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Cornerstones of Cost Management 2nd Edition By Don R. Hansen Sample
Test
Chapter 3–Cost Behavior
Student: ___________________________________________________________________________
1. Costs can display variable, fixed, or mixed behavior, and it important that they are classified accurately. True False

2. A cost that does not change as output changes is a variable cost, and one that changes is a fixed cost. True False

3. A cost object is the item for which managers want cost information, so the first step is to determine appropriate cost objects. True False

4. Fixed costs are costs that, in total, are constant within the relevant range as the level of the associated driver varies. True False

5. Variable costs are defined as costs that, in total, are constant regardless of change in an activity driver. True False

6. Mixed costs are costs that have both a fixed and a variable component. True False

7. Resources, such as direct materials, direct labor, electricity, equipment, and so on, are economic elements that enable one to perform
activities. True False

8. The level of activity performance where the amount of activity capacity needed corresponds to the level of efficiency required is called the
activity capacity. True False

9. Resources are categorized as flexible, which are supplied as needed, and committed, which are supplied in advance of usage. True False

10. Activity-based use of resources can improve both managerial control and decision making because it encourages managers to pay more
attention to controlling resource usage and spending.
True False

11. Methods of estimating costs used by companies include the industrial engineering method, the account analysis method, and the instant
decision method. True False

12. The industrial engineering method is used to determine which activities, and in what amounts, are necessary to complete a process. True
False

13. The account analysis method can be used to estimate costs by classifying accounts in the general ledger as variable. True False

14. The three widely used quantitative methods of separating a mixed cost into its fixed and variable components are the high-low method, the
scatter plot method, and the method of least squares.
True False

15. The high-low method preselects the two points that are used to compute the parameters F and X in the expression Y = F + VX True False

16. The plot of data points showing the relationship between materials handling costs and activity output is called a scattergraph. True False

17. In the method of least squares, each single measure of closeness is first squared. Squaring the deviations avoids problems caused by a mix
of positive and negative numbers. True False

18. A feature of regression routines, not provided by the scatter plot of high-low methods, is to provide information to and in the assessment of
reliability of the estimated costs formula.
True False

19. The percentage of variability in the dependent variable explained by an independent variable (i.e. measure of activity output) is called the
coefficient of correlation. True False

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

21. Finding a strong statistical association between an activity cost and an activity driver can provide evidence to managers about the
correctness of a driver selection. True False

22. Whenever least squares is used to fit an equation involving two or more independent variables, the method is called multiple regression.
True False

23. When Multiple regression is used, the user has a choice of using manual computation or using regression programs. True False

24. Multiple regression is a dependable tool for identifying the behavior of activity costs. True False

25. Multiple regression can be useful to assess cost behavior when dependent variable is affected by only one independent variable. True
False

26. A number of cost behavior patterns do not follow a linear pattern, instead, they follow a nonlinear cost curve called the learning curve. True
False

27. Managers agree that the ideas behind the learning curve can extend to the service industry only. True False

28. The basis of the learning curve is that as we perform an action over and over, we improve, and each additional performance takes less time
than the preceding ones.
True False

29. The experience curve relates cost to increased efficiency, such that the more a task is performed, the lower the cost of doing will be. True
False
30. The cumulative average-time learning curve model states that the cumulative average time per unit increases by a constant percentage.
True False

31. The most widely used method to determine cost behavior is managerial judgement. True False

32. Managerial judgement includes the possibility of mixed costs. True False

33. Before opting to use managerial judgment, management should make sure that each cost is predominantly fixed or variable. True False

34. Based on managerial judgement, the best predictor of manufacturing costs is the units available. True False

35. If a company changes from skilled labor to robots, the previous data are of little value in predicting future costs. True False

36. __________ explain changes in costs as units produced change.

________________________________________

37. __________ explain changes in cost factors other than changes in units produced. ________________________________________

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

39. __________ are assumed to be the sole drivers of a traditional cost management system.
________________________________________

40. __________ result when organizations acquire many multiperiod service capacities by paying cash up front.
________________________________________

41. __________ are those acquired from outside sources where the terms of acquisition do not require any long-term commitments.
________________________________________

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

43. A __________ function displays a constant level of cost for a range of output and then jumps to a higher level.
________________________________________

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

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

46. The __________ method may be used to determine the activities and amounts for cost behavior.
________________________________________

47. __________ and __________ studies may be used in conjunction with the industrial engineering method.
________________________________________

48. The three quantitative methods of separating a mixed cost into its fixed and variable components are: the high-low method, the scatter plot
method and the method of __________ .
________________________________________

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

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

51. The __________ parameter is the point at which the mixed cost line intercepts the cost (vertical) axis.
________________________________________

52. The graph showing the relationship between activity costs and drivers/outputs is called the __________ .
________________________________________

53. The hypothesis test of cost parameters indicates whether the parameters are different from __________ .
________________________________________

54. A __________ interval provides a range of values for the actual cost with a prespecified degree of confidence.
________________________________________

55. A correlation coefficient near +1 means that two variables are moving in the __________ direction.
________________________________________

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

57. A correlation coefficient near -1 means that two variables are moving in the __________ direction
________________________________________

58. The __________ method is used whenever least squares is used to fit an equation involving two or more independent variables.
________________________________________

59. Multiple regression has __________ or __________ independent variables. ________________________________________

60. __________ is useful when the dependent variable is affected by more than one independent variable.
________________________________________

61. When a cost behavior pattern does not follow a linear pattern, a non linear cost curve is used called the __________ curve.
________________________________________
62. Each time cumulative volume doubles, __________ fall by a constant and predictable percentage.
________________________________________

63. Costs in marketing, distribution, and service after the sale __________ as number of units produced and sold __________ .
________________________________________

64. Cumulative average-time __________ curve assumes the cumulative average time per unit decreases by a constant percentage each time
the cumulative quantity of units produced doubles.
________________________________________

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

66. Cost behavior analysis focuses on how costs A. react to changes in profit.
B. react to changes in activity level.
C. change over time.
D. both a and c.

67. The drivers that explain changes in costs as units produced change are called:
A. Non-unit-level drivers
B. Activity based cost drivers
C. Unit-level drivers
D. All of these

68. Drivers that explain changes in costs as factors other than changes in units produced are called: A. Functional based cost drivers
B. Non-unit-based cost drivers
C. Unit-based cost drivers
D. None of these

69. In a traditional cost management system, cost behavior is assumed to be driven only by A. unit based cost drivers.
B. non-unit level cost drivers.
C. activity-based cost drivers.
D. none of these.

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

A. engineering orders
B. material moves
C. inspection hours
D. direct labor hours

71. A $4,000 per month salary paid to a supervisor is an example of a: A. fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

72. When the volume of activity increases within the relevant range, the fixed cost per unit A. decreases at first, then increases.
B. remains the same.
C. decreases.
D. increases.

73. Fixed cost per unit is $7 when 25,000 units are produced and $5 when 35,000 units are produced. What is the total fixed cost when nothing
is produced? A. $130,000
B. $200,000
C. $12
D. $175,000

74. The range of activity within which a linear cost function is valid is called the A. normal range.
B. relevant range.
C. activity range.
D. none of these.

75. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be
represented by a line that is parallel to the horizontal axis?
A. total direct material costs
B. a consultant paid $75 per hour with a maximum fee of $1,200
C. employees who are paid $10 per hour and guaranteed a minimum weekly wage of $200 D. rent on exhibit space at a convention

76. Given the following graphs, which graph represents fixed costs?
I II III

1. I
B. II
C. III
D. none of these

77. As the volume of activity increases within the relevant range, the variable cost per unit A. decreases.
B. decreases at first, then increases.
C. remains the same.
D. increases.

78. A manufacturing company pays an assembly line worker $12 per hour. What is the proper classification of this labor cost? A.
variable cost
B. semivariable cost
 C. fixed cost
D. mixed cost

79. The direct material cost is $20,000 when 2,000 units are produced. What is the direct material cost for 2,500 units produced?
A. $15,000
B. $ 5,000
C. $20,000
D. $25,000

80. Sandusky Corporation has the following costs for 1,000 units:
Total Cost Cost per Unit
Direct materials $ 1,500 $ 1.50
Direct labor 7,500 7.50
Depreciation on building 30,000 30.00

What is the total cost of direct materials for 100 units?

A. $ 1.50
B. $ 3.00
C. $150.00
D. $225.00

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

A. materials used in production
B. research and development
C. supervisors’ salaries
D. rent

82. Direct materials are an example of a A. fixed cost.

B. variable cost.
C. step cost.
D. mixed cost.

83. Which of the following statements is TRUE about fixed and variable costs?
A. Variable costs are constant in total and fixed costs are constant per unit.
B. Both costs are constant when considered on a total basis.
C. Both costs are constant when considered on a per-unit basis.
D. Fixed costs are constant in total and variable costs are constant per unit.

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

A. When costs reach a level above the relevant range, they are considered appropriate for analysis.
B. Linear estimates of an economist’s curvilinear cost function is only valid within the relevant range.
C. When costs reach a level below the relevant range, they are considered appropriate for analysis.
D. The nonlinear relevant range is ignored, and only those costs outside of this range may be considered.

85. Which of the following is NOT a correct statement concerning cost behavior? A. According to economics, in the long run, all costs are variable.
B. Variable costs increase in total in relation to the activity driver.
C. Unit fixed costs increase or decrease inversely in relation to the activity driver. D. None of the above

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

A. direct materials
B. materials used in production
C. salary plus commission on sales
D. supervisors’ salaries

87. The linearity assumption is most likely to be a close approximation for an underlying nonlinear cost function A. within a relevant range of activity.
B. over the long run.
C. for short-run periods.
D. both a and c.

88. Mixed costs, by definition, contain both A. product and period costs.
B. fixed and variable costs.
C. direct and indirect costs.
D. controllable and noncontrollable costs.

89. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be represented by a
line that starts at the origin and reaches a maximum value beyond which the line is parallel to the horizontal axis?
A. total direct material costs
B. a consultant paid $100 per hour with a maximum fee of $2,000
C. employees who are paid $15 per hour and guaranteed a minimum weekly wage of $300
D. rent on exhibit space at a convention.

90. Longhorn Enterprises rents a truck for a flat fee plus an additional charge per mile. What type of cost is the rent? A. step cost
B. fixed cost
C. variable cost
D. mixed cost

91. If production volume increases from 16,000 to 20,000 units, A. total costs will increase by 20 percent.
B. total costs will increase by 25 percent.
C. total variable costs will increase by 25 percent.
D. mixed and variable costs will increase by 25 percent.
92. Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $250 per month plus $0.40 per mile. Management is evaluating
the desirability of switching to a modern, fuel-efficient truck, which can be leased from Goliath, Inc., for a fee of $600 per month plus $0.05 per mile. All
operating costs and fuel are included in the rental fees. In general, a lease from
A. Goliath, Inc., is economically preferable to a lease from Burton Enterprises regardless of the monthly use.
B. Burton Enterprises is economically preferable below 1,000 miles per month.
C. Burton Enterprises is economically preferable to a lease from Goliath, Inc., regardless of the monthly use.
D. Burton Enterprises is economically preferable above 1,000 miles per month.

93. An equipment lease that specifies a payment of $8,000 per month plus $7 per machine hour used is an example of a A. fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

94. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. Develop a cost equation for the total machine maintenance
cost. A. Y= $275,000
B. Y = $20,000
C. Y = $20,000 + $2 MHR
D. Y = $2 MHR

95. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. Refer to Figure 3-1. Compute the total variable machine maintenance cost
last year. A. $275,000
B. $240,000
C. $220,000
D. $550,000

96. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. Compute the total machine maintenance cost for last year.
A. $570,000
B. $550,000
C. $420,000
D. $20,000

97. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. What is the total maintenance cost per unit produced? A.
$0.55
B. $4.20
C. $5.50
D. $5.70

98. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine hour.
Last year 275,000 machine hours were used to produce 100,000 units.
See Figure 3-1. If 300,000 machine hours had been worked last year, what would be the total machine maintenance cost?
A. $600,000
B. $620,000
C. $420,000
D. $220,000

99. The efficient level of activity performance is called A. practical capacity.

B. activity capacity.
C. unused capacity.
D. acquired capacity.

100. If all the activity capacity acquired is not used, this is an example of A. practical capacity.
B. activity capacity.
C. unused capacity.
D. ideal capacity.

101. Flexible resources

A. are supplied as needed.
B. are acquired from outside sources, not requiring a long-term commitment.
C. have no unused capacity.
D. all of the above.

102. Committed resources

A. are supplied as needed.
B. are acquired by a contract for the exact amount of their usage.
C. may exceed the demand for their usage.
D. all of the above.

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

A. depreciation on a factory building
B. supervisor’s salary
C. direct labor
D. insurance on a building
104. The expenses that result when organizations acquire many multiperiod service capacities by paying cash up front or by entering into an explicit contract
that requires periodic cash payments are called:
A. Managed fixed expenses
B. Committed fixed expenses
C. Discretionary fixed expenses
D. Period expenses

105. The type of resources that are acquired from outside sources, where the terms of acquisition do NOT require any long-term commitment for any given
amount of the resource are called:
A. Flexible resources
B. Committed resources
C. Discretionary fixed expenses
D. Committed fixed expenses

106. The costs incurred that provide long-term activity capacity, usually as the result of strategic planning are called: A. Discretionary fixed expenses
B. Committed fixed expenses
C. Mixed costs
D. Step-variable costs

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

A. contract workers
B. property taxes on a factory building
C. depreciation on a factory building
D. insurance on a building

108. The costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly planning are called: A. Discretionary fixed expenses
B. Committed fixed expenses
C. Mixed costs
D. Step-variable costs

109. When a firm acquires the resources needed to perform an activity, it is obtaining A. practical capacity.
B. resource usage.
C. activity capacity.
D. unused capacity.

110. The activity-based resource usage model allows managers to better calculate the changes in resource supply and demand resulting from decisions such
as:
A. to make or buy production components B.
maximization of individual unit performance.
C. increasing the allocation of costs.
D. focusing on managing costs rather than activities.

111. A nursing home requires one nurse for each six patients. This is an example of a A. fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

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

A. cost of disposable gowns used by patients in a hospital
B. cost of soaking solution to clean jewelry (Each jar can soak 50 rings before losing effectiveness.)
C. cost of tuition at $300 per credit hour up to 15 credit hours (Hours taken in excess of 15 hours are free.) D. cost of disposable surgical scissors, which are
purchased in increments of 100

113. Salaries paid to shift supervisors are an example of a A. step-variable cost.

B. mixed cost.
C. step-fixed cost.
D. variable cost.

114. Figure 3-2

A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders were processed. Refer to
Figure 3-2. What is the cost of unused activity?
A. $300,000
B. $240,000
C. $30
D. $60,000

115. Figure 3-2

A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders were processed. Refer to
Figure 3-2. What is the cost of resource usage?
A. $300,000
B. $240,000
C. $30
D. $60,000

116. Figure 3-3

The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year. Refer to Figure 3-3. Calculate the activity rate per change order.
A. $4 per change order
B. $10 per change order
C. $40 per change order
D. $15 per change order

117. Figure 3-3

 The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year.
Refer to Figure 3-3. Calculate the unused capacity.
A. 750 change orders
B. 1,375 change orders
C. 4,000 change orders
D. 2,000 change orders

118. Figure 3-3

The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year. Refer to Figure 3-3. What is the unused capacity in dollars?
A. $60,000
B. $30,000
C. $240,000
D. $15,000

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

A. industrial engineering method
B. account analysis method
C. statistical and quantitative methods
D. confidence interval model

120. The method for analyzing cost behavior that generally classifies general ledger accounts is A. account analysis method.
B. multiple regression method.
C. industrial engineering method.
D. learning curve method.

121. The cost behavior method that may use time and motion studies to determine the activities and amounts for cost behavior analysis is A. account analysis
method.
B. industrial engineering method.
C. regression analysis.
D. high-low method.

122. Which of the following decision-making tools would NOT be useful in determining the slope and intercept of a mixed cost? A. scattergraphs
B. least-squares method
C. high-low method
D. account analysis method

123. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as follows: A. (Total costs – Fixed costs)/Unit
volume
B. (Total costs/Unit volume) – Fixed costs
C. (Total costs ´ Unit volume) – (Fixed costs/Unit volume)
D. Total costs – (Fixed costs/Unit volume)

124. In the formula Y = F + VX, VX refers to the A. total variable costs.

B. intercept.
C. dependent variable.
D. independent variable.

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

B. intercept.
C. slope.
D. total variable costs.

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

B. intercept.
C. dependent variable.
D. independent variable.

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

B. intercept.
C. dependent variable.
D. independent variable.

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

B. intercept.
C. dependent variable.
D. independent variable.

129. Total costs may be computed as follows:

A. Fixed costs + (Variable costs per unit ´ Unit volume)
B. (Fixed costs per unit ´ Unit volume) + Variable costs
C. Fixed costs per unit + (Variable costs per unit ´ Unit volume)
D. (Fixed costs per unit ´ Unit volume) + Variable costs per unit

130. Amigos Industries analyzed the relationship between total factory overhead and changes in direct labor hours. It found the following: Y = $6,000 + $6X
The Y in the equation is an estimate of A.
total variable costs.
B. total direct labor hours.
C. total factory overhead.
D. total fixed costs.

131. Assume the following information:

 Volume Total Cost
90 units $1,200
98 units $1,300
106 units $1,400

What is the variable cost per unit?

A. $15.00
B. $12.50
C. $13.75
D. $14.78

132. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function
Electricity $200 + $20 per direct labor hour
Maintenance $400 + $30 per direct labor hour
Supervisors’ salaries $20,000 per month
Indirect materials $16 per direct labor hour

If January production is expected to be 2,000 units requiring 3,000 direct labor hours, estimated manufacturing overhead costs would be A.
$20,733.
B. $198,000.
C. $152,600. D.
$218,600.

133. Advantages of the method of least squares over the high-low method include
all of the following EXCEPT A. a statistical method is used to mathematically
derive the cost function.
B. only two points are used to develop the cost function.
C. the squared differences between actual observations and the line (cost function) are minimized.
D. all the observations have an effect on the cost function.

134. Weaknesses of the high-low method include all of the following EXCEPT A.
only two observations are used to develop the cost function.
B. the high and low activity levels may not be representative.
C. the method does not detect if the cost behavior is nonlinear.
D. the method is relatively complex and difficult to apply.

135. The high-low method may give unsatisfactory results if A. the points are
unrepresentative.
B. volume of activity is heavy.
C. volume of activity is light.
D. the data points all fall on a line.

136. Figure 3-4

The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs
January 1,400 $2,200
February 2,800 5,400
March 3,200 5,700
April 1,750 3,900
May 1,200 2,400
June 2,100 4,050

Refer to Figure 3-4. Using the high-low method, estimated variable cost per unit of production is A.
$1.75
B. $1.65
C. $1.53
D. $1.26

137. Figure 3-4

The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs
January 1,400 $2,200
February 2,800 5,400
March 3,200 5,700
April 1,750 3,900
May 1,200 2,400
 June 2,100 4,050

Refer to Figure 3-4. What are the fixed costs?

A. $420
B. $100
C. $200
D. none of these

138. The following information was available about supplies cost for the second quarter of the year:
Month Production Volume Supplies Cost
July 700 $3,185
August 1,600 7,100
September 600 2,700

Using the high-low method, the estimate of supplies cost at 1,000 units of production is A.
$2,700.
B. $4,460.
C. $4,900.
D. $7,100.

139. Stanfil Corporation developed a cost function for manufacturing overhead costs of Y = $8,000
+ $1.60X. Estimated manufacturing overhead costs at 10,000 units of production are A. $16,000.
B. $17,600.
C. $24,000. D.
$26,000.
140.
Barron
Enterprises
has the
following
information
about its
truck fleet
miles and
operating
costs:
Year Miles Operating Costs
2014 400,000 $256,000
2015 480,000 280,000
2016 560,000 320,000

What is the best estimate of total costs using the high-low method if the expected fleet mileage for 2017 is 500,000 miles?
A. $288,000
B. $296,000
C. $256,000
D. $320,000

141. The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:
Month Cost of Electricity Direct Labor Hours
February $ 8,100 750
May 9,000 850
August 10,200 1,000
November 8,700 800

Using the high-low method, which of the following is the best equation?
A. Y = $900 + $12.00X
B. Y = $900 + $8.40X
C. Y = $1,800 + $8.40X
D. Y = $2,400 + $8.40X

142. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
 Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation

Refer to Figure 3-5. The monthly production cost can be expressed as

A. X = aY + b
B. X = a + bY
C. Y = a + bX
D. Y = b + aX

143. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation

Refer to Figure 3-5. Using the high-low method, what is the cost formula for estimating costs? A.
Total cost = $20,000 + $2.08X
B. Total cost = $7,500 + $2.08X
C. Total cost = $5,000 + 2.08X
D. Total cost = $2.08X

144. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation
Refer to Figure 3-5. Predict a cost for 5,000 labor hours.
A. $17,900
B. $17,700
C. $16,667
D. $30,400

145. The cost function derived by the least-squares cost estimation method A.
is linear.
B. must be tested for minima and maxima.
C. is parabolic.
D. is quadratic.

146. The scatterplot method of cost estimation A. is influenced by extreme

observations.
B. requires the use of judgment.
C. uses the least-squares method.
D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.

147. The following information was taken from a computer printout generated
with the least-squares method for use in estimating overhead costs:
Slope 45
Intercept 5,700
Correlation coefficient .72
Activity variable Direct labor hours

The cost formula is

A. Overhead = $5,700 – $45X
B. Overhead = $5,700 + $45X
C. Overhead = $5,700 + ($45 ´ 0.72)
D. Overhead = $5,700 ´ 0.72

148. Which of the following is an advantage of using the scatterplot method over the high-low method to estimate costs?
A. It is a statistical method to determine the “best fit.”
B. A cost analyst can review the data visually and eliminate outliers.
C. The quality of the cost formula relies on the objective judgment of the analyst.
D. The cost formula can be determined simply by looking at two points of data.

149. Spokane Corporation found its maintenance cost and sales dollars to be somewhat correlated. Last year’s high and low observations were as follows:
Maintenance Cost Sales
$46,000 $600,000
$52,000 $800,000

What is the fixed portion of the maintenance cost?

A. $28,000
B. $52,000
C. $60,000
D. $14,000

150. In the method of least squares, the deviation is the difference between the A.
predicted and estimated costs.
B. predicted and average costs.
C. average and actual costs.
D. predicted and actual costs.

151. Figure 3-6

The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of variable cost per unit of production using the method of least squares. Rounded to
two decimal places, this value would be A. $3.21.
B. $2.70.
C. $1.31. D.
$1.23.

152. Figure 3-6

 The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of the fixed portion of maintenance costs using the method of least squares.
Rounded to dollars, this value would be A. $575.
B. $166.
C. $160.
D. $66.

153. Figure 3-6

The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of maintenance costs at 100 units of production using the method of least squares.
This value would be A. $291.
B. $321.
C. $336.
D. $698.

154. The hypothesis test of cost parameters A. is not tested by the t-statistic.
B. indicates whether the parameters are different from zero.
C. tells the t-value of the significance achieved.
D. all of the above.

155. The coefficient of determination is

A. a measure of the variability of actual costs around the cost-estimating equation.
B. used to construct probability intervals for cost estimates.
C. a standardized measure of the degree to which two variables move together.
D. a measure of the percent variation in the dependent variable that is explained by an independent variable.

156. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
 8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. What is the model?
A. Overhead = 4.81 + 6.78 DLH
B. Overhead = 100.41 + 14.05 DLH
C. Overhead = 14.05 + 100.41 DLH
D. DLH = 4.81 + 6.78 Overhead

157. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. The coefficient of determination in this model tells us that A.
the slope is 14.05.
B. the intercept is 100.41.
C. 80 percent of the variation in the overhead variable is explained by DLH.
D. the slope is significant.

158. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
 2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. The hypothesis tests of the cost parameters indicate(s) that A.
the slope is significantly different from zero.
B. the intercept is significantly different from zero.
C. both the slope and intercept are not significant.
D. both the slope and intercept are significant.

159. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. Find the t-value for a 90 percent confidence level. A.
1.740
B. 1.753
C. 6.314
D. 2.920

160. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

 Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. What is the confidence interval for the predicted overhead cost rounded to the nearest whole number for a 90 percent confidence level?
A. predicted value between 140,557 and 140,644
B. predicted value between 140,644 and 140,731
C. predicted value between 87,000 and 130,500
D. none of these

161. A coefficient of determination of 0.91 means

A. the two variables move together in the same direction and have a strong relationship.
B. the parameter is not significant.
C. the model is significant 91 percent of the time.
D. that the independent variable explains 91 percent of the cost.

162. What is the difference between a correlation equal to -1 and a correlation equal to 0?
A. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are moving in opposite directions.
B. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are unrelated.
C. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are moving in the same direction.
D. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are unrelated.

163. A managerial accountant has determined the following relationships between overhead and several possible bases:
Basis Correlation with Total Overhead
Direct labor hours 0.842
Direct labor dollars 0.279
Machine hours -0.837
Employee minutes in coffee breaks -0.243

The best basis for overhead application is A.

direct labor hours.
B. coffee breaks.
C. direct labor dollars.
D. machine hours.

164. What is the difference between a correlation equal to -1 and a correlation equal to +1?
A. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are moving in opposite
directions.
B. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are unrelated.
C. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are moving in the same
direction.
D. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are unrelated.

165. What does a correlation coefficient near +1 mean? A. Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
C. Two variables are unrelated.
D. One variable is not a good predictor of the other.

166. The appropriate range for the coefficient of correlation (r) is A. 0 £ r £ 1.

B. -% £ r £ +%.
C. -1 £ r £ 1.
D. -1 £ r £ +%.

167. What does a correlation coefficient near 0 mean?

A. Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
 C. Two variables are unrelated.
D. One variable is a good predictor of the other.

168. Which of the following statements is NOT true?

A. In selecting an independent variable for cost behavior analysis, it is important to determine the activity that causes the cost being analyzed to occur.
B. Professional judgment is very important in selecting an activity measure for a particular cost.
C. A low correlation between two variables proves that one causes the other.
D. The least-squares cost estimation method can be used to measure the linear function.

169. What does a correlation coefficient near -1 mean?

A. Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
C. Two variables are unrelated.
D. One variable is not a good predictor of the other.

170. The confidence interval for the predicted value of Y

A. is a measure of the likelihood that the prediction interval will not contain the actual cost.
B. is constructed by multiplying the t-statistic times the standard error.
C. can only be computed with 95 percent confidence.
D. all of the above.

171. The following data is available of estimated overhead costs using linear regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R 2) 0.80
Standard Error (Se) 25.03
Observations 17

Table of Selected Values: t Distribution

Degrees of Freedom 90% 95% 99%
15 1.753 2.131 2.947
16 1.746 2.120 2.921
17 1.740 2.110 2.898
18 1.734 2.101 2.878
19 1.729 2.093 2.861

What is the interval around Y if 95 percent confidence is desired?

A. Y ± 20.024
B. Y ± 43.87759
C. Y ± 52.8133
D. Y ± 53.33893

172. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. The degrees of freedom for the model is
A. 158
B. 157
C. 159 D. 160

173. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
 Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. Which slope and intercept parameters are significant at the 0.05 level?
A. intercept
B. setup hours
C. number of parts
D. all of the above

174. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. The model being measured is
A. Overhead = 1,000 + 25(Setup hours) + 100(# of parts)
B. Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts)
C. Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts)
D. Overhead = 1,000 + 25(Setup hours)

175. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts. Refer
to Figure 3-8. What is the predicted overhead cost?
A. $2,500
B. $75,000
C. $76,000
D. none of these

176. Which of the following equations uses multiple regression?

A. Overhead = a + b(MH)
B. Overhead = a + b(DLH)
C. DL Costs = a + b(MH)
D. Overhead = a + b(DLH) + c(MH)

177. Which of the following statements is TRUE about the learning curve? A. The curve decreases at an increasing rate.
B. The learning effect will eventually disappear as the number of units produced increases.
C. Failure to recognize learning curve effects will cause units produced later in a new production process to receive less cost than they should.
D. All of these.
178. Wonder Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for production for batches of 1,000 units.
The variable labor costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to
learning. What is the cumulative total time (labor hours) to produce 2,000 units? A. 180 hours
B. 160 hours
C. 100 hours
D. 80 hours

179. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative total time (labor hours) to produce 2,000 units based on the cumulative average-time learning curve?
A. 20 hours
B. 80 hours
C. 100 hours
D. 160 hours

180. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the batch unit time (labor hours) to produce 2,000 units based on the cumulative average time learning curve?
A. 20 hours
B. 60 hours
C. 100 hours
D. 80 hours

181. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative total time using the incremental unit-time learning curve to produce 2,000 units?
A. 180
B. 100
C. 90
D. 80

182. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative average time per batch using the incremental unit-time learning curve for 2,000 units?
A. 180
B. 100
C. 90
D. 80

183. The learning curve that decreases by a constant percentage each time the cumulative quantity doubles is known as the A. cumulative average-time model.
B. cumulative total-time model.
C. incremental unit-time model.
D. decremental average-time model.

184. Apparent Corp. has developed the following information on product costs and inventories for a three-month period:
April May June
Finished goods inventory, units:
Beginning 20 25 30
Manufactured 25 40 35
Available 45 65 65
Sold 25 40 50
Ending 20 25 15

Manufacturing costs $4,000 $6,000 $5,500

Based on managerial judgment, the best predictor of manufacturing costs is A.
beginning inventory.
B. units manufactured.
C. ending inventory.
D. units available.

185. If a motorcycle manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data A. are of little or no value in predicting
future costs.
B. are useful in predicting future costs.
C. are representative of future costs.
D. should be used without adjustments to predict future costs.

186. Tornado Enterprises has the following information available regarding costs at various levels of monthly production:
Production volume 7,000 10,000

Direct materials $ 70,000 $100,000

Direct labor 56,000 80,000
Indirect materials 21,000 30,000
 Supervisors’ salaries 12,000 12,000
Depreciation on plant and equipment 10,000 10,000
Maintenance 32,000 44,000
Utilities 15,000 21,000
Insurance on plant and equipment 1,600 1,600
Property taxes on plant and equipment 2,000 2,000
Total $219,600 $300,600

Required:
a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings:

Variable Costs Fixed Costs Mixed Costs

b. Develop an equation for total monthly production costs.

c. Predict total costs for a monthly production volume of 8,000 units.

187. For each of the following situations, draw a graph that best describes the cost behavior pattern. The vertical axis represents costs, and the horizontal axis
represents volume.
a. Direct materials per unit
b. Depreciation expense on a building per unit
c. An employee paid $50 per hour with a guaranteed salary of $1,000 per week
d. A consultant paid $100 per hour with a maximum fee of $2,000
e. Salaries of teachers where each teacher can handle a maximum of 15 students

188. The Hamilton Mills Company cost accountant wants to determine the cost behavior for overhead. Based on observation and discussion with the plant
workers, the following accounts have been identified as the most relevant: Supervisor salaries and depreciation are believed to be generally be fixed;
Indirect labor, Utilities, and Purchasing are generally believed to be variable; Indirect labor primarily is responsible for moving materials; Utility cost is
primarily caused by the electricity to run machinery; and Purchasing costs are driven by the number of purchase orders. These accounts and their
balances are given below:
Indirect Labor Utilities Purchasing Supervisory Depreciation on
Salaries Plant and
Equipment
January $ 28,500 $ 24,000 $ 76,400 $ 40,000 $ 13,000
February 31,600 21,200 70,800 46,000 13,000
March 33,600 25,000 75,200 64,000 13,000
April 41,400 25,000 80,400 55,600 13,000
May 40,000 25,000 79,800 50,800 13,000
June 34,000 25,000 79,400 34,000 13,000
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000

Information on the activities is given below:

# of moves machine hours purchase orders
January 340 5,400 250
February 380 5,200 300
March 400 5,800 450
April 500 6,200 380
May 480 6,000 340
June 420 5,600 200
 Total 2,520 34,200 1,920

Required:
1. Why did the cost accountant decide that salaries and depreciation were fixed?
2. Calculate the average account balance for each of the 5 accounts and calculate the average monthly amount for each of the three drivers.
3. Calculate the fixed overhead and variable rates for each of the costs. Write an equation for the total overhead cost.
4. In January, 490 moves; 4,375 machine hours, and 220 purchase orders were expected. What is the amount of overhead predicted?

189. The average unit cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of 22,500 units is $2.10.
Required:
Develop an equation for total monthly costs.

190. Lowell & Company has the following cost data pertaining to the production of small desks:
Units Produced Direct Labor Costs Overhead Costs
150 $1,600 $2,800
120 1,500 2,570
210 1,750 2,910
190 1,700 2,850
140 1,600 2,600

Required:
a. Plot the preceding direct labor costs and overhead costs using the scatterplot method. Overhead costs should be on the
vertical axis.
b. Compute the fixed and variable components of the overhead costs using the high-low method.

191. The following data were obtained from the books of Thomas Company:
Month Overhead Costs Direct Labor Hours
1 $14 3
2 18 5
3 25 7
4 12 4
5 26 8
6 8 2

The normal equations are SXY = aSX + bSX2

SY = an + bSX

Required:
Use a computer or calculator to prepare the following:
a. Plot the data for overhead cost as a function of direct labor hours using the scatterplot method.
b. Compute the fixed and variable components of the overhead costs using the high-low method.
c. Compute the fixed and variable components of the overhead costs using the least-squares method.
d. Discuss the strengths and weaknesses of the three different cost estimation techniques used in parts a, b, and c.
192. Machine hours and electricity costs for Lindbergh Industries for the year 2014 are as follows:
Month Machine Hours Electricity Costs
January 2,000 $ 9,200
February 2,320 10,500
March 1,520 6,750
April 2,480 11,500
May 3,040 14,125
June 2,640 11,000
July 3,280 12,375
August 2,800 11,375
September 1,600 7,750
October 2,960 13,000
November 3,760 15,500
December 3,360 13,875

Required:
a. Using the high-low method, develop an estimate of variable electricity costs per machine hour.
b. Using the high-low method, develop an estimate of fixed electricity costs per month.
c. Using the high-low method, develop a cost function for monthly electricity costs.
d. Estimate electricity costs for a month in which 3,000 machine hours are worked.

193. Given the following information:

Month HR Dept Costs # new hires # terminations
January $785,000 444 137
February $569,000 276 250
March $603,000 219 138
April $445,000 343 99
May $463,000 355 75
June $489,000 298 83
July $400,000 196 47
August $423,000 258 92
September $469,000 307 101
October $538,000 389 175
November $667,000 402 23
December $403,000 361 10

Required:
a. Calculate an estimate of HR department costs using the hi-low method using # of new hires as the variable parameter
b. Calculate an estimate of HR department costs using the hi-low method using # termination as the variable parameter
c. Which parameter do you feel is a better driver of HR cost?

194. The plant manager requested information to assist in estimating maintenance costs. The following computer printout was generated using the
leastsquares method:
Intercept 2550
Slope 1.85
 Correlation coefficient 0.84
Activity variable Units of production volume

Required:
a. Using the information from the computer printout, develop a cost function that can be used to estimate maintenance costs
at different volume levels.
b. Estimate maintenance costs if expected production for next month is 10,000 units.

195. The following excel printout provides information to estimate overhead costs using linear regression:
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 6035.987027 1411.05464 4.277642 0.002696 2782.0871 9289.88697
DLH 4.558482698 1.609683731 2.831912 0.022085 0.846543 8.27042244
# setups 771.1028938 54.93418317 14.03685 6.44E-07 644.42436 897.781429
# moves 29.9411124 2.874675342 10.41548 6.26E-06 23.312095 36.5701299

Regression Statistics
Multiple R 0.996584412
R Square 0.99318049
Adjusted R Square 0.990623174
Standard Error 347.9563597
Observations 12

Required:
a. Write the multiple regression model (round to nearest cent).
b. What does the ‘t Stat’ measure?
c. What is the estimate of overhead if the department has 1,205 DLH, 55 setups and 125 moves?

196. The Johnson Company is trying to find an appropriate allocation base for factory overhead. Presented are five months of data:
Month Direct Labor Hours Machine Hours Factory Overhead
June 10 3 $45
July 20 5 75
August 15 4 70
September 30 5 130
October 25 3 80

r = Required:
a. Calculate the correlation coefficient between factory overhead and direct labor hours.

b. Calculate the correlation coefficient between factory overhead and machine hours.
c. Should Johnson Company use direct labor hours or machine hours for their allocation base for factory overhead? Why?

197. The following computer printout estimated overhead costs using linear regression:
t for H(0) Std. error
 Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 75 2.25 0.0250 33.33
Setup hours 13 5.10 0.0001 2.45
# of parts 50 1.65 0.0500 30.30

R Square (R2) 0.83

Standard Error (Se) 50.00
Observations 70

Required:
a. Write the multiple regression model.
b. What does R Square mean?
c. Provide a 95 percent confidence interval around the number of parts parameter.

198. The Knapp Company needs to predict the labor cost in producing small ceramic dolls. The following production information is available:
Year Dolls Produced Labor Hours Labor Dollars
2011 1,150 850 $17,000
2012 1,600 975 23,400
2013 1,100 800 25,600
2014 2,100 1,150 36,800
2015 1,500 950 34,200
2016 1,300 875 35,000

Wage rates have steadily increased since 2011; however, management expects no
further increases in 2017. Required:
a. Select the appropriate independent variable for predicting labor cost. Explain the reason for your selection.
b. Develop an equation to predict for 2017 the labor cost of producing ceramic dolls. Use the high-low method.

199. Alamo, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be required to complete the new unit. An 80
percent incremental unit-time learning curve model for direct labor hours is assumed to be valid. Assume the q = -0.3219. Data on costs are as follows:
Direct materials $50,000 per unit
Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour

Required:
a. Set up a table with columns for cumulative number of units showing the cumulative total time in hours using the incremental
unit-time learning curve. Complete the table for 1, 2, 3, and 4 units given the individual unit time for the nth unit as 500, 400,
351, and 320 for 1 to 4 units respectively.
b. Set up a similar table assuming a 90 percent with the incremental unit-time learning curve with the individual unit time for
the nth unit as 500, 450, 430, 405 for 1 to 4 units respectively.
c. What is the difference in variable cost of producing four units?

200. Highestec, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be required to complete the new unit. A 90
percent cumulative average-time learning curve model for direct labor hours is assumed to be valid. Data on costs are as follows:
 Direct materials $50,000 per unit
Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour

Required:
a. Set up a table with columns for cumulative number of units, cumulative average time per unit in hours, and cumulative total
time in hours using the cumulative average-time learning curve. Complete the table for 1, 2, 4, and 8 units.
b. Set up a similar table assuming an 80 percent cumulative average-time learning curve.
c. What is the difference in variable cost of producing four units?

Chapter 3–Cost Behavior Key

1. Costs can display variable, fixed, or mixed behavior, and it important that they are classified accurately.
TRUE

2. A cost that does not change as output changes is a variable cost, and one that changes is a fixed cost.
FALSE

3. A cost object is the item for which managers want cost information, so the first step is to determine appropriate cost objects.
TRUE

4. Fixed costs are costs that, in total, are constant within the relevant range as the level of the associated driver varies.
TRUE

5. Variable costs are defined as costs that, in total, are constant regardless of change in an activity driver.
FALSE

6. Mixed costs are costs that have both a fixed and a variable component. TRUE

7. Resources, such as direct materials, direct labor, electricity, equipment, and so on, are economic elements that enable one to perform activities.
TRUE

8. The level of activity performance where the amount of activity capacity needed corresponds to the level of efficiency required is called the activity capacity.
FALSE

9. Resources are categorized as flexible, which are supplied as needed, and committed, which are supplied in advance of usage. TRUE

10. Activity-based use of resources can improve both managerial control and decision making because it encourages managers to pay more attention to
controlling resource usage and spending.
TRUE

11. Methods of estimating costs used by companies include the industrial engineering method, the account analysis method, and the instant decision method.
FALSE

12. The industrial engineering method is used to determine which activities, and in what amounts, are necessary to complete a process.
TRUE

13. The account analysis method can be used to estimate costs by classifying accounts in the general ledger as variable.
FALSE

14. The three widely used quantitative methods of separating a mixed cost into its fixed and variable components are the high-low method, the scatter plot
method, and the method of least squares.
TRUE

15. The high-low method preselects the two points that are used to compute the parameters F and X in the expression Y = F + VX FALSE

16. The plot of data points showing the relationship between materials handling costs and activity output is called a scattergraph.
TRUE

17. In the method of least squares, each single measure of closeness is first squared. Squaring the deviations avoids problems caused by a mix of positive and
negative numbers.
TRUE

18. A feature of regression routines, not provided by the scatter plot of high-low methods, is to provide information to and in the assessment of reliability of the
estimated costs formula.
TRUE

19. The percentage of variability in the dependent variable explained by an independent variable (i.e. measure of activity output) is called the coefficient of
correlation.
FALSE

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

FALSE
21. Finding a strong statistical association between an activity cost and an activity driver can provide evidence to managers about the correctness of a driver
selection.
TRUE

22. Whenever least squares is used to fit an equation involving two or more independent variables, the method is called multiple regression.
TRUE

23. When Multiple regression is used, the user has a choice of using manual computation or using regression programs. FALSE

24. Multiple regression is a dependable tool for identifying the behavior of activity costs.
TRUE

25. Multiple regression can be useful to assess cost behavior when dependent variable is affected by only one independent variable.
FALSE

26. A number of cost behavior patterns do not follow a linear pattern, instead, they follow a nonlinear cost curve called the learning curve.
TRUE

27. Managers agree that the ideas behind the learning curve can extend to the service industry only.
FALSE

28. The basis of the learning curve is that as we perform an action over and over, we improve, and each additional performance takes less time than the
preceding ones.
TRUE

29. The experience curve relates cost to increased efficiency, such that the more a task is performed, the lower the cost of doing will be.
TRUE

30. The cumulative average-time learning curve model states that the cumulative average time per unit increases by a constant percentage. FALSE

31. The most widely used method to determine cost behavior is managerial judgement. TRUE

32. Managerial judgement includes the possibility of mixed costs.

FALSE

33. Before opting to use managerial judgment, management should make sure that each cost is predominantly fixed or variable. TRUE

34. Based on managerial judgement, the best predictor of manufacturing costs is the units available.
FALSE

35. If a company changes from skilled labor to robots, the previous data are of little value in predicting future costs.
TRUE

36. __________ explain changes in costs as units produced change. Unit level drivers

37. __________ explain changes in cost factors other than changes in units produced.
Non-unit-based costs driversor
Non unit based costs drivers

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

39. __________ are assumed to be the sole drivers of a traditional cost management system. Unit based cost drivers

40. __________ result when organizations acquire many multiperiod service capacities by paying cash up front. Committed fixed expenses

41. __________ are those acquired from outside sources where the terms of acquisition do not require any long-term commitments. Flexible resources

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

43. A __________ function displays a constant level of cost for a range of output and then jumps to a higher level.
step-costor step
cost

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

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

account

46. The __________ method may be used to determine the activities and amounts for cost behavior.
industrial engineering

47. __________ and __________ studies may be used in conjunction with the industrial engineering method. Time; motionor
Motion; time

48. The three quantitative methods of separating a mixed cost into its fixed and variable components are: the high-low method, the scatter plot method and the
method of __________ .
least squares

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

regression

50. The Y in the equation Y = F + VX represents the __________, the dependent variable total cost
51. The __________ parameter is the point at which the mixed cost line intercepts the cost (vertical) axis.
intercept

52. The graph showing the relationship between activity costs and drivers/outputs is called the __________ .
scattergraph

53. The hypothesis test of cost parameters indicates whether the parameters are different from __________ .
zero

54. A __________ interval provides a range of values for the actual cost with a prespecified degree of confidence.
confidence

55. A correlation coefficient near +1 means that two variables are moving in the __________ direction. same

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

57. A correlation coefficient near -1 means that two variables are moving in the __________ direction opposite

58. The __________ method is used whenever least squares is used to fit an equation involving two or more independent variables.
multiple regression

59. Multiple regression has __________ or __________ independent variables.

two; more

60. __________ is useful when the dependent variable is affected by more than one independent variable. Multiple regression

61. When a cost behavior pattern does not follow a linear pattern, a non linear cost curve is used called the __________ curve.
learning

62. Each time cumulative volume doubles, __________ fall by a constant and predictable percentage.
costs

63. Costs in marketing, distribution, and service after the sale __________ as number of units produced and sold __________ .
decrease; increases

64. Cumulative average-time __________ curve assumes the cumulative average time per unit decreases by a constant percentage each time the cumulative
quantity of units produced doubles.
learning

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

managers

66. Cost behavior analysis focuses on how costs A.react to changes in profit.
B. react to changes in activity level.
C. change over time.
D. both a and c.

67. The drivers that explain changes in costs as units produced change are called:
A.Non-unit-level drivers
B. Activity based cost drivers
C. Unit-level drivers
D. All of these

68. Drivers that explain changes in costs as factors other than changes in units produced are called: A.Functional based cost drivers
B. Non-unit-based cost drivers
C. Unit-based cost drivers
D. None of these

69. In a traditional cost management system, cost behavior is assumed to be driven only by A.unit based cost drivers.
B. non-unit level cost drivers.
C. activity-based cost drivers.
D. none of these.

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

A.engineering orders
B. material moves
C. inspection hours
D. direct labor hours

71. A $4,000 per month salary paid to a supervisor is an example of a: A.fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

72. When the volume of activity increases within the relevant range, the fixed cost per unit A.decreases at first, then increases.
B. remains the same.
C. decreases.
D. increases.

73. Fixed cost per unit is $7 when 25,000 units are produced and $5 when 35,000 units are produced. What is the total fixed cost when nothing is produced? A.
$130,000
B. $200,000
 C. $12
D. $175,000

74. The range of activity within which a linear cost function is valid is called the A.normal range.
B. relevant range.
C. activity range.
D. none of these.

75. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be represented by a line
that is parallel to the horizontal axis?
A.total direct material costs
B. a consultant paid $75 per hour with a maximum fee of $1,200
C. employees who are paid $10 per hour and guaranteed a minimum weekly wage of $200 D. rent on exhibit space at a convention

76. Given the following graphs, which graph represents fixed costs?
I II III

1. I
B. II
C. III
D. none of these

77. As the volume of activity increases within the relevant range, the variable cost per unit A.decreases.
B. decreases at first, then increases.
C. remains the same.
D. increases.

78. A manufacturing company pays an assembly line worker $12 per hour. What is the proper classification of this labor cost? A.variable
cost
B. semivariable cost
C. fixed cost
D. mixed cost

79. The direct material cost is $20,000 when 2,000 units are produced. What is the direct material cost for 2,500 units produced? A.
$15,000
B. $ 5,000
C. $20,000
D. $25,000

80. Sandusky Corporation has the following costs for 1,000 units:
Total Cost Cost per Unit
Direct materials $ 1,500 $ 1.50
Direct labor 7,500 7.50
Depreciation on building 30,000 30.00

What is the total cost of direct materials for 100 units?

A. $ 1.50
B. $ 3.00
C. $150.00
D. $225.00

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

A.materials used in production
B. research and development
C. supervisors’ salaries
D. rent

82. Direct materials are an example of a A.fixed cost.

B. variable cost.
C. step cost.
D. mixed cost.

83. Which of the following statements is TRUE about fixed and variable costs? A.Variable costs are constant in total and fixed costs are constant per unit.
B. Both costs are constant when considered on a total basis.
C. Both costs are constant when considered on a per-unit basis.
D. Fixed costs are constant in total and variable costs are constant per unit.

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

A.When costs reach a level above the relevant range, they are considered appropriate for analysis.
B. Linear estimates of an economist’s curvilinear cost function is only valid within the relevant range.
C. When costs reach a level below the relevant range, they are considered appropriate for analysis.
D. The nonlinear relevant range is ignored, and only those costs outside of this range may be considered.

85. Which of the following is NOT a correct statement concerning cost behavior? A.According to economics, in the long run, all costs are variable.
B. Variable costs increase in total in relation to the activity driver.
C. Unit fixed costs increase or decrease inversely in relation to the activity driver. D. None of the above

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

A.direct materials
 B. materials used in production
C. salary plus commission on sales
D. supervisors’ salaries

87. The linearity assumption is most likely to be a close approximation for an underlying nonlinear cost function A.within a relevant range of activity.
B. over the long run.
C. for short-run periods.
D. both a and c.

88. Mixed costs, by definition, contain both A.product and period costs.
B. fixed and variable costs.
C. direct and indirect costs.
D. controllable and noncontrollable costs.

89. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be represented by a
line that starts at the origin and reaches a maximum value beyond which the line is parallel to the horizontal axis?
A.total direct material costs
B. a consultant paid $100 per hour with a maximum fee of $2,000
C. employees who are paid $15 per hour and guaranteed a minimum weekly wage of $300
D. rent on exhibit space at a convention.

90. Longhorn Enterprises rents a truck for a flat fee plus an additional charge per mile. What type of cost is the rent? A.step cost
B. fixed cost
C. variable cost
D. mixed cost

91. If production volume increases from 16,000 to 20,000 units, A.total costs will increase by 20 percent.
B. total costs will increase by 25 percent.
C. total variable costs will increase by 25 percent.
D. mixed and variable costs will increase by 25 percent.

92. Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $250 per month plus $0.40 per mile. Management is evaluating
the desirability of switching to a modern, fuel-efficient truck, which can be leased from Goliath, Inc., for a fee of $600 per month plus $0.05 per mile. All
operating costs and fuel are included in the rental fees. In general, a lease from
A.Goliath, Inc., is economically preferable to a lease from Burton Enterprises regardless of the monthly use.
B. Burton Enterprises is economically preferable below 1,000 miles per month.
C. Burton Enterprises is economically preferable to a lease from Goliath, Inc., regardless of the monthly use.
D. Burton Enterprises is economically preferable above 1,000 miles per month.

93. An equipment lease that specifies a payment of $8,000 per month plus $7 per machine hour used is an example of a A.fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

94. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. Develop a cost equation for the total machine maintenance
cost. A. Y= $275,000
B. Y = $20,000
C. Y = $20,000 + $2 MHR
D. Y = $2 MHR

95. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. Refer to Figure 3-1. Compute the total variable machine maintenance cost
last year. A. $275,000
B. $240,000
C. $220,000
D. $550,000

96. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. Compute the total machine maintenance cost for last year.
A. $570,000
B. $550,000
C. $420,000
D. $20,000

97. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine
hour. Last year 275,000 machine hours were used to produce 100,000 units. See Figure 3-1. What is the total maintenance cost per unit produced? A.
$0.55
B. $4.20
C. $5.50
D. $5.70

98. Figure 3-1

Sonor Systems undertakes its own machine maintenance. The depreciation on the equipment is $20,000 per year and operating cost is $2 per machine hour.
Last year 275,000 machine hours were used to produce 100,000 units.
See Figure 3-1. If 300,000 machine hours had been worked last year, what would be the total machine maintenance cost? A.
$600,000
B. $620,000
C. $420,000
D. $220,000
99. The efficient level of activity performance is called A.practical capacity.
B. activity capacity.
C. unused capacity.
D. acquired capacity.

100. If all the activity capacity acquired is not used, this is an example of A.practical capacity.
B. activity capacity.
C. unused capacity.
D. ideal capacity.

101. Flexible resources

A.are supplied as needed.
B. are acquired from outside sources, not requiring a long-term commitment.
C. have no unused capacity.
D. all of the above.

102. Committed resources

A.are supplied as needed.
B. are acquired by a contract for the exact amount of their usage.
C. may exceed the demand for their usage.
D. all of the above.

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

A.depreciation on a factory building
B. supervisor’s salary
C. direct labor
D. insurance on a building

104. The expenses that result when organizations acquire many multiperiod service capacities by paying cash up front or by entering into an explicit contract
that requires periodic cash payments are called:
A.Managed fixed expenses
B. Committed fixed expenses
C. Discretionary fixed expenses
D. Period expenses

105. The type of resources that are acquired from outside sources, where the terms of acquisition do NOT require any long-term commitment for any given
amount of the resource are called:
A.Flexible resources
B. Committed resources
C. Discretionary fixed expenses
D. Committed fixed expenses

106. The costs incurred that provide long-term activity capacity, usually as the result of strategic planning are called: A.Discretionary fixed expenses
B. Committed fixed expenses
C. Mixed costs
D. Step-variable costs

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

A.contract workers
B. property taxes on a factory building
C. depreciation on a factory building
D. insurance on a building

108. The costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly planning are called: A.Discretionary fixed expenses
B. Committed fixed expenses
C. Mixed costs
D. Step-variable costs

109. When a firm acquires the resources needed to perform an activity, it is obtaining A.practical capacity.
B. resource usage.
C. activity capacity.
D. unused capacity.

110. The activity-based resource usage model allows managers to better calculate the changes in resource supply and demand resulting from decisions such
as:
A.to make or buy production components B.
maximization of individual unit performance.
C. increasing the allocation of costs.
D. focusing on managing costs rather than activities.

111. A nursing home requires one nurse for each six patients. This is an example of a A.fixed cost.
B. variable cost.
C. step cost.
D. mixed cost.

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

A.cost of disposable gowns used by patients in a hospital
B. cost of soaking solution to clean jewelry (Each jar can soak 50 rings before losing effectiveness.)
C. cost of tuition at $300 per credit hour up to 15 credit hours (Hours taken in excess of 15 hours are free.) D. cost of disposable surgical scissors, which are
purchased in increments of 100

113. Salaries paid to shift supervisors are an example of a A.step-variable cost.

 B. mixed cost.
C. step-fixed cost.
D. variable cost.

114. Figure 3-2

A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders were processed. Refer to
Figure 3-2. What is the cost of unused activity?
A. $300,000
B. $240,000
C. $30
D. $60,000

115. Figure 3-2

A company usually processes 20,000 orders at a total cost of $300,000. During the year, only 16,000 orders were processed. Refer to
Figure 3-2. What is the cost of resource usage?
A. $300,000
B. $240,000
C. $30
D. $60,000

116. Figure 3-3

The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year. Refer to Figure 3-3. Calculate the activity rate per change order.
A. $4 per change order
B. $10 per change order
C. $40 per change order
D. $15 per change order

117. Figure 3-3

The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year.
Refer to Figure 3-3. Calculate the unused capacity.
A. 750 change orders
B. 1,375 change orders
C. 4,000 change orders
D. 2,000 change orders

118. Figure 3-3

The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by
the four engineers. Each engineer is paid $60,000 per year. Refer to Figure 3-3. What is the unused capacity in dollars?
A. $60,000
B. $30,000
C. $240,000
D. $15,000

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

A.industrial engineering method
B. account analysis method
C. statistical and quantitative methods
D. confidence interval model

120. The method for analyzing cost behavior that generally classifies general ledger accounts is A.account analysis method.
B. multiple regression method.
C. industrial engineering method.
D. learning curve method.

121. The cost behavior method that may use time and motion studies to determine the activities and amounts for cost behavior analysis is A.account analysis
method.
B. industrial engineering method.
C. regression analysis.
D. high-low method.

122. Which of the following decision-making tools would NOT be useful in determining the slope and intercept of a mixed cost? A.scattergraphs
B. least-squares method
C. high-low method
D. account analysis method

123. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as follows: A.(Total costs – Fixed costs)/Unit
volume
B. (Total costs/Unit volume) – Fixed costs
C. (Total costs ´ Unit volume) – (Fixed costs/Unit volume) D. Total costs – (Fixed costs/Unit volume)

124. In the formula Y = F + VX, VX refers to the A.total variable costs.

B. intercept.
C. dependent variable.
D. independent variable.

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

B. intercept.
C. slope.
D. total variable costs.

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

B. intercept.
 C. dependent variable.
D. independent variable.

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

B. intercept.
C. dependent variable.
D. independent variable.

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

B. intercept.
C. dependent variable.
D. independent variable.

129. Total costs may be computed as follows:

A.Fixed costs + (Variable costs per unit ´ Unit volume)
B. (Fixed costs per unit ´ Unit volume) + Variable costs
C. Fixed costs per unit + (Variable costs per unit ´ Unit volume)
D. (Fixed costs per unit ´ Unit volume) + Variable costs per unit

130. Amigos Industries analyzed the relationship between total factory overhead and changes in direct labor hours. It found the following: Y = $6,000 + $6X
The Y in the equation is an estimate of A.total
variable costs.
B. total direct labor hours.
C. total factory overhead.
D. total fixed costs.

131. Assume the following information:

Volume Total Cost
90 units $1,200
98 units $1,300
106 units $1,400

What is the variable cost per unit?

A. $15.00
B. $12.50
C. $13.75
D. $14.78

132. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function
Electricity $200 + $20 per direct labor hour
Maintenance $400 + $30 per direct labor hour
Supervisors’ salaries $20,000 per month
Indirect materials $16 per direct labor hour

If January production is expected to be 2,000 units requiring 3,000 direct labor hours, estimated manufacturing overhead costs would be A.
$20,733.
B. $198,000.
C. $152,600.
D. $218,600.

133. Advantages of the method of least squares over the high-low method include all
of the following EXCEPT A.a statistical method is used to mathematically derive
the cost function.
B. only two points are used to develop the cost function.
C. the squared differences between actual observations and the line (cost function) are minimized.
D. all the observations have an effect on the cost function.

134. Weaknesses of the high-low method include all of the following EXCEPT A.only
two observations are used to develop the cost function.
B. the high and low activity levels may not be representative.
C. the method does not detect if the cost behavior is nonlinear.
D. the method is relatively complex and difficult to apply.

135. The high-low method may give unsatisfactory results if A.the points are
unrepresentative.
B. volume of activity is heavy.
C. volume of activity is light.
D. the data points all fall on a line.

136. Figure 3-4

The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs
January 1,400 $2,200
February 2,800 5,400
 March 3,200 5,700
April 1,750 3,900
May 1,200 2,400
June 2,100 4,050

Refer to Figure 3-4. Using the high-low method, estimated variable cost per unit of production is A.
$1.75
B. $1.65
C. $1.53
D. $1.26

137. Figure 3-4

The following information is available for electricity costs for the last six months of the year:
Month Production Volume Electricity Costs
January 1,400 $2,200
February 2,800 5,400
March 3,200 5,700
April 1,750 3,900
May 1,200 2,400
June 2,100 4,050

Refer to Figure 3-4. What are the fixed costs?

A. $420
B. $100
C. $200
D. none of these

138. The following information was available about supplies cost for the second quarter of the year:
Month Production Volume Supplies Cost
July 700 $3,185
August 1,600 7,100
September 600 2,700

Using the high-low method, the estimate of supplies cost at 1,000 units of production is A.
$2,700.
B. $4,460.
C. $4,900.
D. $7,100.

139. Stanfil Corporation developed a cost function for manufacturing overhead costs of Y = $8,000
+ $1.60X. Estimated manufacturing overhead costs at 10,000 units of production are A.
$16,000.
B. $17,600.
C. $24,000. D.
$26,000.

140. Barron Enterprises has the following information about its truck fleet miles and operating costs:
Year Miles Operating Costs
2014 400,000 $256,000
2015 480,000 280,000
2016 560,000 320,000

What is the best estimate of total costs using the high-low method if the expected fleet mileage for 2017 is 500,000 miles? A.
$288,000
B. $296,000
C. $256,000
D. $320,000

141. The Ladder Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:
Month Cost of Electricity Direct Labor Hours
February $ 8,100 750
May 9,000 850
August 10,200 1,000
November 8,700 800
Using the high-low method, which of the following is the best equation?
A. Y = $900 + $12.00X
B. Y = $900 + $8.40X
C. Y = $1,800 + $8.40X
D. Y = $2,400 + $8.40X

142. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation

Refer to Figure 3-5. The monthly production cost can be expressed as

A. X = aY + b
B. X = a + bY
C. Y = a + bX
D. Y = b + aX

143. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation

Refer to Figure 3-5. Using the high-low method, what is the cost formula for estimating costs?
A. Total cost = $20,000 + $2.08X
B. Total cost = $7,500 + $2.08X
C. Total cost = $5,000 + 2.08X
D. Total cost = $2.08X

144. Figure 3-5

Longberry Corporation manufactures and sells party items. The following representative direct labor hours and production costs are provided for a fourmonth
period:
Month Direct Labor Hours Production Costs
May 3,600 $15,000
June 4,800 17,500
 July 6,000 20,000
August 4,800 17,500
Total 19,200 $70,000

Let a = Fixed production costs per month

b = Variable production costs per direct labor hour
n = Number of months
X = Direct labor hours per month
Y = Total monthly production costs
S = Summation

Refer to Figure 3-5. Predict a cost for 5,000 labor hours.

A. $17,900
B. $17,700
C. $16,667
D. $30,400

145. The cost function derived by the least-squares cost estimation method A.is
linear.
B. must be tested for minima and maxima.
C. is parabolic.
D. is quadratic.

146. The scatterplot method of cost estimation A.is influenced by extreme

observations.
B. requires the use of judgment.
C. uses the least-squares method.
D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.

147. The following information was taken from a computer printout generated
with the least-squares method for use in estimating overhead costs:
Slope 45
Intercept 5,700
Correlation coefficient .72
Activity variable Direct labor hours

The cost formula is

A. Overhead = $5,700 – $45X
B. Overhead = $5,700 + $45X
C. Overhead = $5,700 + ($45 ´ 0.72)
D. Overhead = $5,700 ´ 0.72

148. Which of the following is an advantage of using the scatterplot method over the high-low method to estimate costs?
A.It is a statistical method to determine the “best fit.”
B. A cost analyst can review the data visually and eliminate outliers.
C. The quality of the cost formula relies on the objective judgment of the analyst.
D. The cost formula can be determined simply by looking at two points of data.

149. Spokane Corporation found its maintenance cost and sales dollars to be somewhat correlated. Last year’s high and low observations were as follows:
Maintenance Cost Sales
$46,000 $600,000
$52,000 $800,000

What is the fixed portion of the maintenance cost?

A. $28,000
B. $52,000
C. $60,000
D. $14,000

150. In the method of least squares, the deviation is the difference between the A.predicted
and estimated costs.
B. predicted and average costs.
C. average and actual costs.
D. predicted and actual costs.

151. Figure 3-6

The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
 June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of variable cost per unit of production using the method of least squares. Rounded to
two decimal places, this value would be A. $3.21.
B. $2.70.
C. $1.31. D.
$1.23.

152. Figure 3-6

The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of the fixed portion of maintenance costs using the method of least squares.
Rounded to dollars, this value would be A. $575.
B. $166.
C. $160.
D. $66.

153. Figure 3-6

The Stanford Company incurred the following maintenance cost during a five month period:
Month Production Volume Maintenance Costs
June 75 $250
July 115 310
August 190 400
September 60 240
October 135 355

Refer to Figure 3-6. Using a computer or calculator, compute the estimate of maintenance costs at 100 units of production using the method of least squares.
This value would be A. $291.
B. $321.
C. $336.
D. $698.

154. The hypothesis test of cost parameters A.is not tested by the t-statistic.
B. indicates whether the parameters are different from zero.
C. tells the t-value of the significance achieved.
D. all of the above.

155. The coefficient of determination is

A.a measure of the variability of actual costs around the cost-estimating equation.
B. used to construct probability intervals for cost estimates.
C. a standardized measure of the degree to which two variables move together.
D. a measure of the percent variation in the dependent variable that is explained by an independent variable.

156. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

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

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. What is the model?
A. Overhead = 4.81 + 6.78 DLH
B. Overhead = 100.41 + 14.05 DLH
C. Overhead = 14.05 + 100.41 DLH
D. DLH = 4.81 + 6.78 Overhead

157. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. The coefficient of determination in this model tells us that A.
the slope is 14.05.
B. the intercept is 100.41.
C. 80 percent of the variation in the overhead variable is explained by DLH.
D. the slope is significant.

158. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
 Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. The hypothesis tests of the cost parameters indicate(s) that A.
the slope is significantly different from zero.
B. the intercept is significantly different from zero.
C. both the slope and intercept are not significant.
D. both the slope and intercept are significant.

159. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. Find the t-value for a 90 percent confidence level. A.
1.740
B. 1.753
C. 6.314
D. 2.920

160. Figure 3-7

The following computer printout estimated overhead costs using regression:

t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R2) 0.80

Standard Error (Se) 25.03
Observations 17

Please find the following statistical table

degrees 90% 95% 99% degrees of 90% 95% 99%
of freedom freedom
1 6.314 12.708 63.657 11 1.796 2.201 3.106
2 2.920 4.303 9.925 12 1.782 2.179 3.055
3 2.353 3.182 5.841 13 1.771 2.160 3.055
4 2.132 2.776 4.604 14 1.761 2.145 3.012
5 2.015 2.571 4.032 15 1.753 2.131 2.947
6 1.943 2.447 3.707 16 1.746 2.120 2.921
7 1.895 2.365 3.499 17 1.740 2.110 2.898
8 1.860 2.306 3.355 18 1.734 2.101 2.878
9 1.833 2.262 3.250 19 1.729 2.093 2.861
10 1.812 2.228 3.169 20 1.725 2.086 2.845

During the last accounting period 10,000 DLH were worked.

Refer to Figure 3-7. What is the confidence interval for the predicted overhead cost rounded to the nearest whole number for a 90 percent confidence level? A.
predicted value between 140,557 and 140,644
B. predicted value between 140,644 and 140,731
C. predicted value between 87,000 and 130,500
D. none of these

161. A coefficient of determination of 0.91 means

A.the two variables move together in the same direction and have a strong relationship.
B. the parameter is not significant.
C. the model is significant 91 percent of the time.
D. that the independent variable explains 91 percent of the cost.

162. What is the difference between a correlation equal to -1 and a correlation equal to 0?
A.A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are moving in opposite directions.
B. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are unrelated.
C. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are moving in the same direction.
D. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are unrelated.

163. A managerial accountant has determined the following relationships between overhead and several possible bases:
Basis Correlation with Total Overhead
Direct labor hours 0.842
Direct labor dollars 0.279
Machine hours -0.837
Employee minutes in coffee breaks -0.243

The best basis for overhead application is A.

direct labor hours.
B. coffee breaks.
C. direct labor dollars.
D. machine hours.

164. What is the difference between a correlation equal to -1 and a correlation equal to +1?
A.A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are moving in opposite directions.
B. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are unrelated.
C. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are moving in the same
direction.
 D. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are unrelated.

165. What does a correlation coefficient near +1 mean? A.Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
C. Two variables are unrelated.
D. One variable is not a good predictor of the other.

166. The appropriate range for the coefficient of correlation (r) is A.0 £ r £ 1.
B. -% £ r £ +%.
C. -1 £ r £ 1.
D. -1 £ r £ +%.

167. What does a correlation coefficient near 0 mean?

A.Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
C. Two variables are unrelated.
D. One variable is a good predictor of the other.

168. Which of the following statements is NOT true?

A.In selecting an independent variable for cost behavior analysis, it is important to determine the activity that causes the cost being analyzed to occur.
B. Professional judgment is very important in selecting an activity measure for a particular cost.
C. A low correlation between two variables proves that one causes the other.
D. The least-squares cost estimation method can be used to measure the linear function.

169. What does a correlation coefficient near -1 mean? A.Two variables are moving in the opposite direction.
B. Two variables are moving in the same direction.
C. Two variables are unrelated.
D. One variable is not a good predictor of the other.

170. The confidence interval for the predicted value of Y

A.is a measure of the likelihood that the prediction interval will not contain the actual cost.
B. is constructed by multiplying the t-statistic times the standard error.
C. can only be computed with 95 percent confidence.
D. all of the above.

171. The following data is available of estimated overhead costs using linear regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 100.41 4.81 0.0003 20.88
DLH 14.05 6.78 0.0001 2.07

R Square (R 2) 0.80
Standard Error (Se) 25.03
Observations 17

Table of Selected Values: t Distribution

Degrees of Freedom 90% 95% 99%
15 1.753 2.131 2.947
16 1.746 2.120 2.921
17 1.740 2.110 2.898
18 1.734 2.101 2.878
19 1.729 2.093 2.861

What is the interval around Y if 95 percent confidence is desired?

A. Y ± 20.024
B. Y ± 43.87759
C. Y ± 52.8133
D. Y ± 53.33893

172. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

 Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. The degrees of freedom for the model is
A. 158
B. 157
C. 159 D. 160

173. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. Which slope and intercept parameters are significant at the 0.05 level?
A. intercept
B. setup hours
C. number of parts
D. all of the above

174. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts.
Refer to Figure 3-8. The model being measured is
A. Overhead = 1,000 + 25(Setup hours) + 100(# of parts)
B. Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts)
C. Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts)
D. Overhead = 1,000 + 25(Setup hours)

175. Figure 3-8

The following computer printout estimated overhead costs using multiple regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 1000 1.96 0.0250 510.204
Setup hours 25 81.96 0.0001 0.305
# of parts 100 9.50 0.0001 10.527

R Square (R2) 0.94

Standard Error (Se) 75.00
Observations 160

During the year the company used 1,000 setup hours and 500 parts. Refer
to Figure 3-8. What is the predicted overhead cost?
A. $2,500
B. $75,000
C. $76,000
D. none of these

176. Which of the following equations uses multiple regression?

A.Overhead = a + b(MH)
B. Overhead = a + b(DLH)
C. DL Costs = a + b(MH)
D. Overhead = a + b(DLH) + c(MH)

177. Which of the following statements is TRUE about the learning curve? A.The curve decreases at an increasing rate.
B. The learning effect will eventually disappear as the number of units produced increases.
C. Failure to recognize learning curve effects will cause units produced later in a new production process to receive less cost than they should.
D. All of these.

178. Wonder Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for production for batches of 1,000 units.
The variable labor costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to
learning. What is the cumulative total time (labor hours) to produce 2,000 units? A.180 hours
B. 160 hours
C. 100 hours
D. 80 hours

179. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative total time (labor hours) to produce 2,000 units based on the cumulative average-time learning curve?
A. 20 hours
B. 80 hours
C. 100 hours
D. 160 hours

180. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the batch unit time (labor hours) to produce 2,000 units based on the cumulative average time learning curve? A. 20 hours
B. 60 hours
C. 100 hours
D. 80 hours

181. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative total time using the incremental unit-time learning curve to produce 2,000 units? A. 180
B. 100
C. 90
D. 80

182. Figure 3-9

Hereford Company is planning to introduce a new product with an 80 percent learning rate for production for batches of 1,000 units. The variable labor
costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. Refer to
Figure 3-9. What is the cumulative average time per batch using the incremental unit-time learning curve for 2,000 units?
A. 180
B. 100
C. 90
D. 80

183. The learning curve that decreases by a constant percentage each time the cumulative quantity doubles is known as the A.cumulative average-time model.
B. cumulative total-time model.
C. incremental unit-time model.
D. decremental average-time model.

184. Apparent Corp. has developed the following information on product costs and inventories for a three-month period:
April May June
Finished goods inventory, units:
Beginning 20 25 30
Manufactured 25 40 35
Available 45 65 65
Sold 25 40 50
Ending 20 25 15

Manufacturing costs $4,000 $6,000 $5,500

Based on managerial judgment, the best predictor of manufacturing costs is A.
beginning inventory.
B. units manufactured.
C. ending inventory.
D. units available.

185. If a motorcycle manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data A.are of little or no value in predicting
future costs.
 B. are useful in predicting future costs.
C. are representative of future costs.
D. should be used without adjustments to predict future costs.

186. Tornado Enterprises has the following information available regarding costs at various levels of monthly production:
Production volume 7,000 10,000

Direct materials $ 70,000 $100,000

Direct labor 56,000 80,000
Indirect materials 21,000 30,000
Supervisors’ salaries 12,000 12,000
Depreciation on plant and equipment 10,000 10,000
Maintenance 32,000 44,000
Utilities 15,000 21,000
Insurance on plant and equipment 1,600 1,600
Property taxes on plant and equipment 2,000 2,000
Total $219,600 $300,600

Required:
a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings:

Variable Costs Fixed Costs Mixed Costs

b. Develop an equation for total monthly production costs.

c. Predict total costs for a monthly production volume of 8,000 units.

a. Variable Costs Fixed Costs Mixed Costs

Direct materials Supervisors’ salaries Maintenance
Direct labor Depreciation Utilities
Indirect materials Insurance
Property taxes

b. Variable costs = ($300,600 – $219,600)/(10,000 – 7,000) = $27.00

Fixed costs = $300,600 – ($27.00 ´ 10,000) = $30,600 per month
Total monthly production costs = $30,600 + $27.00(monthly production units)

c. Total costs = $30,600 + ($27.00 ´ 8,000) = $246,600

187. For each of the following situations, draw a graph that best describes the cost behavior pattern. The vertical axis represents costs, and the horizontal axis
represents volume.
a. Direct materials per unit
b. Depreciation expense on a building per unit
c. An employee paid $50 per hour with a guaranteed salary of $1,000 per week
d. A consultant paid $100 per hour with a maximum fee of $2,000
e. Salaries of teachers where each teacher can handle a maximum of 15 students

188. The Hamilton Mills Company cost accountant wants to determine the cost behavior for overhead. Based on observation and discussion with the plant
workers, the following accounts have been identified as the most relevant: Supervisor salaries and depreciation are believed to be generally be fixed;
Indirect labor, Utilities, and Purchasing are generally believed to be variable; Indirect labor primarily is responsible for moving materials; Utility cost is
primarily caused by the electricity to run machinery; and Purchasing costs are driven by the number of purchase orders. These accounts and their
balances are given below:
 Indirect Labor Utilities Purchasing Supervisory Depreciation on
Salaries Plant and
Equipment
January $ 28,500 $ 24,000 $ 76,400 $ 40,000 $ 13,000
February 31,600 21,200 70,800 46,000 13,000
March 33,600 25,000 75,200 64,000 13,000
April 41,400 25,000 80,400 55,600 13,000
May 40,000 25,000 79,800 50,800 13,000
June 34,000 25,000 79,400 34,000 13,000
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000

Information on the activities is given below:

# of moves machine hours purchase orders
January 340 5,400 250
February 380 5,200 300
March 400 5,800 450
April 500 6,200 380
May 480 6,000 340
June 420 5,600 200
Total 2,520 34,200 1,920

Required:
1. Why did the cost accountant decide that salaries and depreciation were fixed?
2. Calculate the average account balance for each of the 5 accounts and calculate the average monthly amount for each of the three drivers.
3. Calculate the fixed overhead and variable rates for each of the costs. Write an equation for the total overhead cost.
4. In January, 490 moves; 4,375 machine hours, and 220 purchase orders were expected. What is the amount of overhead predicted?
1. Depreciation is fixed. Salaries is fixed because it does not vary with the drivers.
2.
Indirect Labor Utilities Purchasing Supervisory Depreciation on
Salaries Plant and
Equipment
Total $209,10 $145,200 $ 462,000 $ 290,400 $ 78,000
# of months 6 6 6 6 6
AVG $34,850 $ 24,200 $ 77,000 $ 48,400 $ 13,000

# of moves machine hours purchase orders

Total 2,520 34,200 1,920
# of months 6 6 6
avg 420 5,700 320

3. FOH = $48,400 + $13,000 = $61,400

VC = IL $34,850/420 =$82.98
Utilities = $24,200/5,700 = $4.246
Purchasing = $77,000/320 = $240.625
Total OH = $61,400 + $82.98(moves) + $4.246(MHR) + $240.625(PO)
4. Total OH = $61,400 + $82.98(490) + $4.246(4,375) + $240.625(220) = $173,573.95

189. The average unit cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of 22,500 units is $2.10. Required:
Develop an equation for total monthly costs.

Volume ´ Average Unit Cost = Total Costs

9,000 $3.00 = $27,000
22,500 2.10 = 47,250

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

Fixed costs per month = $27,000 – ($1.50 ´ 9,000) = $13,500
Total monthly costs = $13,500 + $1.50(# of units)

190. Lowell & Company has the following cost data pertaining to the production of small desks:
Units Produced Direct Labor Costs Overhead Costs
 150 $1,600 $2,800
120 1,500 2,570
210 1,750 2,910
190 1,700 2,850
140 1,600 2,600

Required:
a. Plot the preceding direct labor costs and overhead costs using the scatterplot method. Overhead costs should be on the
vertical axis.
b. Compute the fixed and variable components of the overhead costs using the high-low method.

1.
b. b = ($2,910 – $2,570)/(1,750 – 1,500) = 136% of DL Costs
a = $2,910 – ($1,750 ´ 1.36) = $530
Factory overhead costs = $530 + 1.36(DL Costs)

191. The following data were obtained from the books of Thomas Company:
Month Overhead Costs Direct Labor Hours
1 $14 3
2 18 5
3 25 7
4 12 4
5 26 8
6 8 2

The normal equations are SXY = aSX + bSX2

SY = an + bSX

Required:
Use a computer or calculator to prepare the following:
a. Plot the data for overhead cost as a function of direct labor hours using the scatterplot method.
b. Compute the fixed and variable components of the overhead costs using the high-low method.
c. Compute the fixed and variable components of the overhead costs using the least-squares method.
d. Discuss the strengths and weaknesses of the three different cost estimation techniques used in parts a, b, and c.

1.
b. b = ($26 – $8)/(8 – 2) = $3 per DLH
a = $26 – (8 ´ $3) = $2
Overhead costs = $2 + $3(DLH)

c.
X Y XY X2
3 14 42 9
5 18 90 25
7 25 175 49
4 12 48 16
8 26 208 64
2 8 16 4
29 103 579 167

Normal equations:
 (1) 579 = 29a + 167b
(2) 103 = 6a + 29b

Multiplying (1) by 6 and (2) by 29, we get:

3,474 = 174a + 1,002b
-2,987 = 174a + 841b
487 = 161b b
= $3.0248
Substituting 3.0248 into the first equation for b, we get:
579 = 29a + (167 ´ 3.0248)
a = $2.5468
The least-squares cost estimation equation is
Overhead costs = $2.5468 + $3.0248(DLH)
d. Scatterplot Method: Scattergraphs help identify representative high and low volumes. They also are useful in determining if
costs can be reasonably approximated by a straight line. Scatter graphs are simple to use, but professional judgment is
required to draw a representative straight line through the plot of historical data. This method is subjective in nature and
probability intervals cannot be developed.

High-Low Method: This method uses data from two time periods to estimate fixed and variable costs. This is a good method
to use when data is limited. It is a subjective method and probability intervals cannot be developed. It is very
important that the high and low volumes represent the normal operating conditions of all observations. Again, professional
judgment is required to select the appropriate data.

Least-Squares Method: This method uses all available data. It uses a mathematical criterion, which provides for an
objective approach to cost estimation. In addition, this method can provide information on how good the cost estimating
equation fits the historical cost data and information needed to construct probability intervals for cost estimates. It also
can be used to develop equations that are not linear in nature. This method requires more data points than the high-low or
scatterplot methods.

192. Machine hours and electricity costs for Lindbergh Industries for the year 2014 are as follows:
Month Machine Hours Electricity Costs
January 2,000 $ 9,200
February 2,320 10,500
March 1,520 6,750
April 2,480 11,500
May 3,040 14,125
June 2,640 11,000
July 3,280 12,375
August 2,800 11,375
September 1,600 7,750
October 2,960 13,000
November 3,760 15,500
December 3,360 13,875

Required:
a. Using the high-low method, develop an estimate of variable electricity costs per machine hour.
b. Using the high-low method, develop an estimate of fixed electricity costs per month.
c. Using the high-low method, develop a cost function for monthly electricity costs.
d. Estimate electricity costs for a month in which 3,000 machine hours are worked.

a. $3.91 [($15,500 – $6,750)/(3,760 – 1,520)]

b. $798.40 [$15,500 – ($3.91 ´ 3,760)]
c. Y = $798.40 + $3.91X, or
Electricity costs = $798.40 + ($3.91 ´ Machine hours)
d. $12,528.40 [$798.40 + ($3.91 ´ 3,000)]

193. Given the following information:

 Month HR Dept Costs # new hires # terminations
January $785,000 444 137
February $569,000 276 250
March $603,000 219 138
April $445,000 343 99
May $463,000 355 75
June $489,000 298 83
July $400,000 196 47
August $423,000 258 92
September $469,000 307 101
October $538,000 389 175
November $667,000 402 23
December $403,000 361 10

Required:
a. Calculate an estimate of HR department costs using the hi-low method using # of new hires as the variable parameter
b. Calculate an estimate of HR department costs using the hi-low method using # termination as the variable parameter
c. Which parameter do you feel is a better driver of HR cost?

Solution:
a. Variable $1,552.42
using New
Hires =
($785,000 –
400,000) / (444
-196) =
b. Variable $691.67
using
Terminations =
($569,000 –
403,000) / (250
– 10) =

a. Fixed using $396,082.50

new hires =
$569,000 –
(250 ´ $691.67)
=
b. Fixed using $198,944.14
terminations =
$785,000 –
(137 ´
$4,277.78) =

1. There is no good way to determine which driver is a better predictor of HR costs in a given period. Using a regression analysis is the best way to determine if
your parameters correlate to the prediction of overall cost.

194. The plant manager requested information to assist in estimating maintenance costs. The following computer printout was generated using the
leastsquares method:
Intercept 2550
Slope 1.85
Correlation coefficient 0.84
Activity variable Units of production volume

Required:
a. Using the information from the computer printout, develop a cost function that can be used to estimate maintenance costs
at different volume levels.
b. Estimate maintenance costs if expected production for next month is 10,000 units.
 a. Total maintenance costs = $2,550 + $1.85X
b. Total maintenance costs = $2,550 + ($1.85 ´ 10,000) = $21,050

195. The following excel printout provides information to estimate overhead costs using linear regression:
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 6035.987027 1411.05464 4.277642 0.002696 2782.0871 9289.88697
DLH 4.558482698 1.609683731 2.831912 0.022085 0.846543 8.27042244
# setups 771.1028938 54.93418317 14.03685 6.44E-07 644.42436 897.781429
# moves 29.9411124 2.874675342 10.41548 6.26E-06 23.312095 36.5701299

Regression Statistics
Multiple R 0.996584412
R Square 0.99318049
Adjusted R Square 0.990623174
Standard Error 347.9563597
Observations 12

Required:
a. Write the multiple regression model (round to nearest cent).
b. What does the ‘t Stat’ measure?
c. What is the estimate of overhead if the department has 1,205 DLH, 55 setups and 125 moves?

35. Overhead = $6,035.99 + $4.56 (DLH) + $771.10 (#setups) + $29.94 (#moves)

b. There is a tStat for each parameter. These t-statistics are used to test the hypothesis that the parameters are significantly different from zero. The
column labeled “P-value” measures the level of significance achieved for each t-statistic. c. Overhead = $6,035.99 + $4.56 (DLH) + $771.10 (#setups) +
$29.94 (#moves) Overhead = $6,035.99 + $4.56(1,205) + $771.10(55) + $29.94(125) = $57,683.79

196. The Johnson Company is trying to find an appropriate allocation base for factory overhead. Presented are five months of data:
Month Direct Labor Hours Machine Hours Factory Overhead
June 10 3 $45
July 20 5 75
August 15 4 70
September 30 5 130
October 25 3 80

r = Required:
a. Calculate the correlation coefficient between factory overhead and direct labor hours.

b. Calculate the correlation coefficient between factory overhead and machine hours.
c. Should Johnson Company use direct labor hours or machine hours for their allocation base for factory overhead? Why?

a.
X (X – X) (X – X) 2 Y (Y – Y) (Y – Y)2 (X – X)(Y – Y)
10 -10 100 45 -35 1,225 350
20 0 0 75 -5 25 0
15 -5 25 70 -10 100 50
30 10 100 130 50 2,500 500
25 5 25 80 0 0 0
100 250 400 3,850 900

X = 20 Y = 80
 r = (900)/(250 ´
3,850) .5 = 0.91736

b.
X (X – X) (X – X)2 Y (Y – Y) (Y – Y)2 (X – X)(Y – Y)
3 -1 1 45 -35 1,225 35
5 1 1 75 -5 25 -5
4 0 0 70 -10 100 0
5 1 1 130 50 2,500 50
3 -1 1 80 0 0 0
20 4 400 3,850 80

X=4 Y = 80

r = (80)/(4 ´
3,850) .5 = 0.64466

c. Use direct labor hours because the correlation is 0.91736. The higher correlation indicates that the overhead is more
closely related to direct labor hours than machine hours.

197. The following computer printout estimated overhead costs using linear regression:
t for H(0) Std. error
Parameter Estimate Parameter = 0 Pr > t of parameter
Intercept 75 2.25 0.0250 33.33
Setup hours 13 5.10 0.0001 2.45
# of parts 50 1.65 0.0500 30.30

R Square (R2) 0.83

Standard Error (Se) 50.00
Observations 70

Required:
a. Write the multiple regression model.

b. What does R Square mean?

c. Provide a 95 percent confidence interval around the number of parts parameter.

a. Overhead costs = $75 + $13(setup hours) + $50(# of parts)

b. Eighty-three percent of the variation in overhead costs is explained by setup hours and number of parts.
c. df = 70 – 3 = 67
t is 1.65
$50 ± 1.65(30.30) = [$(.005), $99.995]

198. The Knapp Company needs to predict the labor cost in producing small ceramic dolls. The following production information is available:
Year Dolls Produced Labor Hours Labor Dollars
2011 1,150 850 $17,000
2012 1,600 975 23,400
2013 1,100 800 25,600
2014 2,100 1,150 36,800
2015 1,500 950 34,200
 2016 1,300 875 35,000

Wage rates have steadily increased since 2011; however, management expects no
further increases in 2017. Required:
a. Select the appropriate independent variable for predicting labor cost. Explain the reason for your selection.
b. Develop an equation to predict for 2017 the labor cost of producing ceramic dolls. Use the high-low method.

a. In periods of changing prices, unadjusted cost data should not be used as the dependent variable. Assuming that the
technology has not changed, labor hours used in doll production can be substituted for labor dollars in developing the cost-
estimating equation:

Y = a + bX

Total labor hours = a constant + (b ´ # of dolls produced)

After solving for total labor hours, the dependent variable can be restated in terms of labor dollars since wage rates in 2017
have not increased over wage rates in 2016, and for 2017:

Total labor dollars/Total labor hours = Labor rate per hour

This labor rate per hour applied to 2017 estimates will give total labor dollars for 2017.

b. Using labor hours:

b = (1,150 – 800)/($2,100 – 1,100)

= 0.35 variable labor hours per doll

a = 1,150 – (0.35 ´ 2,100)

= 415 fixed labor hours per year

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

The wage rate for 2017 is the same as in 2016.

For 2017, $35,000/875 = $40 per labor hour.

Total labor costs = Total labor hours ´ $40

= 415($40) + 0.35($40)(# of dolls produced)
= $16,600 + $14.00(# of dolls produced)

199. Alamo, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be required to complete the new unit. An 80
percent incremental unit-time learning curve model for direct labor hours is assumed to be valid. Assume the q = -0.3219. Data on costs are as follows:
Direct materials $50,000 per unit
Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour

Required:
a. Set up a table with columns for cumulative number of units showing the cumulative total time in hours using the incremental
unit-time learning curve. Complete the table for 1, 2, 3, and 4 units given the individual unit time for the nth unit as 500, 400,
351, and 320 for 1 to 4 units respectively.
b. Set up a similar table assuming a 90 percent with the incremental unit-time learning curve with the individual unit time for
the nth unit as 500, 450, 430, 405 for 1 to 4 units respectively.
 c. What is the difference in variable cost of producing four units?

a. Units 80% Total Hrs.

1 500 500
2 400 900
3 351 1,251
4 320 1,571

b. Units 90% Total Hrs.

1 500 500
2 450 950
3 430 1,380
4 405 1,785

c. 0.80 model = $200,000 + (50 ´ 1,571) = $278,550/4 = $69,637.50

0.90 model = $200,000 + (50 ´ 1,785) = $289,250/4 = $72,312.50
The difference is $2,675.00

200. Highestec, Inc., is beginning the production of a new product. Management believes that 500 labor hours will be required to complete the new unit. A 90
percent cumulative average-time learning curve model for direct labor hours is assumed to be valid. Data on costs are as follows:
Direct materials $50,000 per unit
Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour

Required:
a. Set up a table with columns for cumulative number of units, cumulative average time per unit in hours, and cumulative total
time in hours using the cumulative average-time learning curve. Complete the table for 1, 2, 4, and 8 units.
b. Set up a similar table assuming an 80 percent cumulative average-time learning curve.
c. What is the difference in variable cost of producing four units?

a. Units 90% Total Hrs.

1 500 500
2 450 900
4 405 1,620
8 364.5 2,916

b. Units 80% Total Hrs.

1 500 500
2 400 800
4 320 1,280
8 256 2,048

c. 0.90 model = $200,000 + 50(1,620) = $281,000/4 = $70,250

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