CHAPTER3:COSTANALYSIS

MultipleChoice

b1.Theprincipaladvantageofthescatterdiagrammethodoverthehighlow
methodofcostestimationisthatthescatterdiagrammethod
a.includescostsoutsidetherelevantrange.
b.considersmorethantwopoints.
c.canbeusedwithmoretypesofcoststhanthehighlowmethod.
d.givesaprecisemathematicalfitofthepointstotheline.
a2.Themajorobjectiveofpreparingascatterdiagramisto
a.deriveanequationtopredictfuturecosts.
b.performregressionanalysisontheresults.
c.determinetherelevantrange.
d.findthehighandlowpointstouseforthehighlowmethodof
estimatingcosts.
d3.Thecostestimationmethodthatgivesthemostmathematicallyprecise
costpredictionequationis
a.thehighlowmethod.
b.thescatterdiagrammethod.
c.thecontributionmarginmethod.
d.regressionanalysis.
c4.Whichcostismostlikelytobemixedforamanufacturer?
a.Rawmaterials.
b.Directlabor.
c.Manufacturingoverhead.
d.Insurance.
b5.Whichcombinationsofobjectofcostandclassificationofcostismost
reasonable?
ObjectofCostClassificationofCost

a.MaterialsusedtomakeproductsDiscretionaryfixedcost
b.AdvertisingcostDiscretionaryfixedcost
c.StraightlinedepreciationVariablecost
d.President'ssalaryAvoidablefixedcost
c6.Acostisvariableifitvarieswiththe
a.numberofunitsmanufactured.
b.numberofunitssold.
c.levelofsomeactivity.
d.sellingpriceoftheproduct.
d7.Anonvalueaddingcostis
a.usuallydirecttoaproduct.
b.thesameasadiscretionarycost.
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c.unavoidable.
d.notessentialtomanufacturingaproduct.
a8.Fixedcoststhatcannotbereducedwithinashortperiodoftimeare
a.committed.
b.variable.
c.avoidable.
d.unnecessary.
b9.Whichcostismostlikelytobecommitted?
a.Repairsandmaintenance.
b.Sumoftheyears'digitsdepreciationonthefactorybuilding.
c.Feeforaconsultantonthecompany'slongrangeplanning.
d.Advertising.
a10.RST'saveragecostperunitisthesameatalllevelsofvolume.Which
ofthefollowingistrue?
a.RSTmusthaveonlyvariablecosts.
b.RSTmusthaveonlyfixedcosts.
c.RSTmusthavesomefixedcostsandsomevariablecosts.
d.RST'scoststructurecannotbedeterminedfromthisinformation.
b11.Amixedcost
a.increasesinstepsasvolumeincreases.
b.containsafixedcomponentandavariablecomponent.
c.varieswithmorethanonemeasureofvolume.
d.cannotbeaccuratelypredicted.
b12.Anonvalueaddingactivity
a.cannotbeacostdriver.
b.shouldbeeliminated.
c.usuallydrivesonlyvariablecosts.
d.cannotusuallybeobservedbymanagers.
d13.Acostpredictingequationdeterminedthroughregressionanalysis
a.alwaysgivesclosepredictions.
b.willnotworkanybetterthanoneobtainedusingthehighlowmethod.
c.canbeusedonlyforcoststhatvarywithsalesorproduction.
d.couldbeseverelyaffectedbyoutliers.
b14.WhichofthefollowingdoJIToperationstrytoeliminate?
a.Discretionaryfixedcosts.
b.Nonvalueaddingcosts.
c.Avoidablecosts.
d.Directcosts.

d15.ABCCompanybreaksevenat$600,000salesandearns$60,000at$700,000
sales.Whichofthefollowingistrue?
a.Fixedcostsare$40,000.
b.Profitatsalesof$800,000wouldbe$160,000.
c.Thesellingpriceperunitis$6.
d.Contributionmarginis60%ofsales.

b16.Aseasonalbusinessthatsetssellingpricesat20%aboveaveragecost
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fortheprecedingmonthwill
a.bebetteroffifitcloseddownduringtheoffseason.
b.chargehigherpricesintheoffseasonthaninthebusyseason.
c.alwayschargehigherpricesthanitscompetitors.
d.makeaconsistentreturnonsalesof20%.

b17.Thecomponentsofmanufacturingcostare
a.variablecosts,fixedcosts,andoverheadcosts.
b.materials,directlabor,andoverhead.
c.purchases,wages,andmanufacturingoverhead.
d.wagesandsalaries,maintenanceandrepairs,utilities,and
depreciation.

b18.Whichstatementistrueforamanufacturer?
a.Itcannotusethecontributionmarginformatoftheincomestatement.
b.Manycostsvarywithproductionactivities,notwithsales.
c.Theconceptsoffixedandvariablecostsdonotapply.
d.Costvolumeprofitanalysisisnotappropriate.
d19.Fixedcoststhatmanagerscanchangeonshortnoticeare
a.valueaddingcosts.
b.variablecosts.
c.unavoidablecosts.
d.discretionarycosts.
c20.A(n)__________relationshipisonethatappearstoexisteventhough
thereisnocausalrelationship.
a.Correlation.
b.Outlier.
c.Spurious.
d.Valueadded.
c21.Identifyingcostdrivers
a.isnotnecessarywithregressionanalysis.
b.isthesameasidentifyingcostpools.
c.isanimportantpartofcostmanagement.
d.isusefulonlywithstepvariablecosts.
d22.Acostpoolis
a.allofthecostsofaparticulardepartment.
b.allcostsinagroupsuchasvariablecostsordiscretionaryfixed
costs.
c.allcostsrelatedtoaproductorproductline.
d.allcoststhathavethesamedriver.
b23.Asvolumeincreases,
a.totalfixedcostsremainconstantandperunitfixedcostsincrease.
b.totalfixedcostsremainconstantandperunitfixedcostsdecrease.
c.totalfixedcostsremainconstantandperunitfixedcostsremain
constant.
d.totalfixedcostsincreaseandperunitfixedcostsincrease.

d24.WhichcostisNOTsubtractedfromsellingpriceto
calculatecontributionmarginperunit?
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a.Variablemanufacturingoverhead.
b.Variablesellingexpenses.
c.Directlabor.
d.Fixedmanufacturingoverhead.

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c25.Acommittedfixedcost
a.canneverbeeliminated.
b.canbeeliminatedintheshorttermandinthelongterm.
c.canbeeliminatedinthelongterm,butnotintheshortterm.
d.canbeeliminatedintheshortterm,butnotinthelongterm.

c26.Avoidablecostsareusually
a.committed.
b.common.
c.direct.
d.fixed.

a27.Directcostsare
a.associatedwithaspecificactivity.
b.alwaysvariable.
c.usuallycommitted.
d.usuallydiscretionary.
c28.Discretionarycosts
a.areusuallyunavoidable.
b.arenotnecessaryforsuccessfuloperations.
c.canbeeitherdirectorindirect.
d.shouldbethefirstonescutinacostreductionprogram.

a29.OgdenCompanyhad$300,000overheadcostat20,000machinehours,
$320,000overheadcostat25,000hours.Variableoverheadcostper
machinehouris
a.$4.00.
b.$12.80.
c.$15.00.
d.someothernumber.

b30.SacramentoCompanyhad$400,000overheadcostat50,000machinehours
and$460,000overheadcostat60,000hours.Totalfixedoverheadis
a.$60,000
b.$100,000
c.$120,000.
d.$320,000.

d31.WhichcostisLEASTlikelytobediscretionary?
a.Salariesofsalespeople.
b.Advertising.
c.Buildingmaintenance.
d.Insurance.

a32.WhichcostisLEASTlikelytobedirecttoaparticularproduct?
a.Salariesofsalespeoplewhosellallofthecompany'sproducts.
b.Advertisingoftheproduct.
c.Licensefeespaidtothedesigneroftheproduct.
d.Costofmaterialsusedtomaketheproduct.

c33.Whichcostismostlikelytobeavoidableindecidingwhethertoshut
downoneofthefourassemblylinesinafactory?
a.Depreciationonthefactorybuilding.
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b.Salariesofmaintenanceworkerswhoserviceallassemblylines.
c.Powerusedtooperateequipmentontheassemblyline.
d.Heatandlightforthebuilding.
c34.DSPCompanyearned$100,000onsalesof$1,000,000.Itearned130,000
onsalesof$1,100,000.Variablecostsasapercentageofsalesare
a.30%.
b.40%.
c.70%.
d.90%.

b35.DSPCompanyearned$100,000onsalesof$1,000,000.Itearned$130,000
onsalesof$1,100,000.Totalfixedcostsare
a.$0.
b.$200,000.
c.$420,000.
d.$900,000.
c36.Predictingcostsatactivitylevelsthatareoutsidetherelevantrange
iscalled
a.association.
b.correlation.
c.extrapolation.
d.noneoftheabove.

a37.Anonvalueaddingcost
a.isdrivenbyanonvalueaddingactivity.
b.isdiscretionary.
c.isdirecttoaproduct.
d.allowsthecompanytochargeahigherpricefortheproduct.
b38.Lookingatthefollowingscatterdiagramswecanconcludethat
$$
|**|**
|***|***
|****|**
|**|**
||
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|__________________|__________________
activityactivity
CostACostB
a.costAwillbeeasiertopredictthancostB.
b.costBwillbeeasiertopredictthancostA.
c.costAisoutofcontrol.
d.costBhasnofixedcomponent.
b39.MNOhasabreakevenpointof200,000unitsandearnsa$100,000profit
atsalesof250,000units.Whichofthefollowingistrue?
a.Fixedcostsare$100,000.
b.Totalcontributionmarginat200,000unitsis$400,000.
c.Profitatsalesof300,000unitsis$120,000.
d.Sellingpriceperunitis$2.
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29

a40.Theclosenessoftherelationshipbetweenthecostandtheactivityis
called
a.correlation.
b.spurious.
c.regressionanalysis.
d.manufacturingoverhead.
d41.Rsquaredisameasureof
a.thespuriousrelationshipbetweencostandactivity.
b.thefixedcostcomponent.
c.thevariablecostperunitofactivity.
d.howwelltheregressionlineaccountsforthechangesinthe
dependentvariable.
c42.DJHhasanaverageunitcostof$20at20,000unitsand$13.75at40,000
units.Whatisthevariablecostperunit?
a.$5.00
b.$6.25
c.$7.50
d.Anamountthatcannotbedeterminedwithoutmoreinformation.
b43.DJHhasanaverageunitcostof$20at20,000unitsand$13.75at40,000
units.Whatisthetotalfixedcost?
a.$125,000
b.$250,000
c.$400,000
d.Anamountthatcannotbedeterminedwithoutmoreinformation.
a44.GMHCompanyhad$200,000overheadcostat25,000machinehoursand
$240,000overheadcostat60,000hours.Variableoverheadpermachine
houris
a.$4.00.
b.$1.00.
c.$0.83.
d.someothernumber.
d45.ElmwoodCompanyhad$300,000overheadcostat40,000machinehours,and
$360,000overheadcostat60,000hours.Totalfixedoverheadis
a.$36,000
b.$40,000
c.$60,000.
d.$180,000.
b46.CrookstonCompanybreaksevenat$300,000salesandearns$40,000at
$400,000sales.Whichofthefollowingistrue?
a.Fixedcostsare$120,000.
b.Profitatsalesof$500,000wouldbe$50,000.
c.Thesellingpriceperunitis$4.
d.Contributionmarginis10%ofsales.

a47.Glenwoodhasanaverageunitcostof$45at20,000unitsand$25at
60,000units.Whatisthevariablecostperunit?
a.$15
b.$20
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c.$35
d.Anamountthatcannotbedeterminedwithoutmoreinformation.
b48.Glenwoodhasanaverageunitcostof$45at20,000unitsand$25at
60,000units.Whatisthetotalfixedcost?
a.$400,000
b.$600,000
c.$900,000
d.Anamountthatcannotbedeterminedwithoutmoreinformation.
b49.OsceolaCompanyearned$50,000onsalesof$400,000.Itearned$70,000
onsalesof$450,000.Contributionmarginasapercentageofsalesis
a.30%.
b.40%.
c.60%.
d.70%.

c50.OsceolaCompanyearned$50,000onsalesof$400,000.Itearned$70,000
onsalesof$450,000.Totalfixedcostsare
a.$0.
b.$50,000.
c.$110,000.
d.$180,000.

TrueFalse
F1.Themajorvariablecostinamanufacturingcompanyisfactoryoverhead.

T2.Ininterpretingregressionresults,thehigherthecorrelation,the
bettercostpredictionsarelikelytobe.

F3.Discretionarycostsarestepvariable.

F4.Discretionaryfixedcostsarenotnecessarytosuccessfuloperationof
thebusiness.

T5.Highlow,scatterdiagram,andregressionanalysisaremethodsof
developingformulastopredictmixedcosts.
F6.Asvolumeincreases,theperunitamountofamixedcostincreases.

T7.Indevelopingacostpredictionequationusingregressionanalysis,you
mightnotselecttheonewiththehighestcorrelation.
F8.Acompanyusingactivitybasedcostingneednotdoregressionanalysis
orscatterdiagrams.
F9.Anrsquaredof.91witharegressionequationmeansthatpredictions
willbeaccurate91%ofthetime.
T10.Amultipleregressionequationusesmorethanonedrivertopredict
costs.

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32

Problems
1.CarlsonCompanyincurred$170,000inoverheadcostsmaking12,000unitsin
March.Itmade15,000unitsandincurred$188,000inoverheadcostsin
April.

a.Computethevariablecomponentofoverheadcost.
b.Findthefixedfactorofoverheadcost.

SOLUTION:
a.$6[($188,000$170,000)/(15,00012,000)]
b.$98,000[$170,000(12,000x$6),or$188,000(15,000x$6)]

2.ThestatisticianofRST,Inc.hasdevelopedthefollowingcostprediction
equation,usingobservationsfrom12,000to30,000machinehours.
Y=$236,837+$3.7625X,rsquared=.81,standarderror=$24,363
Y=totalmaintenancecost,X=machinehours
a.Findthepredictedmaintenancecostat25,000machinehours.
b.Willmaintenancecostatzeromachinehoursbe$236,837?yesno
Circlethecorrectanswer.
c.About68%ofthetime,maintenancecostshouldbewithinwhatamountof
thepredictedvalue?

SOLUTION:
a.$330,900($236,837+$3.7625x25,000)
b.No,zeroisoutsidetherelevantrange.
c.$24,363,thestandarderror

3.GennerCompanyearned$125,000onsalesof$750,000.Itearned$225,000on
salesof$1,000,000.
a.Findthevariablecostsasapercentageofsales.
b.Findthetotalfixedcosts.

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SOLUTION:
a.60%{1[($225,000$125,000)/($1,000,000$750,000)]}
b.$175,000[$1,000,000x(160%)$225,000]

4.Dannerhasanaverageunitcostof$22.50atavolumeof400,000units.At
500,000unitstheaverageunitcostis$20.50.
a.Computethevariablecostperunit.
b.Computethetotalfixedcost.

SOLUTION:
a.$12.50{[($20.50x500,000)($22.50x400,000)]/(500,000400,000)}
b.$4,000,000($9,000,000$12.50x400,000)

5.TriCountyCompanyincurred$175,000inoverheadcostsmaking40,000units
inApril.Itmade24,000unitsandincurred$147,000inoverheadcostsin
May.

a.Computethevariablecomponentofoverheadcost.
b.Findthefixedfactorofoverheadcost.

SOLUTION:
a.$1.75[($175,000$147,000)/(40,00024,000)]
b.$105,000[$147,000(24,000x$1.75),or$175,000(40,000x$1.75)]

6.BilboCompanyincurred$374,000inoverheadcostsmaking11,000unitsin
November.Itmade7,500unitsandincurred$325,000inoverheadcostsin
December.

a.Computethevariablecomponentofoverheadcost.
b.Findthefixedfactorofoverheadcost.

SOLUTION:
a.$14[($374,000$325,000)/(11,0007,500)]
b.$220,000[$325,000(7,500x$14),or$374,000(11,000x$14)]

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7.ThestatisticianofComstock,Inc.hasdevelopedthefollowingprediction
equationforcosts,usingobservationsfrom25,000to60,000machinehours.
Y=$146,374+$4.892X,rsquared=.86,standarderror=$28,638
Y=totalrepaircost,X=machinehours
a.Findthepredictedrepaircostat50,000machinehours.
b.Willrepaircostatzeromachinehoursbe$146,374?yesno
Circlethecorrectanswer.
c.About68%ofthetime,repaircostshouldbewithinwhatamountofthe
predictedvalue?

SOLUTION:
a.$390,974($146,374+$4.892x50,000)
b.No,zeroisoutsidetherelevantrange.
c.$28,638,thestandarderror

8.ScooterCompanyearned$150,000onsalesof$1,000,000.Itearned$330,000
onsalesof$1,400,000.
a.Findthecontributionmarginratio.
b.Findthetotalfixedcosts.

SOLUTION:
a.45%($330,000$150,000)/($1,400,000$1,000,000)
b.$300,000[$1,000,000x45%)$150,000]

9.Benncohasanaverageunitcostof$18.50atavolumeof100,000units.At
200,000unitstheaverageunitcostis$14.25.
a.Computethevariablecostperunit.
b.Computethetotalfixedcost.

SOLUTION:
a.$10.00{[($14.25x200,000)($18.50x100,000)]/(200,000100,000)}
b.$850,000($2,850,000$10x200,000)

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36

10.ParsonsCompanyincurred$475,000inoverheadcostsmaking40,000unitsin
August.Itmade30,000unitsandincurred$447,000inoverheadcostsin
September.

a.Computethevariablecomponentofoverheadcost.
b.Findthefixedfactorofoverheadcost.

SOLUTION:
a.$2.80[($475,000$447,000)/(40,00030,000)]
b.$363,000[$447,000(30,000x$2.80),or$475,000(40,000x$2.80)]

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