the predicted overhead cost at an activity level of 6,300,000 units.
C.
What
is North’s dependent variable in this case?
D.
How
can the company evaluate the "quality" of its regression equation?
LO: 5,
8 Type: A, N
Answer:
A.
|
Y = $3,200,000
+ $2.25X
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B.
|
Direct labor:
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For 6
million units, direct labor totals 150,000 hours ($2,100,000 ¸ $14);
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For 1
unit, direct labor totals 0.025 hours (150,000 ¸ 6,000,000);
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For 6,300,000
units, direct labor totals 157,500 hours (6,300,000 x 0.025).
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Y = $3,200,000
+ (157,500 x $2.25) = $3,554,375
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C.
|
The dependent
variable is Y, or total overhead cost.
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D.
|
There are two
ways to evaluate the regression equation:
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1.
|
Determine
whether the relationship makes economic sense. Is it plausible that overhead cost is
related to direct labor hours? Does
the estimated regression equation look reasonable? Answering these questions requires a good
understanding of the production process
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2.
|
Use the
coefficient of determination, R², to assess the regression equation's
goodness of fit.
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DISCUSSION
QUESTIONS
Cost
Behavior Characteristics
78. Compare and contrast the following types of
costs: (1) variable and step-variable and (2) fixed and step-fixed.
LO: 2 Type: RC
Answer:
(1)
A
variable cost changes in direct proportion to a change in an activity level or
cost driver, with a typical example being direct material. A step-variable cost is nearly variable, but
it increases in small steps rather than continuously (e.g., additional direct
labor).
(2)
A
fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a step-fixed cost remains fixed
over a sizable range of activity, but jumps to a different amount for
activities outside that range (e.g., the salaries of new employees who are
needed because of volume changes).
The Relevant
Range
79. Define the term "relevant range"
and explain its importance in understanding cost behavior.
LO: 3 Type: RC
Answer:
The
relevant range is the range of activity within which management expects a
company to operate. This can be based on
past experience and/or sales projections.
This
concept is important because management need not concern itself with extremely
high or low levels of activity that are unlikely to occur. Also, observed cost relationships are
typically valid within the relevant range and can therefore be used for
purposes of estimation at other levels within that range.
Committed
Costs and Discretionary Costs
80. Differentiate between committed costs and
discretionary costs. Be sure to present
two examples of each and explain which of the two cost types would likely be
cut should a company encounter financial difficulties.
LO: 4 Type: RC
Answer:
A
committed cost is a fixed amount that stems from an organization's ownership or
use of facilities, and its basic organizational structure. Property taxes, rent, and salaries of top
management are examples of committed costs.
A
discretionary cost, also a fixed amount, occurs as a result of a management
decision to spend a particular amount of money for some purpose. Examples are advertising, training,
promotion, and contributions to charitable organizations.
The
distinction between committed and discretionary costs is that committed costs
can be changed only by major decisions with long-term implications. Discretionary costs can be changed in the
short run and, thus, are cost-cutting targets should an organization encounter
financial difficulties.
Deficiencies
of the Visual-Fit and High-Low Methods
81. Both the visual-fit and high-low methods of
cost estimation have inherent limitations.
Briefly identify the major deficiency associated with each method.
LO: 5 Type: RC
Answer:
The
visual-fit method suffers from a lack of objectivity. Given that the cost line is created by visual
approximation or "eyeballing," different cost analysts will likely
produce different lines. The high-low
method, on the other hand, is objective.
However, it uses only two data points and ignores the rest, thus
generalizing about cost behavior by relying on only a very small percentage of
possible data observations.
Least-Squares
Regression and Multiple Regression
82. Distinguish between least-squares regression
and multiple regression as cost estimation methods.
LO: 5,
6 Type: RC
Answer:
In the
least-squares regression (LSR) method, the cost line is positioned to minimize
the sum of the squared deviations between the cost line and the data
points. The cost line fit to the data
using LSR is called a regression line.
The statistical equation for this line is represented by the formula: Y
= a + bX, with X denoting activity level (independent variable) and Y denoting
the total cost (dependent variable).
The
multiple-regression line has all the same properties of the simple LSR line,
but more than one independent variable is taken into consideration. The use of more independent variables can
better explain accompanying changes in cost.
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