Chapter 4

Measurement of Cost Behavior

4.1 Questions
1) Many organizations use a linear relationship with a single cost driver to describe a cost even though the cost may have multiple cost drivers. Why? A) This approach is easier and less expensive. B) The cost of developing a more complex function is greater than the benefit. C) Cost estimates from the simple function are accurate enough for most decisions. D) All of the above 2) It may be difficult to trace costs to products or services if the costs are ________. A) volume-driven B) affected by activities directly related to volume C) affected by multiple cost drivers D) none of the above 3) Costs that change abruptly at different levels of activity because the resources and their costs come in indivisible chunks are called ________. A) mixed costs B) variable costs C) fixed costs D) step costs 4) Palmer Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Palmer Inc. expects to produce 115,000 units. Palmer's relevant range for production is 100,000 to 120,000 units. If 115,000 units are produced next year, what is the expected variable cost? A) $420,000 B) $430,000 C) $440,000 D) $460,000 5) Snead currently produces 120,000 units at a cost of $400,000. Of the $400,000 cost, $200,000 is a fixed cost. Next year Snead expects to produce 145,000 units. Snead's relevant range for production activities is 100,000 to 150,000 units. If 145,000 units are produced next year, what is the expected fixed cost for next year? A) $200,000 B) $241,667 C) $265,833 D) $483,333 6) The following three data points are available. This is an example of a ________ cost. Units 600 650 800 999 A) variable B) fixed C) mixed D) semivariable Costs $500 $500 $500 $500

7) A car lease payment is computed based solely on the number of miles driven. This is an example of a ________. A) purely variable cost B) mixed cost C) step cost D) stair cost 8) In a small construction firm, a crew supervisor is added for every ten workers employed. The salaries of the crew supervisors are a ________. A) variable cost B) mixed cost C) step cost D) fixed cost 9) Knowledge about the relationship between costs and cost drivers helps managers ________. A) make short run decisions B) plan the effects of future activities C) make long-run decisions D) all of the above 10) Which of the following statements about step costs is FALSE? A) If the individual chunks of cost are relatively large and apply to a specific, broad range of activity, the step cost is considered to be a fixed cost over that range of activity. B) When individual chunks of cost are relatively small and apply to a narrow range of activity, step costs are considered to be variable costs. C) Some step costs can be assumed to be variable costs for planning purposes with little loss of accuracy. D) Step costs are the same as mixed costs. 11) ________ contain elements of both fixed and variable cost behavior. A) Committed fixed costs B) Discretionary fixed costs C) Capacity costs D) Mixed costs

12) The cost of using the telephone, which involves a flat rate per month plus a fee for every local and long-distance call would be a ________ cost. A) step B) fixed C) variable D) mixed 13) A company rents a machine to be used in operations. The rental agreement calls for a flat rent payment of $2,000 per month plus $0.10 for each hour the machine is used. This is an example of a ________. A) fixed cost B) variable cost C) mixed cost D) step cost 14) Which is NOT a step cost? A) When oil and gas exploration activity reaches a certain level in a given area, a company leases an additional rig. The lease cost of the rigs is a step cost. B) When ten nurses are added to a shift, a nursing supervisor is also added to the shift. The salaries of the nursing supervisors are a step cost. C) When a telemarketing company adds ten workers to a shift, a supervisor is also added to the shift. The salaries of the supervisors are a step cost. D) When a manufacturing company ceases production, a skeleton crew of maintenance workers continues to work, but the rest are terminated. When production resumes, maintenance workers are rehired in direct proportion to the amount of production. The wages of the maintenance workers are a step cost. 15) Salaries of the telemarketers are set at $10,000 per month. The telemarketers also receive a commission for each donation they receive. They receive $5 per donation. The telemarketers salaries' and commission is a ________ cost. A) fixed B) variable C) mixed D) step 16) A compensation plan where the sales force is paid salary plus commission is a ________. A) purely variable cost B) mixed cost C) step cost D) fixed cost 17) Knowledge about relationships between costs and cost drivers is useful for managers to ________. A) plan controls B) provide feedback to managers C) make decisions about the most efficient use of resources D) all of the above
TRUE / FALSE

18) Understanding the relationship between costs and their cost drivers allows managers in all types of organizations to make proper short-run marketing decisions. 19) Measurement of cost behavior means understanding and quantifying how activities of an organization affect its level of costs. 20) Volume-driven costs can be easily traced to products or services.

21) An example of a volume-driven cost in making a textbook is the salaries of the editorial staff. 22) Step costs change abruptly at different intervals of activity. 23) Mixed costs are composed of only fixed costs. 24) A telephone bill, which includes a monthly base rate plus an extra fee for each local and long-distance call is an example of a variable cost. 25) The Milwaukee Recreation Center is planning its annual fundraiser. The event committee has developed the following budget for the event. Ballroom rental Entertainment Printing Food Decorations $2,900 $4,500 $600 plus $10 per guest $29 per guest $700 plus $5 per guest

The committee expects 3,000 people will attend the event. Required: A) Compute the fixed and variable costs for the event. B) If Milwaukee Recreation charges $100 per person, how much money will be raised by this event?

4.2 Questions
1) The fixed costs required to achieve a desired level of production or to provide a desired level of service, while maintaining product or service attributes, are ________. A) discretionary fixed costs B) mixed costs C) capacity costs D) cost-reducing costs 2) ________ arise as a result of strategic decisions about the scale and scope of an organization's activities. A) Capacity costs B) Discretionary fixed costs C) Mixed costs D) Step costs 3) In a corporate setting, property taxes are an example of a(n) ________. A) mixed cost B) committed fixed cost C) discretionary fixed cost D) engineering cost 4) Costs arising from the possession of facilities, equipment and a basic organizational structure are ________. A) capacity costs B) discretionary costs C) committed fixed costs D) engineered costs

5) ________ have no obvious relationship to levels of output activity, but are determined as part of the periodic planning process. A) Discretionary fixed costs B) Committed fixed costs C) Capacity costs D) Engineered costs 6) Due to the economic downturn, a company has reduced charitable donations to community groups. This is an example of a ________. A) variable cost B) committed fixed cost C) capacity cost D) discretionary fixed cost

7) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________. A) lease payment B) salaries of key personnel C) employee training program D) insurance on corporate offices 8) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________. A) property taxes on factory building B) insurance on factory building C) lease payments on computers in corporate headquarters D) public relations department 9) Only major changes in the scale or scope of operations can change ________ in future periods. Managers can very spending levels for ________ in the short run. A) committed fixed costs; capacity costs B) committed fixed costs; discretionary fixed costs C) discretionary fixed costs; capacity costs D) capacity costs; committed fixed costs 10) Costs that may be essential to the long-run achievement of the organization's goals, but that managers can almost reduce to zero in the short-run, are called ________. A) capacity costs B) committed fixed costs C) discretionary fixed costs D) mixed costs 11) In a corporate setting, a mortgage payment would be identified as a ________. A) purely variable cost B) discretionary fixed cost C) committed fixed cost D) mixed cost 12) A lump sum amount of money set aside for research and development would be called a ________. A) purely variable cost B) discretionary fixed cost C) committed fixed cost D) mixed cost 13) In an economic downturn, a company could temporarily reduce or eliminate ________. A) depreciation expense on corporate building B) bond interest payment C) property taxes on corporate building D) advertising and promotion 14) In an economic recession, a company could NOT eliminate ________. A) employee training program B) research and development projects C) salaries of maintenance workers D) depreciation of factory machines 15) Which statement regarding fixed costs is true? A) Discretionary fixed costs preserve management's flexibility. B) Committed fixed costs preserve management's flexibility. C) Both discretionary and committed fixed costs preserve management's flexibility. D) Discretionary fixed costs limit management's flexibility.

16) ________ is the first step in estimating or predicting costs. A) Cost measurement B) Cost determination C) Cost driver identification D) Cost behavior investigation TRUE / FALSE 17) Most companies make capacity decisions frequently. 18) The decisions made by managers influence cost behavior throughout the entire value chain. 19) Capacity costs are mixed costs related to a desired level of production or service. 20) Committed fixed costs usually arise from the possession of facilities, equipment and a basic organizational structure. 21) Committed fixed costs can be altered by management if management decides that different levels of spending are desirable. 22) Companies can recover fixed capacity costs when demand falls during an economic downturn. 23) Discretionary fixed costs have direct relationships with levels of capacity or output activity. 24) Managers cannot eliminate discretionary fixed costs. 25) The use of high-technology methods rather than labor in manufacturing products usually means a much greater fixed-cost component to total costs. 26) The use of high-technology methods rather than labor in manufacturing products usually creates less risk for companies with wide variations in demand. 27) The first step in estimating or predicting costs is cost measurement. 28) Identify the following planned costs as: (A) purely variable costs (B) discretionary fixed costs (C) committed fixed costs (D) mixed costs (E) step costs ________ 1. Mortgage payment on factory building. ________ 2. Electricity used in operating equipment. The utility company charges a base rate of $100 per month plus $0.10 per hour. ________ 3. A lump sum amount of advertising costs planned by a local restaurant. ________ 4. Nursing supervisors' salaries (a supervisor is needed for every 10 nurses). ________ 5. Training costs for employees. ________ 6. Crew supervisor in small construction company. A new supervisor is needed for

every 12 workers employed. ________ 7. Sales commissions based on amount of sales. ________ 8. Rental payment on a 30-year lease for office space in a private office building. ________ 9. Public relations department at a large consumer-oriented company. ________ 10. Management consulting services acquired to resolve company image Problems. ________ 11. Insurance on factory machines. ________ 12. Salaries of Chief Financial Officer and Chief Executive Officer.

4.3 Questions
1) When managers graph a linear cost function with one cost driver, the intercept represents the ________ cost and the slope represents the ________ cost. A) variable; fixed B) fixed; variable C) fixed; mixed D) variable; mixed 2) A cause and effect relationship between a ________ and a ________ is desirable in order to obtain accurate and useful cost functions. A) cost driver; cost function B) cost function; resource cost C) cost driver; resource cost D) step cost; capacity cost 3) When developing cost functions, which of the following statement is FALSE? A) The cost function must be believable. B) The cost function should explain past cost behavior. C) Personal observations of costs and activities provide the best evidence of a plausible relationship between a cost and its cost driver. D) The cost function does not have to be reliable. 4) An algebraic equation used by managers to describe the relationship between a cost and its cost driver(s) is called a ________. A) cost behavior B) cost function C) cost system D) cost analysis 5) Merkey Motel's cost function is given as: Y = $50,000 + $7.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Merkey Motel has 8,000 guest days. In the next year, Merkey Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected fixed custodial cost for next year? A) $7.50

B) $50,000 C) $62,500 D) $75,000 6) Moonlight Motel's cost function is given as: Y = $50,000 + $7.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Moonlight Motel has 8,000 guest days. In the next year, Moonlight Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total variable custodial cost for next year? A) $60,000 B) $75,000 C) $125,000 D) $137,500 7) Sunrise Motel's cost function is given as: Y = $50,000 + $7.50X Where: Y = annual custodial cost X = number of guest-days of occupancy In the current year, Sunrise Motel has 8,000 guest days. In the next year, Sunrise Motel expects an occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the current year.) What is the expected total custodial cost for next year? A) $50,000 B) $62,500 C) $125,000 D) $137,500 8) In a mixed-cost linear function with one cost driver, the intercept is the ________ and the slope is the ________. A) fixed cost; step cost B) fixed cost; variable cost C) variable cost; fixed cost D) variable cost; step cost 9) Consider the following linear mixed-cost function: Y = $72,000 + $7.70X Where: Y = total annual maintenance cost X = number of patient-days What does the $72,000 represent? A) variable cost per patient-day B) total variable cost C) fixed cost per patient-day D) total fixed cost

10) Consider the following linear mixed-cost function: Y = $72,000 + $7.70X Where: Y = total annual custodial cost X = number of patient-days What does the $7.70 represent? A) variable cost per patient-day B) total variable cost C) fixed cost per patient-day D) total fixed cost 11) Managers apply two criteria to obtain accurate and useful cost functions. These criteria are ________. A) plausibility and believability B) plausibility and reliability C) reliability and validity D) believability and plausibility 12) In relation to a cost function, the term reliability means ________. A) whether the costs and activities can be easily observed B) whether the cost function conforms to a given mathematical model C) how well the cost function predicts future costs D) how well the cost function explains past cost behavior
TRUE / FALSE

13) A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s). 14) Managers should apply plausibility and reliability to obtain accurate and useful cost functions. 15) When referring to a cost function, plausibility refers to whether you can rely upon the cost function for predicting the future. 16) In a linear mixed cost function, the slope of the function is the fixed cost per unit of the cost driver. 17) Goodness of fit pertains to how well a cost function predicts cost behavior. 18) Cleveland Recreation Center is planning its annual fundraiser. The event committee has developed the following budget for the event. Ballroom rental Entertainment Printing Food Decorations $2,900 $4,500 $600 plus $9 per guest $29 per guest $700 plus $5 per guest

The committee expects 3,000 people will attend the event. Required: A) Compute the fixed and variable costs of the event. B) Prepare the cost function. C) If Cleveland Recreation charges $100 per person, how much money will be raised by this event?

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4.4 Questions
1) Activity analysis is used to ________. A) identify relevant costs for decision making B) classify costs C) identify an appropriate cost driver D) predict future costs 2) The process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service is called ________. A) account analysis B) activity analysis C) cost measurement D) action analysis 3) Skoda Company makes metal signs for businesses and residences. These signs are made of sheet metal, which the owner paints by hand. The owner is concerned that he does not have a good measure of support costs for the signs. Currently, he predicts support costs to be 30 percent of the cost of materials. Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure. Skoda Company has the following information available: Materials cost Direct labor hours Small Sign $300 5 Large Sign $700 11

Using cost of materials as the cost driver, what amount of support costs is assigned to the small sign? A) $37 B) $50 C) $90 D) $210 4) SK Company makes metal signs for businesses and residences. These signs are made of sheet metal, which the owner paints by hand. The owner is concerned that he does not have a good measure of support costs for the signs. Currently, he predicts support costs to be 30 percent of the cost of materials. Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure. SK Company has the following information available: Materials cost Direct labor hours Small Sign $300 5 Large Sign $700 11

Using cost of materials as the cost driver, what amount of support costs is assigned to the large sign? A) $50 B) $80 C) $90 D) $210 5) Cat Company makes metal signs for businesses and residences. These signs are made of sheet metal, which the owner paints by hand. The owner is concerned that he does not have a good measure of support costs for the signs. Currently, he predicts support costs to

11

be 30 percent of the cost of materials. Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure. Cat Company has the following information available: Small Sign $300 5 Large Sign $700 11

Materials cost Direct labor hours

Using direct labor hours as the cost driver, what amount of support costs is assigned to the small sign? A) $50 B) $110 C) $160 D) $200 6) Dog Company makes metal signs for businesses and residences. These signs are made of sheet metal, which the owner paints by hand. The owner is concerned that he does not have a good measure of support costs for the signs. Currently, he predicts support costs to be 30 percent of the cost of materials. Close investigation of the business reveals that $10 per direct labor hour is a more plausible and reliable support cost measure. Dog Company has the following information available: Materials cost Direct labor hours Small Sign $300 5 Large Sign $700 11

Using direct labor hours as the cost driver, what amount of support costs is assigned to the large sign? A) $33 B) $60 C) $110 D) $160
TRUE / FALSE

7) The cost of a final product may have several cost drivers. 8) Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service. 9) The cost of the Maintenance Department at Forest Manufacturing has always been charged to the production departments based on the number of employees. Recently, an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each production department. The Maintenance Department cost is $1,000,000. The following data is available: Production Departments Dept. X Dept. Y Dept. Z Number of Employees 300 250 50 Square Feet of Space 15,000 25,000 10,000 Required: Determine the amount of the maintenance department cost that should be allocated to Department X if the cost driver used is: (A) number of employees and (B) square feet of space.

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4.5 Questions
1) To estimate or approximate cost functions, managers have a broad selection of methods that do NOT include ________. A) engineering analysis B) account analysis C) sales mix analysis D) visual fit method 2) ________ and ________ rely on a logical analysis of the cost environment instead of an explicit analysis of prior cost data. A) engineering analysis; account analysis B) activity analysis; account analysis C) visual fit method; high low method D) least-squares regression analysis; activity analysis 3) The methods to approximate cost functions are not ________; managers frequently use two or more together to avoid ________ in measuring cost behavior. A) the same; duplication B) mutually exclusive; errors C) complementary; errors D) similar; duplication 4) In engineering analysis, cost analysts estimate cost functions using ________. A) past experience and experiments with prototypes B) accounting and industrial engineering literature C) experience from competitors D) all of the above 5) A disadvantage of engineering analysis is ________. A) it fails to produce a cost function B) the information produced may not be timely C) it is not acceptable under Generally Accepted Accounting Principles D) it cannot be used with mixed costs 6) In account analysis, users rely on the ________ for information about cost behavior. A) management audit B) performance report C) value chain D) accounting system 7) ________ is a method of approximating cost functions. A) Cost driver analysis B) Activity analysis C) Account analysis D) Cost volume profit analysis 8) Selecting a volume-related cost driver and classifying each account as a variable cost or a fixed cost is called ________. A) engineering analysis B) high-low method C) visual-fit method D) account analysis

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9) Account analysis ________. A) is subjective, requiring judgment by the analyst B) is more expensive than engineering analysis C) cannot be used for mixed costs D) does not require recording of cost accounts and cost drivers 10) Engineering analysis and account analysis are similar because ________. A) both provide timely results B) both do not develop a cost function C) both provide more objective results than the high-low method D) both require the subjective judgment of the analyst 11) Account analysis and engineering analysis will remain the ________ methods of measuring cost behavior because the other methods ________. A) secondary; are more objective B) secondary; are more accurate C) primary; require more past cost data D) primary; are too difficult to work with 12) Which statement is FALSE regarding the high-low method to approximate a linear cost function? A) The first step is to plot the historical data points on a graph. B) Outliers should be removed from the analysis. C) Draw a line between the representative high and low points. D) The point at which the line intersects the Y-axis is the estimate of variable costs. 13) Presented below is the production data for the first six months of the year showing the mixed costs incurred by Euclid Company. Month January February March April May June Cost $7,500 13,000 11,500 11,700 13,500 11,850 Units 4,000 7,500 9,000 11,500 12,000 6,000

Euclid Company uses the high-low method to analyze mixed costs. The variable cost per unit is ________. A) $0.75 B) $1.25 C) $1.31 D) $1.35 14) The following data has been assembled for Lion Company. Use the high-low method. Month Cost Hours January $24,400 2,000 February 39,000 3,500 March 39,280 3,450 April 43,400 3,200 May 44,160 3,900 The variable cost per hour is ________. A) $1.52 B) $1.84

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C) $8.64 D) $10.40 15) A painting contractor is trying to estimate the cost function for painting jobs. He has the following information: House Square Feet Cost 1 2,600 $3,300 2 3,010 3,700 3 2,800 3,100 4 2,850 3,150 5 4,050 4,700 6 2,700 3,250 7 2,375 2,800 8 2,450 2,800 9 2,600 2,875 10 3,700 4,100 Using the high-low method, what is the variable cost per square foot? A) $0.73 B) $0.80 C) $1.13 D) $1.15 16) Presented below is the production data for six months of the year showing the mixed costs incurred by Columbia Company. Month Cost Units July $7,500 4,000 August 10,250 6,500 September 10,500 8,000 October 12,700 10,500 November 13,500 12,000 December 10,850 9,000 Columbia Company uses the high-low method to analyze mixed costs. The total fixed cost is ________. A) $4,000 B) $4,500 C) $10,417 D) $10,500 17) The following data has been assembled for Tire Company. Use the high-low method. Month Cost Hours January $24,400 2,000 February 39,000 2,200 March 35,280 2,750 April 36,400 3,500 May 44,160 3,900 The total fixed cost is ________. A) $3,600 B) $10,112 C) $21,360 D) $26,672 18) The following data has been assembled for Tiger Company. Use the high-low method.

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Month January February March April May

Cost $24,400 39,000 35,280 36,400 44,160

Hours 2,000 2,200 2,750 3,500 3,900

The cost function is ________ where Y = Total cost and X = Number of hours. A) Y = $3,600 + $10.40X B) Y = $10,112 + $8.64X C) Y = $21,360 + $1.52X D) Y = $26,672 + $1.84X 19) The following data has been assembled for Cub Company. Use the high-low method. Month Cost Hours January $24,400 2,000 February 39,000 2,200 March 35,280 2,750 April 36,400 3,500 May 44,160 3,900 The expected total cost at an operating level of 2,850 hours is ________. A) $25,692 B) $32,016 C) $33,240 D) $34,736 20) Presented below is the production data for six months showing the mixed costs incurred by Andrew Company. Month July August September October November December Cost $5,890 4,024 7,480 8,840 5,800 7,336 Units 4,100 3,200 6,300 7,500 5,800 6,600

Andrew Company uses the high-low method to analyze mixed costs. The cost function is ________ where Y= Total Cost and X= Number of units. A) Y = $440 + $1.12X B) Y = $3,562 + $0.144X C) Y = $107 + $1.416X D) Y = $7,850 + $0.132X 21) Presented below is the production data for six months of the year showing the mixed costs incurred by Brooklyn Company. Month July August September October November December Cost $7,500 11,250 11,500 11,700 13,500 12,850 Units 4,000 9,500 9,000 10,500 12,000 10,000

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Brooklyn Company uses the high-low method to analyze mixed costs. The predicted total cost at an operating level of 10,000 units is ________. A) $11,725 B) $11,800 C) $12,000 D) $12,500 22) The high-low method can be used to approximate a cost function. A disadvantage of this method is ________. A) it is difficult to apply due to rigorous calculations B) it is more subjective than account analysis C) it is more subjective than engineering analysis D) it makes inefficient use of information because it does not use all the available data 23) The high-low method can be used to approximate a cost function. A disadvantage of this method is ________. A) the choice of the high and low points is subjective B) it is difficult to use C) it provides information about the reliability of the cost estimates D) it requires less past cost data than account analysis 24) A disadvantage of the visual-fit method to approximate a cost function is ________. A) it does not use all the available data B) it is costly to apply C) it does not capture the general tendency of the data D) the placement of the line is subjective 25) ________ is a method in which the cost analyst draws a straight line through a plot of all the available data, and develops the cost function from this line. A) Engineering analysis B) Account analysis C) The visual-fit method D) Activity analysis 26) The least-squares regression method can be used to approximate a cost function. A disadvantage of this method is ________. A) it does not use all the available data points B) it requires a lot of prior cost data C) it requires subjective placement of the line D) it is more subjective than engineering analysis 27) A measure of how much of the fluctuation of a cost is explained by changes in the cost driver is ________. A) least squares regression analysis B) standard error of coefficient C) standard error of constant D) coefficient of determination 28) ________ uses statistics to fit a cost function to all the historical data. A) The high-low method B) Account analysis C) Regression analysis D) Activity analysis 29) Because of the grounding in ________ analysis, the regression cost measures for a cost

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function are more ________ than those obtained from other methods. A) activity; reliable B) account; accurate C) statistical; reliable D) engineering; accurate 30) The first step in regression analysis is to plot the cost data against each potential cost driver because the plots may show ________. A) nonlinear trends in the data B) outliers C) nonlinear trends in the data and outliers D) missing cost data 31) In the linear cost function derived from regression analysis, the cost driver is the ________ variable and the cost to be explained is the ________ variable. A) dependent; independent B) independent; dependent C) fixed cost; variable cost D) mixed cost; dependent 32) When examining the output from regression analysis, the cost driver is the ________ variable in the cost function. A) dependent B) independent C) constant D) slope 33) The Rockford Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 595 R-Squared 0.8650 No. of observations 30 Degrees of freedom 28 X Coefficient 2.037 Standard error of coefficient 0.917 The total fixed cost is ________. A) $2.037 B) $595 C) $2,500 D) none of the above 34) The Rock Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 595 R-Squared 0.8650 No. of observations 30 Degrees of freedom 28 X Coefficient 2.037

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Standard error of coefficient The variable cost per direct labor hour is ________. A) $2.037 B) $595 C) $2,500 D) none of the above

0.917

35) The Ford Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 595 R-Squared 0.8650 No. of observations 30 Degrees of freedom 28 X Coefficient 2.037 Standard error of coefficient 0.917 The linear cost function is ________ where Y = Total utilities cost and X = Number of direct labor hours. A) Y = $2,500 + $2.037X B) Y = $2.037 + $2,500X C) Y = $595 + $0.865X D) Y = $2,500 + $0.865X 36) The Chev Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant 2,500 Standard error of Y estimate 595 R-Squared 0.8650 No. of observations 30 Degrees of freedom 28 X Coefficient 2.037 Standard error of coefficient 0.917 The coefficient of determination is ________. A) 0.8650 B) 0.917 C) 2.037 D) 595 37) The WE Energies Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20

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X Coefficient Standard error of coefficient The total fixed cost is ________. A) $2.1876 B) $11.75 C) $9,960 D) $14,885

11.75 2.1876

38) Nonin Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20 X Coefficient 11.75 Standard error of coefficient 2.1876 The variable cost per unit of product is ________. A) $2.1876 B) $11.75 C) $9,960 D) $14,885 39) Yesterday Company used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20 X Coefficient 11.75 Standard error of coefficient 2.1876 The linear cost function is ________ where Y = Total indirect materials cost and X = Number of units produced. A) Y = $2.1876 + $9,960X B) Y = $11.75 + $14,885X C) Y= $9,960 + $14,885X D) Y = $14,885 + 11.75X 40) PP Energies used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant 14,885 Standard error of Y estimate 9,960 R-Squared 0.7832 No. of observations 22 Degrees of freedom 20

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X Coefficient Standard error of coefficient The coefficient of determination is ________. A) 0.7832 B) 2.1876 C) 11.75 D) 9,960

11.75 2.1876

41) When evaluating a cost function and its estimates, it is important to see if the estimated cost function makes economic sense. This is assessed by ________. A) examining the sign of the coefficient of determination B) examining the sign of the fixed cost estimate C) examining the sign of the variable cost estimate D) examining the standard deviation of the cost driver 42) XX Company manufactures electronic devices. The company is considering three cost drivers for measuring maintenance costs in the factory. The following cost functions have been estimated using each cost driver: Cost Driver 1. X = number of parts 2. X = number of labor hours 3. X = number of machine hours Cost Function Y = $20,000 + $5X Y = $13,000 + $10X Y = $15,000 + $7X R2 = 0.40 R2 = 0.95 R2 = 0.30

Which cost driver should be chosen? A) number of parts B) number of labor hours C) number of machine hours D) none of the above
TRUE / FALSE

43) Several methods cannot be used to approximate a cost function. 44) An engineering cost analysis is often not timely in measuring the cost function. 45) During an engineering cost analysis, knowledge about new costs may be obtained from experiments with prototypes. 46) Account analysis is one method of approximating cost functions. 47) When performing an engineering analysis, one must consider that the observed time period may be abnormal. 48) The account analysis method of measuring cost behavior does not rely on subjective assessments. 49) A concern with using historical data to measure cost behavior is the possibility that historical data may hide past inefficiencies that the company could reduce if it could identify them. 50) The visual-fit method is more objective than the engineering analysis method. 51) The high-low method uses estimated cost data to approximate the cost function. 52) Least-squares regression provides statistical information about the reliability of its cost

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estimates. 53) In a regression analysis, the constant from the linear cost function is a measure of reliability. 54) If regression analysis is used when measuring cost behavior, plotting the cost against each of the potential cost drivers is not necessary. 55) In a linear cost function, the cost to be explained is the independent variable. 56) In a linear cost function, the constant or intercept measures variable cost per unit of the cost driver. 57) In regression analysis, a lower coefficient of determination is better than a higher one. 58) Wacky Bird Company, a producer of fine quality clocks, produced 5,000 clocks at a cost of $1,150,000 in July. In August, the company produced 3,000 clocks at a cost of $900,000. Required: A) Using the two data points, determine a cost function for Wacky Bird Company. B) Determine the expected total cost if Wacky Bird Company produces 4,000 clocks. 59) The EEE Company has obtained the following data: Month July August September October November December Indirect Production Costs $92,095 105,056 81,802 99,400 109,794 97,404 Direct Labor Hours 4,900 5,480 3,700 4,400 6,000 3,900

Required: A) Using the high-low method, determine the cost function for the above data. Round to two decimal places. B) If direct labor hours equal 10,000, what are the total expected indirect production costs? 60) AAA Electric Company used least squares regression analysis to obtain the following output: Payroll Department Cost Explained by Number of Employees Constant Standard error of Y estimate R-Squared No. of observations Degrees of freedom X coefficient Standard error of coefficient 9,300 630 0.9624 20 18 3.102 0.0966

Required: A) What is the total fixed cost of the payroll department? B) What is the variable cost per employee for the payroll department? C) What is the linear cost function? D) What is the coefficient of determination? Comment on the goodness of fit.

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61) XXX Company manufactures cardboard boxes. The company is considering three cost drivers for measuring support costs in the factory. The following cost functions have been estimated using each cost driver: Cost Driver 1. X = gluing time in hours 2. X = labor hours 3. X = machine hours Cost Function Y = $20,000 + $5X Y = $13,000 + $10X Y = $15,000 + $7X R2 R2 = 0.90 R2 = 0.55 R2 = 0.30

Required: A) Which cost driver should be chosen? Why?

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