Chapter 05

Cost Estimation

True / False Questions

1. Cost behavior is the most important characteristic for managerial decision making.

True False

2. In general, accounting records accumulate cost information according to its behavior (i.e.,
variable and fixed).

True False

3. In general, cost behavior results are likely to differ between the engineering method and the

account analysis method.

True False

4. The engineering method of determining cost behavior is particularly useful for new activities or
products.

True False

5-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. One advantage of the engineering method is that it does not require data from prior periods to
estimate cost behavior.

True False

6. One advantage of the account analysis method for estimating cost behavior is that it includes
actual work conditions.

True False

7. The account analysis method is more subjective than other cost estimation methods because it

relies heavily on the personal judgment and experience of accountants.

True False

8. In general, the account analysis method focuses on the underlying relationship between cost and
activities from the previous period.

True False

9. The relevant range represents those activity levels for which valid cost relationships have been

observed.

True False

10. A scattergraph is useful for identifying outliers/irrelevant data points.

True False

5-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11. One disadvantage of the high-low method is the highest and lowest points may not be
representative of normal operating activities.

True False

12. One advantage that regression techniques have over other cost estimation methods is it
generates information that can be used to determine how well the estimated cost equation will
predict future costs.

True False

13. Because outliers are extreme data points, they can be included in the regression analysis and not

significantly affect the results.

True False

14. In general, the use of multiple independent variables increases the proportion of the variation in
the dependent variable explained by the cost equation.

True False

15. One way to control the effects of a nonlinear relation between total costs and volume is to reduce

the relevant range.

True False

16. The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.

True False

5-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
17. Cost estimates using regression analysis are always more accurate and dependable than cost
estimates using the scattergraph methods.

True False

18. A basic assumption of most cost estimation methods is cost behavior patterns are linear within
the relevant range.

True False

19. The quality of the cost equation depends on collecting appropriate data.

True False

20. Different cost estimations methods may produce different cost equations, even when using the

same set of data.

True False

Multiple Choice Questions

5-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
21. Which of the following statements is (are) true regarding cost behaviors?

(A) In general, accounting records accumulate cost information according to its behavior.

(B) Cost behaviors are the most important consideration in managerial decision making.

A. Only A is true.

B. Only B is true.

C. Both A and B are true.

D. Neither A nor B is true.

22. Which of the following is the difference between variable costs and fixed costs: (CMA adapted)

A. Variable costs per unit fluctuate and fixed costs per unit remain constant.

B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.

C. Total variable costs are variable over the relevant range and fixed in the long term, while fixed
costs never change.

D. Variable costs per unit change in varying increments, while fixed costs per unit change in

equal units.

23. A cost driver is defined as: (CMA adapted)

A. the largest cost in a manufacturing process.

B. a fixed cost that cannot be avoided.

C. the significant factor in developing a new product.

D. a causal factor that increases the total cost of a cost objective.

5-5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
24. Which cost estimation method does not use the company's cost information as its primary source
of information about the relationship between total costs and activity levels?

A. Scattergraph.

B. High-low.

C. Account analysis.

D. Engineering estimates.

25. A manager is trying to estimate the manufacturing costs of a new product. The company makes
several other products that utilize some of the same manufacturing procedures as the new
product. Which cost estimation method would be the best method to determine the total cost of

manufacturing the new product?

A. Engineering estimates.

B. Regression analysis.

C. Account analysis.

D. Scattergraph.

26. Engineering cost estimates are usually based on operating conditions that are considered:

A. optimal.

B. practical.

C. attainable.

D. historical.

5-6
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
27. Which of the following cost estimation methods finds the fixed portion of a mixed cost before
calculating the variable portion?

A. Scattergraph.

B. High-low method.

C. Account analysis.

D. Linear regression.

28. Which of the following costs would most likely be classified as variable, assuming the account
analysis method is used to determine cost behaviors?

A. Indirect materials.

B. Supervisory salaries.

C. Equipment maintenance.

D. Building occupancy costs.

5-7
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
29. Given the following information, compute the total number of units for the period:

Direct labor hours 12,000

Direct labor cost $2.70 per hour

Direct materials cost $75 per unit

Total manufacturing cost $132,600

Fixed overhead cost $36,000

Variable overhead cost 50% of total labor cost

A. 360.

B. 432.

C. 640.

D. 840.

30. In the cost equation TC = F + VX, X is best described as the:

A. costs that do not vary with changes in the activity level.

B. costs that do vary with changes in the activity level.

C. total cost estimate at a particular activity level.

D. activity level used to estimate the total cost.

31. In the cost equation TC = F + VX, V is best described as the:

A. costs that do not vary with changes in the activity level.

B. intercept of the cost equation.

C. slope of the cost equation.

D. activity level used to estimate the dependent variable.

5-8
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
32. Ballard Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp
required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost was
$1.50 per direct labor hour?

A. $1,700.

B. $3,000.

C. $5,600.

D. $8,000.

33. The term "relevant range" as used in cost accounting means the range over which:

A. relevant costs are incurred.

B. costs may fluctuate.

C. cost relationships are valid.

D. cost data is available.

34. Which of the following cost estimation methods finds the variable portion of a mixed cost before

calculating the fixed portion?

A. Engineering approach.

B. High-low method.

C. Account analysis.

D. Linear regression.

5-9
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
35. A disadvantage of the high-low method of cost analysis is that it:

A. typically results in a totally inaccurate cost formula.

B. is too time consuming to apply.

C. uses only two data points, which may not be representative of normal conditions.

D. relies totally on the judgment of the person performing the cost analysis.

36. In the standard regression equation of y = a + bx, the letter b is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

37. In the standard regression equation of y = a + bx, the letter a is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

38. In the standard regression equation of y = a + bx, the letter y is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

5-10
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
39. The coefficient of correlation is:

A. the range of values over which the probability may be estimated based upon the regression
equation results.

B. the proportion of the total variance in the dependent variable explained by the independent
variable.

C. the measure of variability of the actual observations from the predicting (forecasting) equation
line.

D. the relative degree that changes in one variable can be used to estimate changes in another
variable.

5-11
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
40. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and
believe that the costs can be explained in large part by the number of customers patron­izing the
stores. Monthly data regarding customer visits and costs for the preceding year for one of the

stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

In a regression equation expressed as y = a + bx, how is the letter b best described? (CMA
adapted)

A. An estimate of the probability of return customers.

B. The fixed costs per customer-visit.

C. The estimate of the cost for an additional customer visit.

D. The proximity of the data points to the regression line.

5-12
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
41. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and
believe that the costs can be explained in large part by the number of customers patron­izing the
stores. Monthly data regarding customer visits and costs for the preceding year for one of the

stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

How is the letter y in the regression equation best described? (CMA adapted)

A. An estimate of the total customers for the month.

B. The observed store cost for a given month.

C. The estimate of the number of new customer visits for the month.

D. The proximity of the data points to the regression line.

5-13
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
42. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and
believe that the costs can be explained in large part by the number of customers patron­izing the
stores. Monthly data regarding customer visits and costs for the preceding year for one of the

stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

How is the letter x in the regression equation best described? (CMA adapted)

A. Fixed costs per each customer-visit.

B. The observed store costs for a given month.

C. The estimate of the number of new customer visits for the month.

D. The observed customer visits for a given month.

5-14
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
43. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and
believe that the costs can be explained in large part by the number of customers patron­izing the
stores. Monthly data regarding customer visits and costs for the preceding year for one of the

stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

Based on the data derived from the regression analysis, what are the estimated costs for 1,600
customer-visits in a month? (CMA adapted)

A. $6,125.

B. $4,629.

C. $3,328.

D. $4,824.

5-15
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
44. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and
believe that the costs can be explained in large part by the number of customers patron­izing the
stores. Monthly data regarding customer visits and costs for the preceding year for one of the

stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

What is the percent of the total variance that can be explained by the regression equation? (CMA
adapted)

A. 86.8%

B. 31.6%

C. 97.7%

D. 71.9%

5-16
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
45. The Macon Company uses the high-low method to determine its cost equation. The following
information was gathered for the past year:

Machine Direct Labor

Hours Costs

Busiest month (June) 14,000 $200,000

Slowest month
6,000 $120,000
(December)

What are the direct labor costs per machine hour?

A. $20.00.

B. $16.00.

C. $14.29.

D. $10.00.

5-17
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
46. The Macon Company uses the high-low method to determine its cost equation. The following
information was gathered for the past year:

Machine Direct Labor

Hours Costs

Busiest month (June) 14,000 $200,000

Slowest month
6,000 $120,000
(December)

If Macon expects to use 10,000 machine hours next month, what are the estimated direct labor
costs?

A. $160,000.

B. $180,000.

C. $175,000.

D. $150,000.

5-18
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
47. Fromme's Frocks has the following machine hours and production costs for the last six months of
last year:

Month Machine Hours Production Cost

July 15,000 $12,075

August 13,500 10,800

September 11,500 9,580

October 15,500 12,080

November 14,800 11,692

December 12,100 9,922

If Fromme expects to incur 14,000 machine hours in January, what will be the estimated total

production cost using the high-low method?

A. $8,750.00.

B. $11,142.50.

C. $22,400.00.

D. $10,889.10.

5-19
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
48. The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies
needed for the Cleveland Plant for the month of July, when production is expected to be 470,000
units to meet the ending inventory requirements and sales of 475,000 units. Fortnight Co.'s

budget analyst has the following actual data for the last three months.

Month Production in Units Manufacturing Supplies

March 450,000 $723,060

April 540,000 853,560

May 480,000 766,560

Using the high-low method to develop a cost estimating equation, the estimate of needed

manufacturing supplies for July would be: (CMA adapted)

A. $681,500.

B. $688,750.

C. $749,180.

D. $752,060.

49. The Crater Manufacturing Company recorded overhead costs of $14,182 at an activity level of

4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that

overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per machine
hour using the high-low method to estimate the cost equation?

A. $2.78.

B. $2.86.

C. $3.10.

D. $3.38.

5-20
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
50. The Missou Manufacturing Company recorded overhead costs of $14,182 at an activity level of
4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the total estimated cost for

2,600 machine hours using the high-low method to estimate the cost equation?

A. $9,730.

B. $9,606.

C. $9,106.

D. $8,788.

51. The cost accountants at the Barkley Company regressed total overhead costs and direct labor

hours for the past 30-months and reported the following results:

Slope $41.27

Intercept $596.36

Correlation Coefficient .934

What is the estimated overhead cost if 225 direct labor hours are expected to be used in the
upcoming period? (rounded to the nearest whole dollar)

A. $10,534.

B. $9,882.

C. $9,230.

D. $8,617.

5-21
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-22
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What would be the cost equation if regression analysis is used?

A. Maintenance Costs = 7.2884 + 684.65 × Hours of Activity.

B. Maintenance Costs = 684.65 + 49.515 × Hours of Activity.

C. Maintenance Costs = 684.65 + 7.2884 × Hours of Activity.

D. Maintenance Costs = 34.469 + .99724 × Hours of Activity.

5-23
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
53. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-24
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

Based upon the data derived from the regression analysis, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar)

A. $3,797.

B. $3,780.

C. $3,746.

D. $3,600.

5-25
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
54. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-26
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What is the variable cost per hour using the high-low method to estimate the cost equation?

A. $9.00.

B. $7.50.

C. $0.1333.

D. $0.1111.

5-27
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
55. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-28
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What is the fixed cost per month using the high-low method to estimate the cost equation?

A. $570.

B. $600.

C. $1,140.

D. $2,250.

5-29
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
56. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-30
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would
mean the maintenance costs would be budgeted at:

A. $3,150.

B. $3,600.

C. $3,720.

D. $3,780.

5-31
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. The McGraw Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for

last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the a

49.515
coefficient

Standard error of the b

.12126
coefficient

Standard error of the

34.469
estimate

5-32
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What would be the cost equation if the high-low method is used?

A. Maintenance Costs = 9.00 × Hours of Activity.

B. Maintenance Costs = 3,600 + 400 × Hours of Activity.

C. Maintenance Costs = 570 + 7.50 × Hours of Activity.

D. Maintenance Costs = 34.469 + .99724 × Hours of Activity.

5-33
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
58 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-34
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Upper Lower Upper

t Stat P-value Lower 95%
s Error 95% 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.9060 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 8 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.4006083 129.72093 76.400608 129.72093

1 97 03 41 -06 3 1 33 1

If the controller uses the high-low method to estimate costs, the variable cost per credit hour is:

A. $82.33.

B. $103.56.

C. $111.96.

D. $201.22.

5-35
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-36
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Upper Lower Upper

t Stat P-value Lower 95%
s Error 95% 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.9060 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 8 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.4006083 129.72093 76.400608 129.72093

1 97 03 41 -06 3 1 33 1

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost
equation for administrative salaries is:

A. $198,808.

B. $69,731.68.

C. $96,409.42.

D. $19,943.58.

5-37
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-38
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses the high-low method to estimate costs, the cost equation for administrative
salaries is:

A. Cost = $96,409.42 + $103.56 × Credit-hours.

B. Cost = $69,731.68 + $111.96 × Credit-hours.

C. Cost = $201.21 × Credit-hours.

D. Cost = $198,808.

5-39
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
61 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-40
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the high-low analysis, the estimate of administrative costs in a month with
1,000 credit hours would be: (rounded to the nearest whole dollar)

A. $181,691.68.

B. $199,969.

C. $201,210.

D. $198,808.

5-41
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
62 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-42
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the cost equation for administrative
salaries is:

A. Cost = $19,943.58 + $13.00 × Credit-hours.

B. Cost = $69,474.40 + $114 30 × Credit-hours.

C. Cost = $96,647.02 + $103.06 x Credit-hours.

D. Cost = $12,521.26 + $11.99 × Credit-hours.

5-43
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-44
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the estimate of the variable portion of
administrative salaries is:

A. Cost = $8.63 × Credit-hours.

B. Cost = $0.87 × Credit-hours.

C. Cost = $103.06 × Credit-hours.

D. Cost = $11.99 × Credit-hours.

5-45
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
64 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-46
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of
administrative salaries is:

A. Cost = $103.56.

B. Cost = $12,521.26.

C. Cost = $19,943.58.

D. Cost = $96,647.02.

5-47
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
65 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-48
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the regression analysis, the estimate of administrative costs in a month
with 1,000 credit hours would be: (rounded to the nearest whole dollar)

A. $198,808.

B. $201,000.

C. $199,707.

D. $96,409.

5-49
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
66 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-50
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

The correlation coefficient (rounded to the 3rd decimal) for the regression equation for
administrative costs is:

A. 0.932.

B. 0.868.

C. 0.856.

D. 0.966.

5-51
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
67 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-52
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

The percent of the total variance that can be explained by the regression is:

A. 93.3%.

B. 86.8%.

C. 85.9%.

D. 96.6%.

5-53
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
68 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-54
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the regression analysis, the estimate of the variable portion of
administrative costs in a month with 200 credit hours would be:

A. $198,808.

B. $20,612.

C. $117,121.

D. $40,242.

5-55
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
69. In determining cost behavior in business, the cost function is often expressed as Y = a + bX.
Which one of the following cost estimation methods should not be used in estimating fixed and
variable costs for the equation? (CMA adapted)

A. Scattergraph method.

B. Simple regression.

C. High and low point method.

D. Management analysis of data.

70. Which of the following may be used to estimate how inventory warehouse costs are affected by
both the number of shipments and the weight of the material handled? (CPA adapted)

A. Economic order quantity analysis.

B. Probability analysis.

C. Correlation analysis.

D. Multiple regression analysis.

5-56
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
71. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-57
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the variable cost per machine hour

is:

A. $6.25.

B. $6.90.

C. $5.77.

D. $11.70.

5-58
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
72. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-59
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost

equation for electricity cost is:

A. $3,726.88.

B. $1,425.18.

C. $1,625.00.

D. $22,825.00.

5-60
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
73. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-61
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the cost equation for electricity cost

is:

A. Cost = $3,726.88 + $5.77 × Machine-hours.

B. Cost = $1,625.00 + $6.25 × Machine-hours.

C. Cost = $6.90 × Machine-hours.

D. Cost = $22,825.

5-62
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
74. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-63
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

Based on the results of the high-low analysis, the estimate of electricity costs in a month with

2,200 machine hours would be:

A. $15,375.

B. $22,825.

C. $15,180.

D. $16,427.

5-64
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
75. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-65
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the cost equation for electricity cost

is:

A. Cost = $1,425.18 + $12.00 × Machine-hours.

B. Cost = $3,726.88 + $1,682.82 × Machine-hours.

C. Cost = $1,682.82 + $0.49 × Machine-hours.

D. Cost = $3,726.88 + $5.77 × Machine-hours.

5-66
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
76. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-67
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the estimate of the variable portion of

electricity cost is:

A. Cost = $11.70 × Machine-hours.

B. Cost = $0.93 × Machine-hours.

C. Cost = $5.77 × Machine-hours.

D. Cost = $0.49 × Machine-hours.

5-68
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
77. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-69
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of

electricity cost is:

A. Cost = $5.77.

B. Cost = $1,682.82.

C. Cost = $1,425.18.

D. Cost = $3,726.88

5-70
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
78. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-71
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

Based on the results of the regression analysis, the estimate of electricity costs in a month with

2,200 machine hours would be: (rounded to the nearest whole dollar)

A. $3,727.

B. $16,421.

C. $15,180.

D. $22,825.

5-72
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
79. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-73
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

The correlation coefficient for the regression equation for electricity costs is:

A. 0.965.

B. 0.932.

C. 0.925.

D. 0.982.

5-74
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
80. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-75
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

The percent of the total variance that can be explained by the regression is:

A. 0.965.

B. 0.932.

C. 0.925.

D. 0.982.

5-76
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
81. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total
production for the last two years has been analyzed using simple linear regression. The analysis
results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what percentage of the variation in overhead costs is explained by the
independent variable?

A. 24%

B. 81.4%

C. 91.1 %

D. 9.7%

5-77
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
82. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total
production for the last two years has been analyzed using simple linear regression. The analysis
results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what is the total overhead cost for an estimated activity level of 45,000
direct labor-hours?

A. $125,000

B. $345,000

C. $600,000

D. $225,000

5-78
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
83. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:
• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total
production for the last two years has been analyzed using simple linear regression. The analysis
results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, how much is the variable manufacturing cost per unit, using the

variable overhead esti­mated by the regression (assuming that direct materials and direct labor

are variable costs)?

A. $78

B. $91

C. $96

D. $71

5-79
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
84. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total
production for the last two years has been analyzed using simple linear regression. The analysis
results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what is the expected contribution margin per unit to be earned during
the first year on 20,000 units of the new product? (Assume that all marketing and administrative

costs are fixed.)

A. $14

B. $13

C. $99

D. $32

5-80
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
85. Given actual amounts of a semi-variable cost for various levels of output, the method that will
always give the most reliable measure of the fixed and variable components is the:

A. high-low method.

B. linear regression method.

C. scattergraph method.

D. account analysis method.

86. Which of the following statements regarding regression analysis is (are) true?

(A) One way to control the effects of a nonlinear relationship between total costs and activity is

reduce the relevant range.

(B) The linear cost estimate tends to understate the slope of the cost line in ranges close to

capacity.

A. Only A is true.

B. Only B is true.

C. Both A and B are true.

D. Neither A nor B is true.

87. Which of the following is a common assumption of cost estimation?

A. Cost behavior depends on many cost drivers.

B. Cost behavior patterns are nonlinear outside of the relevant range.

C. Cost behavior patterns are linear within the relevant range.

D. Costs are curvilinear.

5-81
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
88. Which of the following is not a data problem an analyst must watch for when estimating cost
behavior?

A. Missing data.

B. Outliers.

C. Allocated costs.

D. Depreciable assets.

89. Which of the following is not a data problem an analyst must watch for when estimating cost
behavior?

A. Non-numeric data.

B. Inflation.

C. Discretionary costs.

D. Mismatched time periods.

90. In the learning curve equation Y = aXb, the Y term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

5-82
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
91. In the learning curve equation Y = aXb, the X term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

92. In the learning curve equation Y = aXb, the "a" term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

93. In the learning curve equation Y = aXb, the "b" term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

5-83
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
94. Which of the following statements regarding the learning phenomenon is true?

A. The more units that are produced, the greater the average time to produce a single unit.

B. The relationship between number of units produced and the marginal time to produce the
latest unit is linear.

C. Total labor cost is a linear function of the total units produced.

D. As production doubles, the time to produce the latest unit decreases.

95. Bachmann Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:

Units Produced Marginal Labor Time

1 80.00

2 68.00

How much time will be needed to complete the 4th unit?

A. 74.00 hours.

B. 57.80 hours.

C. 56.00 hours.

D. 54.40 hours.

5-84
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
96. Bachmann Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:

Units Produced Marginal Labor Time

1 80.00

2 68.00

How much time will be needed to complete the 8th unit?

A. 74.00 hours.

B. 57.80 hours.

C. 56.00 hours.

D. 49.13 hours.

Essay Questions

5-85
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
97. The following manufacturing costs were incurred by the Miracle Mile Company in 2015:

Direct materials $225,000

Direct labor 350,000

Manufacturing overhead 470,000

These costs were incurred to produce 50,000 units of product. Variable manufacturing overhead
was 70% of the direct materials cost.
In 2016, the direct material and variable overhead costs per unit will increase by 12%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to

increase by 8%.

Required:

(a.) Prepare a cost estimate for an activity level of 40,000 units of product in 2016.
(b.) Determine the total product costs per unit for 2015 and 2016.

5-86
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
98. The following manufacturing costs were incurred by the Trinitram Company in 2015:

Direct materials $112,500

Direct labor 175,000

Manufacturing overhead 235,000

These costs were incurred to produce 25,000 units of product. Variable manufacturing overhead
was 80% of the direct materials cost.
In 2016, the direct material and variable overhead costs per unit will increase by 15%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to

increase by 7.5%.

Required:

(a.) Prepare a cost estimate for an activity level of 20,000 units of product in 2016.
(b.) Determine the total product costs per unit for 2015 and 2016.

5-87
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
99. The Thomas Company's total overhead costs at various levels of activity are presented below:

Month Direct Labor Hours Total Overhead

July 7,500 $272,000

August 6,000 234,000

September 9,000 319,000

October 10,500 340,500

Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is as
follows:

Utilities (V) $137,700

Supervisory Salaries (F) 80,000

Maintenance (M) 101,300

319,000

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.
(b.) Express the company's total overhead costs in linear equation form.

5-88
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
100.The Feline Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots might

also be having an impact on the amount of their monthly manufacturing overhead costs. In order

to investigate this possibility, the company collected information on its monthly manufacturing
overhead costs, production in units, and average production lot size for 2016.

Manufacturing Average Monthly

Production
Overhead Production Lot
(Units)
Month Cost Size

1 75,000 $925,800 20

2 90,000 843,875 19

3 65,000 910,125 24

4 80,000 946,000 19

5 55,000 879,000 24

6 50,000 825,000 18

7 85,000 960,000 22

8 105,000 1,053,500 25

9 102,000 1,020,000 23

10 68,000 905,000 20

11 75,000 938,000 22

12 95,000 995,000 24

Required:

(a.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming
the company is planning to produce 92,000 units.
(b.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming

the company is planning to run a 21-lot size.

5-89
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
101.Argo Company ran a regression analysis using direct labor hours as the independent variable
and manufacturing overhead costs as the dependent variable. The results are summarized
below:

Intercept $14,600

Slope $12.55

Correlation coefficient .931

R-squared .867

Argo is planning on operating at a level that would require 12,000 direct labor hours per month in

the upcoming year.

Required:

(a.) Use the information from the regression analysis to write the cost estimation equation for the
manufacturing overhead costs.
(b.) Compute the estimated manufacturing overhead costs per month for the upcoming year.

5-90
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
102.The Feline Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots might

also be having an impact on the amount of their monthly manufacturing overhead costs. In order

to investigate this possibility, the company collected information on its monthly manufacturing
overhead costs, production in units, and average production lot size for 2016.

Manufacturing Average Monthly

Production
Overhead Production Lot
(Units)
Month Cost Size

1 75,000 $925,800 20

2 90,000 843,875 19

3 65,000 910,125 24

4 80,000 946,000 19

5 55,000 879,000 24

6 50,000 825,000 18

7 85,000 960,000 22

8 105,000 1,053,500 25

9 102,000 1,020,000 23

10 68,000 905,000 20

11 75,000 938,000 22

12 95,000 995,000 24

Regression analysis results of the information presented above are as follows:

Ordinary regression:

Equation: $691,741 + $3.0692 × units

r-square: .628

Multiple regression:

5-91
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 $482,172 + $2.4918 × units + $11,770.939
Equation:
× lot size

r-square: .777

Required:

(a.) Use the results from the ordinary regression and estimate next month's manufacturing

overhead costs, assuming the company is planning to produce 92,000 units. (final answer should
be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 92,000 units with an average lot size of 21.

(final answer should be rounded to the nearest whole dollar)

(c.) Comment on which regression seems to be more appropriate under these circumstances.

What additional information would you like to see? Be specific.

5-92
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
103.The Ornate Company produces a single product and has total costs ranging from $321,875 (at
20,000 units) to $966,875 (at 80,000 units). Sales volume in 2016 was 32,000, and operating
income was $45,125. Ornate's product is highly specialized; therefore, no units are kept in

inventory.

Required:

(a.) Determine the cost equation for Ornate's costs.

(b.) Prepare a contribution margin income statement for 2016 including separate columns for

total dollars, per unit dollars, and percentages.

(c.) Determine the break-even point (in units and in dollars).

5-93
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
104.Iowa Enterprises had an average cost of $10.75 during a month when 50,000 units were
produced. When production doubled several months later, the average cost dropped to $8.25.

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 80,000 units?

105.Washington Products had costs of $600,000 when sales equaled 75,000 units. When sales
increased by 25,000 units, costs increased by $125,000. The selling price is $9 per unit.

Required:

(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 80,000 units.

5-94
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
106.New Venture, Inc. has received a contract for 8 units of a new product. The contract is a cost-
plus contract, with the total to be received equal to the total labor cost + 20%. New Venture found
that the first unit of a new product required 120 hours to complete. The second unit was

completed using only 114 hours. New Venture believes that the rate of learning that was

observed will continue for all 8 units of the contract. The labor wage paid is $25/hour. The
following factors are available for various rates of learning: 80% learning, b = -.3219; 85%, b = -
.2345; 90%, b = -.1520; 95%, b = -.0740.

Required:

(a.) What will the total labor cost be for the contract?

(b.) What will the total fee be for the contract?

5-95
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
107.Market Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:

Units Produced Marginal Labor Time

1 250.00

2 225.00

Required:

(a.) How much time will be needed to complete the 4th unit?
(b.) How much time will be needed to complete the 8th unit?

(c.) How much time will be needed to complete the 16th unit?

5-96
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
108.Clough Company is interested in establishing the relationship between utility costs and machine
hours. Data have been collected and a regression analysis prepared using Excel. The monthly
data and the regression output follow:

Machine Electricity
Month Hours Costs

January 3,250 22,080

February 3,770 25,200

March 2,470 16,200

April 4,030 27,600

May 4,940 33,900

June 4,290 26,400

July 5,330 29,700

August 4,550 27,300

September 2,600 18,600

October 4,810 31,200

November 6,110 37,200

December 5,460 33,300

SUMMARY OUTPUT

Regression
Statistics

Multiple R 96.5%

R Square 93.2%

Adjusted R-
92.5 %
Square

Standard
1,710.21
Error

Observations 12.00

5-97
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Standard t P- Lower Upper
Coefficients
Error Stat value 95% 95%

-
Intercept 4,472.26 2,019.39 2.21 0.051 8971.74
27.23

Machine 3.69E-
5.329 0.455 11.7 4.314 6.343
Hours 07

Required:

(a.) What is the equation for utility costs using the regression analysis?
(b.) Does the variable "machine hours" have statistical significance? Explain.
(c.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

5-98
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
109.Clough Company is interested in establishing the relationship between utility costs and machine
hours. Data have been collected and a regression analysis prepared using Excel. The monthly
data and the regression output follow:

Machine Electricity
Month Hours Costs

January 3,250 22,080

February 3,770 25,200

March 2,470 16,200

April 4,030 27,600

May 4,940 33,900

June 4,290 26,400

July 5,330 29,700

August 4,550 27,300

September 2,600 18,600

October 4,810 31,200

November 6,110 37,200

December 5,460 33,300

Required:

(a.) What is the equation for utility costs using the high-low method?

(b.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

5-99
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
110.Yates Corp. wants to develop a cost equation for its administrative costs. The controller believes
the appropriate cost driver is units produced. Last year's data are presented below:

Units Administrative
Month produced Costs

January 32,500 $24,288

February 37,700 27,720

March 24,700 17,820

April 40,300 30,360

May 49,400 37,290

June 42,900 29,040

July 53,300 32,670

August 45,500 30,030

September 26,000 20,460

October 48,100 34,320

November 61,100 40,920

December 54,600 36,630

Total 516,100 $361,548

Average 43,008 $30,129

Required:

(a.) What is the equation for administrative costs using the high-low method?

(b.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.

5-100
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
111.Yates Corp. wants to develop a cost equation for its administrative costs. The controller believes
the appropriate cost driver is units produced. Last year's data are presented below:

Units Administrative
Month produced Costs

January 32,500 $24,288

February 37,700 27,720

March 24,700 17,820

April 40,300 30,360

May 49,400 37,290

June 42,900 29,040

July 53,300 32,670

August 45,500 30,030

September 26,000 20,460

October 48,100 34,320

November 61,100 40,920

December 54,600 36,630

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.965383

R Square 0.931965

Adjusted R-
0.925162
Square

Standard
1,881.232
Error

Observations 12

Standard Lower Upper

Coefficients t Stat P-value
Error 95% 95%

5-101
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Intercept 4,919.48 2,221.329 2.21 0.051156 -29.9485 9,868.909

Units
0.586154 0.050082 11.70 3.69E-07 0.474566 0.697743
Produced

Required:

(a.) What is the equation for administrative costs using the regression analysis?

(b.) Does the variable "units produced" have statistical significance? Explain.
(c.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.

5-102
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
112.The Wonder Drug Company's total overhead costs at various levels of activity are presented
below:

Direct Labor
Month Total Overhead
Hours

September 15,000 $472,000

October 12,000 409,400

November 18,000 542,000

December 21,000 604,700

Assume that the overhead costs above consist of indirect labor, scheduling salaries, and
maintenance. The breakdown of these costs for the month of November is as follows:

Indirect labor (V) $219,600

Maintenance (M) 197,400

Scheduling Salaries (F) 125,000

$542,000

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.
(b.) Express the company's total overhead costs in linear equation form.

5-103
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
113.The Norcross Company has traditionally estimated manufacturing overhead costs using
production volume. Some of the production managers believe that the number of setups may
also have an impact on monthly manufacturing overhead costs. In order to investigate this

possibility, the company collected information on its monthly manufacturing overhead costs,

production in units, and number of setups for 2016.

Manufacturing
Production
Overhead Number of
(Units)
Month Cost Setups

1 50,000 $800,100 17

2 65,000 752,500 16

3 40,000 795,100 21

4 55,000 822,750 16

5 30,000 771,225 21

6 25,000 706,200 15

7 60,000 843,000 19

8 80,000 935,200 22

9 77,000 901,750 20

10 43,000 786,400 17

11 50,000 819,600 19

12 70,000 880,900 21

Regression analysis results of the information presented above are as follows:

Ordinary regression:
Equation: $650,398 + $3.1061 × units

r-square: .707
Multiple regression:
Equation: $464,481 + $2.5356 × units + $11,631.6048 × number of set ups
r-square: .867

Required:

5-104
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 (a.) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 75,000 units. (final answer should
be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month's manufacturing

costs, assuming the company is planning to produce 75,000 units with 18 set ups. (final answer
should be rounded to the nearest whole dollar)
(c.) Comment on which regression seems to be more appropriate under these circumstances.
What additional information would you like to see? Be specific.

5-105
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
114.Barnard Enterprises had an average cost of $8.60 during a month when 75,000 units were
produced. When production was 125,000 units several months later, the average cost dropped to
$6.98.

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 110,000 units?

115.Doran Products had costs of $950,000 when sales equaled 55,000 units. When sales increased

to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit.

Required:

(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 70,000 units.

5-106
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
116.Markham, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 30%. Markham found that the
first unit of a new product required 90 hours to complete. The second unit was completed using

only 76.5 hours. Markham believes that the rate of learning that was observed will continue for all

8 units of the contract. The labor wage paid is $40/hour. The following factors are available for
various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b = -.1520; 95%, b = -
.0740.

Required:

(a.) What will the total labor cost be for the contract?

(b.) What will be the total fee for the contract?

5-107
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
117.Woodman Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:

Units Produced Marginal Labor Time

1 112.50

2 90.00

Required:

(a.) How much time will be needed to complete the 4th unit?
(b.) How much time will be needed to complete the 8th unit?

(c.) How much time will be needed to complete the 16th unit?

5-108
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
118.Below are several examples of costs that are labeled fixed or variable according to their typical
accounting designations. Under which circumstances would any of these costs behave in a
manner opposite to that listed?

a. Direct labor—variable.
b. Equipment depreciation—fixed.
c. Utilities (with a minimum charge)—variable.
d. Supervisory salaries—fixed.
e. Indirect materials purchased in given lot sizes that become spoiled within a few days—
variable.

119.When using past data to predict a cost that has fixed and variable components, it is possible to
have an equation with a negative intercept. Does this mean that at a zero production level, the

company will make money on its fixed costs? Explain.

5-109
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
120.Describe the engineering method of cost estimation. Provide two advantages and two
disadvantages associated with the engineering approach to cost estimation.

121.Explain the difference between the engineering method of cost estimation and the account

analysis method.

122.When preparing cost estimates for account analysis purposes, should the costs be extracted
from the historical accounting records?

5-110
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
123.Describe two advantages and two disadvantages of the high-low method of cost estimation.

124.Is it possible to compensate for the effects of price instability when preparing cost esti­mates

using high-low or regression techniques?

5-111
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
125.J.C. Riley owns Riley's Auto Repair Shop. J.C. is trying to determine whether the company's
advertising pro­gram is successful. He has used a spreadsheet program to estimate the
relationship between advertising expenditures and sales dollars. Monthly data for the past two

years were entered into the program. The regression results indicated the following:

Sales dollars = $169, 000 - ($200 × Advertising expenditures)

Correlation coefficient = -.864
To J.C., the results imply that advertising is actually reducing sales. Can you help explain to him
what might cause the negative relationship between advertising expendi­tures and sales?

5-112
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
126.Southside Hospital is trying to get a better idea of the costs in its cardiac surgical unit. Unit cost
data for supplies, labor, etc. have been collected for a three-year period. After analyzing the data
using Excel, the following output was generated, based on 1,500 procedures.

Intercept = $2,169, 000

Coefficient on procedures $972

Correlation coefficient = .448
R2 = .189
The controller asks you for advice on whether to rely on this estimate. Based on the output, what

would you say?

127.What are "outliers" and what effect does their presence have when using regression analysis for

cost estimation?

5-113
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
128.Describe the effect on cost estimation of four of the following five problems: 1) missing data, 2)
outliers, 3) allocated and discretionary costs, 4) inflation, or 5) mismatched time periods.

129.Your manager asks you for a cost estimate to open a new retail outlet and says, "I want you to

use statistical analysis, so it will be objective because it is based on real data." How would you

respond?

5-114
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
130.Fast-food restaurants, like Taco Bell and McDonalds are known for high employee turnover, high
qual­ity, and low costs. Using your knowledge of the learning phenomenon, how do these fast-
food chains get high quality and low costs when they have so much employee turnover?

131.Assume that as part of their recent merger, Dell and EMC are perfecting a new device that will

access and coordinate the Internet of Things. The new company is inter­ested in estimating the
impact of learning on the cost of producing this new device and plan to use data from previous

products to esti­mate the learning parameter. What are the advantages of doing this? What are
the disadvantages?

5-115
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Chapter 05 Cost Estimation Answer Key

True / False Questions

1. Cost behavior is the most important characteristic for managerial decision making.

TRUE

This is a fundamental concept.

AICPA: FN Decision Making

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

2. In general, accounting records accumulate cost information according to its behavior (i.e.,
variable and fixed).

FALSE

Accounting records accumulate cost information by account.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy

5-116
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

3. In general, cost behavior results are likely to differ between the engineering method and the
account analysis method.

TRUE

Results are likely to differ from method to method.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.

4. The engineering method of determining cost behavior is particularly useful for new activities or

products.

TRUE

This is true because there often is no history to rely on.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

5-117
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. One advantage of the engineering method is that it does not require data from prior periods to
estimate cost behavior.

TRUE

The engineering method is based on what needs to be done, not what was done in prior
periods.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

6. One advantage of the account analysis method for estimating cost behavior is that it includes

actual work conditions.

TRUE

The account analysis method is based on existing circumstances.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-118
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7. The account analysis method is more subjective than other cost estimation methods because
it relies heavily on the personal judgment and experience of accountants.

TRUE

Different accountants will have different experience and will classify items accordingly.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

8. In general, the account analysis method focuses on the underlying relationship between cost
and activities from the previous period.

TRUE

The identification of the relationship between this relationship (the dependent and independent
variable) is key to the analysis.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-119
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9. The relevant range represents those activity levels for which valid cost relationships have
been observed.

TRUE

This is a definition of the term relevant range.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

10. A scattergraph is useful for identifying outliers/irrelevant data points.

TRUE

This visual representation gives an indication of unusual or extreme points that are outside the

area determined to be the norm.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-120
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
11. One disadvantage of the high-low method is the highest and lowest points may not be
representative of normal operating activities.

TRUE

High and low points may reflect unusual circumstances.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

12. One advantage that regression techniques have over other cost estimation methods is it
generates information that can be used to determine how well the estimated cost equation will

predict future costs.

TRUE

It is objective, provides a number of statistics not available from other methods, and could be

the only feasible method when more than one predictor is used.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-121
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13. Because outliers are extreme data points, they can be included in the regression analysis and
not significantly affect the results.

FALSE

Outliers will significantly affect the results as they did in the High and Low analysis.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

14. In general, the use of multiple independent variables increases the proportion of the variation
in the dependent variable explained by the cost equation.

TRUE

This is a basic principal. The adjusted R-squared (R2) is the correlation coefficient squared
and adjusted for the number of independent variables used to make the estimate. This

adjustment to R2 recognizes that as the number of independent variables increases, R2

(unadjusted) increases.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-122
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
15. One way to control the effects of a nonlinear relation between total costs and volume is to
reduce the relevant range.

TRUE

This is done as a basis for defining cost-volume-profit relationship by the use of a smaller
range of data in order to avoid the need to use differential calculus.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

16. The linear cost estimate tends to understate the slope of the cost line in ranges close to

capacity.

TRUE

As capacity is approached there are changes in the costs such as additional overtime due to

scheduling problems.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

5-123
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
17. Cost estimates using regression analysis are always more accurate and dependable than cost
estimates using the scattergraph methods.

FALSE

Not always. If the data is linear the scattergraph method will give the same results as
regression analysis.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

18. A basic assumption of most cost estimation methods is cost behavior patterns are linear within

the relevant range.

TRUE

Most cost estimation models are linear models and assume that the underlying data is linear.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

5-124
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
19. The quality of the cost equation depends on collecting appropriate data.

TRUE

The results obtained are only as good as the data used. If data improves, so will the results.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

20. Different cost estimations methods may produce different cost equations, even when using the
same set of data.

TRUE

The general rule is that moving up the hierarchy of cost estimation methods will cost more to

implement but will return a more accurate result.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

5-125
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Multiple Choice Questions

21. Which of the following statements is (are) true regarding cost behaviors?

(A) In general, accounting records accumulate cost information according to its behavior.
(B) Cost behaviors are the most important consideration in managerial decision making.

A. Only A is true.

B. Only B is true.

C. Both A and B are true.

D. Neither A nor B is true.

Accounting records accumulate information by account and not by behavior.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

5-126
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
22. Which of the following is the difference between variable costs and fixed costs: (CMA
adapted)

A. Variable costs per unit fluctuate and fixed costs per unit remain constant.

B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are
variable.

C. Total variable costs are variable over the relevant range and fixed in the long term, while
fixed costs never change.

D. Variable costs per unit change in varying increments, while fixed costs per unit change in

equal units.

Variable costs per unit are constant, fixed costs in total are constant; in the long term all costs

are variable.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

5-127
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
23. A cost driver is defined as: (CMA adapted)

A. the largest cost in a manufacturing process.

B. a fixed cost that cannot be avoided.

C. the significant factor in developing a new product.

D. a causal factor that increases the total cost of a cost objective.

A cost driver is a causal factor that increases the total cost of a cost objective.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

24. Which cost estimation method does not use the company's cost information as its primary
source of information about the relationship between total costs and activity levels?

A. Scattergraph.

B. High-low.

C. Account analysis.

D. Engineering estimates.

The engineering method uses time and motion studies (estimates), rather than cost estimates.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand

5-128
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

25. A manager is trying to estimate the manufacturing costs of a new product. The company

makes several other products that utilize some of the same manufacturing procedures as the
new product. Which cost estimation method would be the best method to determine the total

cost of manufacturing the new product?

A. Engineering estimates.

B. Regression analysis.

C. Account analysis.

D. Scattergraph.

A new product has no previous history so there is no past data points, regression, or account
analysis ability.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

5-129
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
26. Engineering cost estimates are usually based on operating conditions that are considered:

A. optimal.

B. practical.

C. attainable.

D. historical.

Engineering estimates are often based on optimal conditions. This results in a difficulty in
selecting this technique.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

5-130
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
27. Which of the following cost estimation methods finds the fixed portion of a mixed cost before
calculating the variable portion?

A. Scattergraph.

B. High-low method.

C. Account analysis.

D. Linear regression.

Account analysis finds the fixed portion of a mixed cost before calculating the variable portion;
all of the other methods estimate the variable portion either first or simultaneously with fixed

costs.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-02 Estimate costs using engineering estimates.

28. Which of the following costs would most likely be classified as variable, assuming the account

analysis method is used to determine cost behaviors?

A. Indirect materials.

B. Supervisory salaries.

C. Equipment maintenance.

D. Building occupancy costs.

Only indirect materials would have variable behavior. All the other items have fixed behavior.

AACSB: Analytical Thinking

5-131
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

29. Given the following information, compute the total number of units for the period:

Direct labor hours 12,000

Direct labor cost $2.70 per hour

Direct materials cost $75 per unit

Total manufacturing cost $132,600

Fixed overhead cost $36,000

Variable overhead cost 50% of total labor cost

A. 360.

B. 432.

C. 640.

D. 840.

$132,600 = $75(units) + 12,000($2.70) + .50(12,000)($2.70) + $36,000; Units = 640

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-132
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
30. In the cost equation TC = F + VX, X is best described as the:

A. costs that do not vary with changes in the activity level.

B. costs that do vary with changes in the activity level.

C. total cost estimate at a particular activity level.

D. activity level used to estimate the total cost.

The letter "X" is best described as the activity level used to estimate the total cost; for
example, this would be the volume in number of units of output, by definition.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

31. In the cost equation TC = F + VX, V is best described as the:

A. costs that do not vary with changes in the activity level.

B. intercept of the cost equation.

C. slope of the cost equation.

D. activity level used to estimate the dependent variable.

The letter "V" is the variable cost per unit which makes up the slope of the variable cost curve.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand

5-133
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

32. Ballard Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp

required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost
was $1.50 per direct labor hour?

A. $1,700.

B. $3,000.

C. $5,600.

D. $8,000.

$8,600 = FC + $1.50(400)(5); FC = $5,600

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-134
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
33. The term "relevant range" as used in cost accounting means the range over which:

A. relevant costs are incurred.

B. costs may fluctuate.

C. cost relationships are valid.

D. cost data is available.

Relevant range is the level of activity for which a cost estimate may be valid.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

34. Which of the following cost estimation methods finds the variable portion of a mixed cost
before calculating the fixed portion?

A. Engineering approach.

B. High-low method.

C. Account analysis.

D. Linear regression.

Account analysis finds the fixed first; regression and engineering find fixed and variable
simultaneously; the high-low method finds the variable portion of a mixed cost before
calculating the fixed portion.

AACSB: Analytical Thinking

5-135
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

35. A disadvantage of the high-low method of cost analysis is that it:

A. typically results in a totally inaccurate cost formula.

B. is too time consuming to apply.

C. uses only two data points, which may not be representative of normal conditions.

D. relies totally on the judgment of the person performing the cost analysis.

The estimates are not always inaccurate; the high-low method is fast to apply, and it doesn't
rely solely on judgment.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-136
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
36. In the standard regression equation of y = a + bx, the letter b is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

The letter "b" is the slope of the equation; this is a basic definition of the term of the formula.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

37. In the standard regression equation of y = a + bx, the letter a is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

The letter "a" is the intercept of the equation; this is a basic definition of the term of the
formula.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand

5-137
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

38. In the standard regression equation of y = a + bx, the letter y is best described as the:

A. independent variable.

B. dependent variable.

C. slope of the equation.

D. intercept of the equation.

The letter "y" is best described as the dependent variable; this is a basic definition of the term

of the formula.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-138
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
39. The coefficient of correlation is:

A. the range of values over which the probability may be estimated based upon the

regression equation results.

B. the proportion of the total variance in the dependent variable explained by the independent
variable.

C. the measure of variability of the actual observations from the predicting (forecasting)
equation line.

D. the relative degree that changes in one variable can be used to estimate changes in

another variable.

This is the definition of the coefficient of correlation.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-139
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
40. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores
and believe that the costs can be explained in large part by the number of customers
patron­izing the stores. Monthly data regarding customer visits and costs for the preceding

year for one of the stores have been entered into the regression analysis and the analysis is
as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

In a regression equation expressed as y = a + bx, how is the letter b best described? (CMA

adapted)

A. An estimate of the probability of return customers.

B. The fixed costs per customer-visit.

C. The estimate of the cost for an additional customer visit.

D. The proximity of the data points to the regression line.

The letter b is best described as the estimate of the cost for an additional customer visit.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-140
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
41. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores
and believe that the costs can be explained in large part by the number of customers
patron­izing the stores. Monthly data regarding customer visits and costs for the preceding

year for one of the stores have been entered into the regression analysis and the analysis is
as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

How is the letter y in the regression equation best described? (CMA adapted)

A. An estimate of the total customers for the month.

B. The observed store cost for a given month.

C. The estimate of the number of new customer visits for the month.

D. The proximity of the data points to the regression line.

The letter y is best described as the observed store cost for a given month.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-141
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
42. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores
and believe that the costs can be explained in large part by the number of customers
patron­izing the stores. Monthly data regarding customer visits and costs for the preceding

year for one of the stores have been entered into the regression analysis and the analysis is
as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

How is the letter x in the regression equation best described? (CMA adapted)

A. Fixed costs per each customer-visit.

B. The observed store costs for a given month.

C. The estimate of the number of new customer visits for the month.

D. The observed customer visits for a given month.

The letter x is best described as the observed customer visits for a given month.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-142
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
43. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores
and believe that the costs can be explained in large part by the number of customers
patron­izing the stores. Monthly data regarding customer visits and costs for the preceding

year for one of the stores have been entered into the regression analysis and the analysis is
as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

Based on the data derived from the regression analysis, what are the estimated costs for

1,600 customer-visits in a month? (CMA adapted)

A. $6,125.

B. $4,629.

C. $3,328.

D. $4,824.

The estimated costs for a month with 1,600 customer visits is $4,824 (= $1,496 + $2.08 ×
1,600 customer-visits).

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-143
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
44. Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores
and believe that the costs can be explained in large part by the number of customers

patron­izing the stores. Monthly data regarding customer visits and costs for the preceding
year for one of the stores have been entered into the regression analysis and the analysis is
as follows:

Average monthly customer-visits 1,462

Average monthly total costs $4,629

Regression Results

Intercept $1,496

b coefficient $2.08

R2 0.86814

What is the percent of the total variance that can be explained by the regression equation?
(CMA adapted)

A. 86.8%

B. 31.6%

C. 97.7%

D. 71.9%

The total variance that can be explained by the regression is 86.8% (= R2).

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-144
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
45. The Macon Company uses the high-low method to determine its cost equation. The following
information was gathered for the past year:

Machine Direct Labor

Hours Costs

Busiest month (June) 14,000 $200,000

Slowest month
6,000 $120,000
(December)

What are the direct labor costs per machine hour?

A. $20.00.

B. $16.00.

C. $14.29.

D. $10.00.

VC per M/C Hr. = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-145
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
46. The Macon Company uses the high-low method to determine its cost equation. The following
information was gathered for the past year:

Machine Direct Labor

Hours Costs

Busiest month (June) 14,000 $200,000

Slowest month
6,000 $120,000
(December)

If Macon expects to use 10,000 machine hours next month, what are the estimated direct
labor costs?

A. $160,000.

B. $180,000.

C. $175,000.

D. $150,000.

VC per unit = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00: FC = $120,000 - $10(6,000) =

$60,000; TC = $60,000 + $10 (10,000) = $160,000

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-146
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
47. Fromme's Frocks has the following machine hours and production costs for the last six months
of last year:

Month Machine Hours Production Cost

July 15,000 $12,075

August 13,500 10,800

September 11,500 9,580

October 15,500 12,080

November 14,800 11,692

December 12,100 9,922

If Fromme expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?

A. $8,750.00.

B. $11,142.50.

C. $22,400.00.

D. $10,889.10.

VC per unit = ($12,080 - 9,580)/(15,500 - 11,500) = $.625; FC = $12,080 - $.625(15,500) =

$2,392.50; TC = $2,392.50 + $.625(14,000) = $11,142.50

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-147
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
48. The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies
needed for the Cleveland Plant for the month of July, when production is expected to be
470,000 units to meet the ending inventory requirements and sales of 475,000 units. Fortnight

Co.'s budget analyst has the following actual data for the last three months.

Month Production in Units Manufacturing Supplies

March 450,000 $723,060

April 540,000 853,560

May 480,000 766,560

Using the high-low method to develop a cost estimating equation, the estimate of needed

manufacturing supplies for July would be: (CMA adapted)

A. $681,500.

B. $688,750.

C. $749,180.

D. $752,060.

VC per unit = ($853,560 - 723,060)/(540,000 - 450,000) = $1.45 per unit; FC = $853,560 -

$1.45(540,000) = $70,560; TC = $70,560 + $1.45(470,000) = $752,060

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-148
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
49. The Crater Manufacturing Company recorded overhead costs of $14,182 at an activity level of
4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per

machine hour using the high-low method to estimate the cost equation?

A. $2.78.

B. $2.86.

C. $3.10.

D. $3.38.

($14,182 - 8,748)/(4,200 - 2,300) = $2.86

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-149
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
50. The Missou Manufacturing Company recorded overhead costs of $14,182 at an activity level
of 4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the total estimated cost for

2,600 machine hours using the high-low method to estimate the cost equation?

A. $9,730.

B. $9,606.

C. $9,106.

D. $8,788.

VC = ($14,182 - 8,748)/(4,200 - 2,300) = $2.86; FC = $14,182 - 2.86(4,200) = $2,170; TC =

$2,170 + $2.86(2,600) = $9,606

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-150
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
51. The cost accountants at the Barkley Company regressed total overhead costs and direct labor
hours for the past 30-months and reported the following results:

Slope $41.27

Intercept $596.36

Correlation Coefficient .934

What is the estimated overhead cost if 225 direct labor hours are expected to be used in the
upcoming period? (rounded to the nearest whole dollar)

A. $10,534.

B. $9,882.

C. $9,230.

D. $8,617.

$596.36 + $41.27(225) = $9,882.11

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-151
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-152
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What would be the cost equation if regression analysis is used?

A. Maintenance Costs = 7.2884 + 684.65 × Hours of Activity.

B. Maintenance Costs = 684.65 + 49.515 × Hours of Activity.

C. Maintenance Costs = 684.65 + 7.2884 × Hours of Activity.

D. Maintenance Costs = 34.469 + .99724 × Hours of Activity.

Maintenance Costs = 684.65 + 7.2884 × Hours of Activity.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-153
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
53. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-154
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

Based upon the data derived from the regression analysis, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at: (rounded to the nearest whole
dollar)

A. $3,797.

B. $3,780.

C. $3,746.

D. $3,600.

$684.65 + $7.2884(420) = $3,746

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-155
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
54. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-156
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What is the variable cost per hour using the high-low method to estimate the cost equation?

A. $9.00.

B. $7.50.

C. $0.1333.

D. $0.1111.

($4,470 - 2,820)/(520 - 300) = $7.50

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-157
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
55. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-158
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What is the fixed cost per month using the high-low method to estimate the cost equation?

A. $570.

B. $600.

C. $1,140.

D. $2,250.

VC = ($4,470 - 2,820)/(520 - 300) = $7.50; FC = $2,820 - 7.50 × 300 = $570

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-159
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
56. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-160
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

Using the high-low method to estimate cost behavior, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at:

A. $3,150.

B. $3,600.

C. $3,720.

D. $3,780.

$570 + $7.50(420) = $3,720

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-161
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. The McGraw Company is accumulating data to be used in preparing its annual profit plan for
the coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the

form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)

Hours of Maintenance

Activity Costs

January 480 $4,200

February 320 3,000

March 400 3,600

April 300 2,820

May 500 4,350

June 310 2,960

July 320 3,030

August 520 4,470

September 490 4,260

October 470 4,050

November 350 3,300

December 340 3,160

Sum 4,800 $43,200

Average 400 3,600

A coefficient 684.65

B coefficient 7.2884

Standard error of the

49.515
a coefficient

Standard error of the

.12126
b coefficient

Standard error of the

34.469
estimate

5-162
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 R2 .99724

T-value a 13.827

T-value b 60.105

What would be the cost equation if the high-low method is used?

A. Maintenance Costs = 9.00 × Hours of Activity.

B. Maintenance Costs = 3,600 + 400 × Hours of Activity.

C. Maintenance Costs = 570 + 7.50 × Hours of Activity.

D. Maintenance Costs = 34.469 + .99724 × Hours of Activity.

VC = ($4,470 - 2,820)/(520 - 300) = $7.50; FC = $2,820 - 7.50 × 300 = $570

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-163
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
58 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression

analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-164
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Upper Lower Upper

t Stat P-value Lower 95%
s Error 95% 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.9060 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 8 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.4006083 129.72093 76.400608 129.72093

1 97 03 41 -06 3 1 33 1

If the controller uses the high-low method to estimate costs, the variable cost per credit hour is:

A. $82.33.

B. $103.56.

C. $111.96.

D. $201.22.

5-165
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
VC = ($225,580 - 82,613)/(1,392 - 115) = $111.96

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-166
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-167
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Upper Lower Upper

t Stat P-value Lower 95%
s Error 95% 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.9060 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 8 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.4006083 129.72093 76.400608 129.72093

1 97 03 41 -06 3 1 33 1

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost
equation for administrative salaries is:

A. $198,808.

B. $69,731.68.

C. $96,409.42.

D. $19,943.58.

5-168
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
VC = ($225,580 - 82,613)/(1,392 - 115) = $111.96; FC = $225,580 - 111.96 × 1,392 = $69,731.68

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-169
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-170
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses the high-low method to estimate costs, the cost equation for administrative
salaries is:

A. Cost = $96,409.42 + $103.56 × Credit-hours.

B. Cost = $69,731.68 + $111.96 × Credit-hours.

C. Cost = $201.21 × Credit-hours.

D. Cost = $198,808.

5-171
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
VC = ($225,580 - 82,613)/(1,392 - 115) = $111.96; FC = $225,580 - 111.96 × 1,392 = $69,731.68

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-172
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
61 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-173
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the high-low analysis, the estimate of administrative costs in a month with
1,000 credit hours would be: (rounded to the nearest whole dollar)

A. $181,691.68.

B. $199,969.

C. $201,210.

D. $198,808.

5-174
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
$69,731.68 + $111.96 × 1,000 credit-hours = $181,691.68

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-175
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
62 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-176
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the cost equation for administrative
salaries is:

A. Cost = $19,943.58 + $13.00 × Credit-hours.

B. Cost = $69,474.40 + $114 30 × Credit-hours.

C. Cost = $96,647.02 + $103.06 x Credit-hours.

D. Cost = $12,521.26 + $11.99 × Credit-hours.

5-177
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Using the Excel output, Cost = $96,647.02 + $103.06 × Credit-hours.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-178
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-179
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the estimate of the variable portion of
administrative salaries is:

A. Cost = $8.63 × Credit-hours.

B. Cost = $0.87 × Credit-hours.

C. Cost = $103.06 × Credit-hours.

D. Cost = $11.99 × Credit-hours.

5-180
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Using the Excel output, Cost = $103.06 × Credit-hours.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-181
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
64 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-182
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of
administrative salaries is:

A. Cost = $103.56.

B. Cost = $12,521.26.

C. Cost = $19,943.58.

D. Cost = $96,647.02.

5-183
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Using the Excel output, Cost = $96,647.02

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-184
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
65 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-185
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the regression analysis, the estimate of administrative costs in a month
with 1,000 credit hours would be: (rounded to the nearest whole dollar)

A. $198,808.

B. $201,000.

C. $199,707.

D. $96,409.

5-186
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
$96,647.02 + $103.06 × 1,000 = $199,707

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-187
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
66 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-188
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

The correlation coefficient (rounded to the 3rd decimal) for the regression equation for
administrative costs is:

A. 0.932.

B. 0.868.

C. 0.856.

D. 0.966.

5-189
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
The correlation coefficient for the regression equation for administrative costs is Multiple R or
0.932.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-190
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
67 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-191
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

The percent of the total variance that can be explained by the regression is:

A. 93.3%.

B. 86.8%.

C. 85.9%.

D. 96.6%.

5-192
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
The percent of the total variance that can be explained by the regression is r-squared or 86.8%.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-193
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
68 The College of Business at Northeast College is accumulating data as a first step in the
. preparation of next year's budget development. One cost that is being looked at closely is
administrative costs as a function of student credit hours. Data on administrative costs and credit

hours for the past thirteen months are shown below:

Month Administrative Costs Credit Hours

July $129,301 250

August 82,613 115

September 225,580 1,392

October 216,394 1,000

November 258,263 1,309

December 184,449 1,112

January 219,137 1,339

February 245,000 1,373

March 209,462 1,064

April 191,925 1,123

May 249,978 1,360

June 170,418 420

July 128,167 315

Total $2,510,687 12,172

Average $193,130 936

The controller's office has analyzed the data and has given you the results from the regression
analysis:

SUMMARY OUTPUT

Repression Statistics

Multiple R 0.9317157

0.8680941
R Square
47

5-194
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Adjusted R 0.8561027

Square 05

Standard 20134.923

Error 95

Observatio
13
ns

ANOVA

Significanc
df SS MS F
eF

Regressio 293491435 293491435 72.39281 3.61909E-

1
n 14 14 17 06

445956678 405415162
Residual 11
7 .4

338087103
Total 12
01

Coefficient Standard Lower Upper

t Stat P-value Lower 95% Upper 95%
s Error 95.0% 95.0%

96647.023 12641.665 7.6451180 1.00291E 68822.906 124471.14 68822.906 124471.14

Intercept
98 39 3 -05 08 19 08 19

X Variable 103.06076 12.112831 8.5083965 3.61909E 76.400608 129.72093 76.400608 129.72093

1 97 03 41 -06 33 1 33 1

Based on the results of the regression analysis, the estimate of the variable portion of
administrative costs in a month with 200 credit hours would be:

A. $198,808.

B. $20,612.

C. $117,121.

D. $40,242.

5-195
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 $103.06 × 200 = $20,612

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

69. In determining cost behavior in business, the cost function is often expressed as Y = a + bX.

Which one of the following cost estimation methods should not be used in estimating fixed and
variable costs for the equation? (CMA adapted)

A. Scattergraph method.

B. Simple regression.

C. High and low point method.

D. Management analysis of data.

Management analysis of data is a judgmental approach.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-196
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
70. Which of the following may be used to estimate how inventory warehouse costs are affected
by both the number of shipments and the weight of the material handled? (CPA adapted)

A. Economic order quantity analysis.

B. Probability analysis.

C. Correlation analysis.

D. Multiple regression analysis.

Only multiple regression analysis is a cost estimation approach.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-197
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
71. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-198
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the variable cost per machine

hour is:

A. $6.25.

B. $6.90.

C. $5.77.

D. $11.70.

VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-199
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
72. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-200
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost

equation for electricity cost is:

A. $3,726.88.

B. $1,425.18.

C. $1,625.00.

D. $22,825.00.

VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25; FC = $31,000 - (6.25 × 4,700) = $1,625

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-201
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
73. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-202
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses the high-low method to estimate costs, the cost equation for electricity

cost is:

A. Cost = $3,726.88 + $5.77 × Machine-hours.

B. Cost = $1,625.00 + $6.25 × Machine-hours.

C. Cost = $6.90 × Machine-hours.

D. Cost = $22,825.

VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25; FC = $31,000 - (6.25 × 4,700) = $1,625

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-203
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
74. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-204
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

Based on the results of the high-low analysis, the estimate of electricity costs in a month with

2,200 machine hours would be:

A. $15,375.

B. $22,825.

C. $15,180.

D. $16,427.

$1,625 + $6.25 × 2,200 machine-hours = $15,375

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-205
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
75. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-206
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the cost equation for electricity

cost is:

A. Cost = $1,425.18 + $12.00 × Machine-hours.

B. Cost = $3,726.88 + $1,682.82 × Machine-hours.

C. Cost = $1,682.82 + $0.49 × Machine-hours.

D. Cost = $3,726.88 + $5.77 × Machine-hours.

Using the Excel output, Cost = $3,726.88 + $5.77 × Machine-hours.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-207
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
76. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-208
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the estimate of the variable portion

of electricity cost is:

A. Cost = $11.70 × Machine-hours.

B. Cost = $0.93 × Machine-hours.

C. Cost = $5.77 × Machine-hours.

D. Cost = $0.49 × Machine-hours.

Using the Excel output, Cost = $5.77 × Machine-hours.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-209
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
77. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-210
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of

electricity cost is:

A. Cost = $5.77.

B. Cost = $1,682.82.

C. Cost = $1,425.18.

D. Cost = $3,726.88

Using the Excel output, Cost = $3,726.88.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-211
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
78. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-212
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

Based on the results of the regression analysis, the estimate of electricity costs in a month

with 2,200 machine hours would be: (rounded to the nearest whole dollar)

A. $3,727.

B. $16,421.

C. $15,180.

D. $22,825.

$3,726.88 + $5.77 × 2,200 = $16,421

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-213
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
79. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-214
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

The correlation coefficient for the regression equation for electricity costs is:

A. 0.965.

B. 0.932.

C. 0.925.

D. 0.982.

Multiple R or the correlation coefficient for the regression equation for electricity costs is 0.965.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-215
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
80. Thane Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Month Machine Hours Electricity Costs

January 2,500 18,400

February 2,900 21,000

March 1,900 13,500

April 3,100 23,000

May 3,800 28,250

June 3,300 22,000

July 4,100 24,750

August 3,500 22,750

September 2,000 15,500

October 3,700 26,000

November 4,700 31,000

December 4,200 27,750

Summary Output

Regression Statistics

Multiple R .965

R Square .932

Adjusted R2 .925

Standard
1,425.18
Error

Observations 12.00

Standard t P- Lower Upper

Coefficients
Error Stat value 95% 95%

Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45

Machine 5.77 0.49 11.7 0.00 4.67 6.87

5-216
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Hours

The percent of the total variance that can be explained by the regression is:

A. 0.965.

B. 0.932.

C. 0.925.

D. 0.982.

The percent of the total variance that can be explained by the regression is the r-square or
0.932.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-217
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
81. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total

production for the last two years has been analyzed using simple linear regression. The
analysis results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what percentage of the variation in overhead costs is explained by
the independent variable?

A. 24%

B. 81.4%

C. 91.1 %

D. 9.7%

R2 explains the variation in Y from the X regressor.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium

5-218
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

82. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total
production for the last two years has been analyzed using simple linear regression. The
analysis results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what is the total overhead cost for an estimated activity level of

45,000 direct labor-hours?

A. $125,000

B. $345,000

C. $600,000

D. $225,000

$120,000 + ($5 × 45,000) = $345,000

AACSB: Analytical Thinking

5-219
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-220
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
83. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:
• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total

production for the last two years has been analyzed using simple linear regression. The
analysis results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, how much is the variable manufacturing cost per unit, using the

variable overhead esti­mated by the regression (assuming that direct materials and direct

labor are variable costs)?

A. $78

B. $91

C. $96

D. $71

($1,000,000 ÷ 20,000) + ($720,000 ÷ 20,000) + ($5 × 2 labor-hours) = $50 + $36 + $10 = $96

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium

5-221
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Gradable: automatic
Topic: What Methods are Used to Estimate Cost Behavior?

5-222
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
84. Balcom Enterprises is planning to introduce a new product that will sell for $110 a unit.
Manufacturing cost estimates for 20,000 units for the first year of production are:

• Direct materials $1,000,000

• Direct labor $720,000 (based on $18 per hour × 40,000 hours)

Although overhead has not be estimated for the new product, monthly data for Balcom's total

production for the last two years has been analyzed using simple linear regression. The
analysis results are as follows:

Dependent variable Factory overhead costs

Independent variable Direct labor hours

Intercept $120,000

Coefficient on
$5.00
independent variable

Coefficient of correlation 0.911

R2 0.814

Based on this information, what is the expected contribution margin per unit to be earned
during the first year on 20,000 units of the new product? (Assume that all marketing and

administrative costs are fixed.)

A. $14

B. $13

C. $99

D. $32

($1,000,000 ÷ 20,000) + ($720,000 ÷ 20,000) + ($5 × 2 labor-hours) = $50 + $36 + $10 = $96;
$110 - $96 = $14

AACSB: Analytical Thinking

AICPA: FN Decision Making

5-223
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

85. Given actual amounts of a semi-variable cost for various levels of output, the method that will
always give the most reliable measure of the fixed and variable components is the:

A. high-low method.

B. linear regression method.

C. scattergraph method.

D. account analysis method.

Linear regression will always give the most reliable measure of the fixed and variable

components for various levels of output; high-low may give the best line but scattergraph and
account analysis rely on judgment.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

5-224
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
86. Which of the following statements regarding regression analysis is (are) true?

(A) One way to control the effects of a nonlinear relationship between total costs and activity is
reduce the relevant range.

(B) The linear cost estimate tends to understate the slope of the cost line in ranges close to
capacity.

A. Only A is true.

B. Only B is true.

C. Both A and B are true.

D. Neither A nor B is true.

Both A and B are true; when capacity is approached there are more scheduling problems and
overtime may be needed, changing the variable cost.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

5-225
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
87. Which of the following is a common assumption of cost estimation?

A. Cost behavior depends on many cost drivers.

B. Cost behavior patterns are nonlinear outside of the relevant range.

C. Cost behavior patterns are linear within the relevant range.

D. Costs are curvilinear.

The two basic assumptions of cost estimation are: single (or few) cost driver(s) and linearity of
costs.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

88. Which of the following is not a data problem an analyst must watch for when estimating cost

behavior?

A. Missing data.

B. Outliers.

C. Allocated costs.

D. Depreciable assets.

Depreciable assets do not create data problems.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation

5-226
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

89. Which of the following is not a data problem an analyst must watch for when estimating cost
behavior?

A. Non-numeric data.

B. Inflation.

C. Discretionary costs.

D. Mismatched time periods.

Non-numeric data is easily incorporated into the analysis using indicator variables.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

5-227
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
90. In the learning curve equation Y = aXb, the Y term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

In this equation, the Y term represents the labor time required to produce the last single unit.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

91. In the learning curve equation Y = aXb, the X term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

In this equation, the X term represents the cumulative number of units.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium

5-228
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

92. In the learning curve equation Y = aXb, the "a" term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

In this equation, the "a" term represents the labor time required to produce the first unit.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

93. In the learning curve equation Y = aXb, the "b" term represents:

A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.

C. the cumulative number of units.

D. the index of learning.

In this equation, the "b" term represents the index of learning.

AACSB: Analytical Thinking

5-229
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

94. Which of the following statements regarding the learning phenomenon is true?

A. The more units that are produced, the greater the average time to produce a single unit.

B. The relationship between number of units produced and the marginal time to produce the

latest unit is linear.

C. Total labor cost is a linear function of the total units produced.

D. As production doubles, the time to produce the latest unit decreases.

Learning curves are nonlinear. Learning means the latest unit takes less time than the

previous units. So, as production doubles, the time to produce the latest unit decreases.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

5-230
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
95. Bachmann Products, Inc., has found that new products follow a learning curve. The first two
units have been completed with the following results:

Units Produced Marginal Labor Time

1 80.00

2 68.00

How much time will be needed to complete the 4th unit?

A. 74.00 hours.

B. 57.80 hours.

C. 56.00 hours.

D. 54.40 hours.

68/80 = 85% × 68 = 57.80 hours

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

5-231
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
96. Bachmann Products, Inc., has found that new products follow a learning curve. The first two
units have been completed with the following results:

Units Produced Marginal Labor Time

1 80.00

2 68.00

How much time will be needed to complete the 8th unit?

A. 74.00 hours.

B. 57.80 hours.

C. 56.00 hours.

D. 49.13 hours.

68/80 = 85% × 68 = 57.80 hours for 4th unit × 85% = 49.13 hours for 8th unit

AACSB: Analytical Thinking

AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Gradable: automatic
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

Essay Questions

5-232
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
97. The following manufacturing costs were incurred by the Miracle Mile Company in 2015:

Direct materials $225,000

Direct labor 350,000

Manufacturing overhead 470,000

These costs were incurred to produce 50,000 units of product. Variable manufacturing
overhead was 70% of the direct materials cost.
In 2016, the direct material and variable overhead costs per unit will increase by 12%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are

expected to increase by 8%.

Required:

(a.) Prepare a cost estimate for an activity level of 40,000 units of product in 2016.
(b.) Determine the total product costs per unit for 2015 and 2016.

(a.) $960,220 (2016)

(b.) 2015 unit cost: $1,045,000/50,000 = $20.90; 2016 unit cost: $960,220/40,000 = $24.01

Feedback: (a.) Variable overhead costs (2015) = .70($225,000) = $157,500

Fixed overhead costs (2015) = $470,000 - $157,500 = $312,500

2015 2016

Direct materials $225,000 $201,600 (1)

Direct labor 350,000 280,000 (2)

Variable overhead costs 157,500 141,120 (3)

Fixed overhead costs 312,500 337,500 (4)

Total $1,045,000 $960,220

5-233
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 (1) [($225,0000)/50,000)(1.12)](40,000) = $201,600
(2) ($350,000/50,000)(40,000) = $280,000
(3) [($157,500)/50,000)(1.12)](40,000) = $141,120

(4) ($312,500)(1.08) = $337,500

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-234
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
98. The following manufacturing costs were incurred by the Trinitram Company in 2015:

Direct materials $112,500

Direct labor 175,000

Manufacturing overhead 235,000

These costs were incurred to produce 25,000 units of product. Variable manufacturing

overhead was 80% of the direct materials cost.

In 2016, the direct material and variable overhead costs per unit will increase by 15%, but the

direct labor costs per unit are not expected to change. Fixed manufacturing costs are
expected to increase by 7.5%.

Required:

(a.) Prepare a cost estimate for an activity level of 20,000 units of product in 2016.

(b.) Determine the total product costs per unit for 2015 and 2016.

(a.) $482,175 (2016)

(b.) 2015 unit cost: $522,500/25,000 = $20.90; 2016 unit cost: $482,175/20,000 = $24.11

Feedback: (a.) Variable overhead costs (2015) = .80($112,500) = $90,000

Fixed overhead costs (2015) = $235,000 - $90,000 = $145,000

2015 2016

Direct materials $112,500 $103,500 (1)

Direct labor 175,000 140,000 (2)

Variable overhead costs 90,000 82,800 (3)

Fixed overhead costs 145,000 155,875 (4)

Total $522,500 $482, 175

5-235
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 (1) [($112,500)/25,000)(1.15)](20,000) = $103,500
(2) ($175,000/25,000)(20,000) = $140,000
(3) [($90,000)/25,000)(1.15)](20,000) = $82,800

(4) ($145,000)(1.075) = $155,875

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-236
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
99. The Thomas Company's total overhead costs at various levels of activity are presented below:

Month Direct Labor Hours Total Overhead

July 7,500 $272,000

August 6,000 234,000

September 9,000 319,000

October 10,500 340,500

Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is as

follows:

Utilities (V) $137,700

Supervisory Salaries (F) 80,000

Maintenance (M) 101,300

319,000

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.

(b.) Express the company's total overhead costs in linear equation form.

(a.) $12,000 + 8.36667 × Direct Labor Hour

(b.) $92,000 + 23.6667 × Direct Labor Hour

Feedback: (a.) Utilities per hour = $137,700/9,000 = $15.30 per direct labor hour
Utility cost at the high point = $15.30(10,500) = $160,650
Utility cost at the low point = $15.30(6,000) = $91,800

Maintenance cost at the high point = $340,500 - 80,000 - 160,650 = $99,850

Maintenance cost at the low point = $234,000 - 80,000 - 91,800 = $62,200

Maintenance cost per hour = ($99,850 - 62,200)/(10,500 - 6,000) = $8.36667

5-237
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Fixed Maintenance costs per month = $99,850 - ($8.36667 × 10,500) = $12,000
Total maintenance costs = $12,000 + $8.36667 per Direct Labor Hour
(b.) Total overhead costs = ($80,000 + 12,000) + ($15.30 + 8.36667) × Direct Labor Hours =

$92,000 + $23.66667 × Direct Labor Hours

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-238
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
100. The Feline Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots

might also be having an impact on the amount of their monthly manufacturing overhead costs.
In order to investigate this possibility, the company collected information on its monthly

manufacturing overhead costs, production in units, and average production lot size for 2016.

Average
Manufacturing
Production Monthly
Overhead
(Units) Production Lot
Month Cost
Size

1 75,000 $925,800 20

2 90,000 843,875 19

3 65,000 910,125 24

4 80,000 946,000 19

5 55,000 879,000 24

6 50,000 825,000 18

7 85,000 960,000 22

8 105,000 1,053,500 25

9 102,000 1,020,000 23

10 68,000 905,000 20

11 75,000 938,000 22

12 95,000 995,000 24

Required:

(a.) Use the high-low method to estimate next month's manufacturing overhead costs,
assuming the company is planning to produce 92,000 units.
(b.) Use the high-low method to estimate next month's manufacturing overhead costs,
assuming the company is planning to run a 21-lot size.

5-239
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 (a.) $999,498
(b.) $922,929

Feedback: (a.) Variable cost per unit = ($1,053,500 - 825,000)/(105,000 - 50,000) = $4.154
Fixed costs = $1,053,500 - ($4.154)(105,000) = $617,330

TC = $617,330 + ($4.154)(92,000) = $999,498

(b.) Variable cost per unit = ($1,053,500 - 825,000)/(25 - 18) = $32,642.857

Fixed costs = $1,053,500 - ($32,642.857)(25) = $237,429

TC = $237,429 + ($32,642.857)(21) = $922,929

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-240
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
101. Argo Company ran a regression analysis using direct labor hours as the independent variable
and manufacturing overhead costs as the dependent variable. The results are summarized
below:

Intercept $14,600

Slope $12.55

Correlation coefficient .931

R-squared .867

Argo is planning on operating at a level that would require 12,000 direct labor hours per

month in the upcoming year.

Required:

(a.) Use the information from the regression analysis to write the cost estimation equation for

the manufacturing overhead costs.

(b.) Compute the estimated manufacturing overhead costs per month for the upcoming year.

(a.) Total manufacturing overhead costs = $14,600 + ($12.55 × Direct Labor Hours)
(b.) $165,200

Feedback: (b.) Total manufacturing overhead costs = $14,600 + ($12.55)(12,000) = $165,200

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 1 Easy
Gradable: manual
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-241
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
102. The Feline Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots

might also be having an impact on the amount of their monthly manufacturing overhead costs.
In order to investigate this possibility, the company collected information on its monthly

manufacturing overhead costs, production in units, and average production lot size for 2016.

Average
Manufacturing
Production Monthly
Overhead
(Units) Production Lot
Month Cost
Size

1 75,000 $925,800 20

2 90,000 843,875 19

3 65,000 910,125 24

4 80,000 946,000 19

5 55,000 879,000 24

6 50,000 825,000 18

7 85,000 960,000 22

8 105,000 1,053,500 25

9 102,000 1,020,000 23

10 68,000 905,000 20

11 75,000 938,000 22

12 95,000 995,000 24

Regression analysis results of the information presented above are as follows:

Ordinary regression:

Equation: $691,741 + $3.0692 × units

r-square: .628

Multiple regression:

5-242
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 $482,172 + $2.4918 × units +
Equation:
$11,770.939 × lot size

r-square: .777

Required:

(a.) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 92,000 units. (final answer

should be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 92,000 units with an average lot size of
21. (final answer should be rounded to the nearest whole dollar)
(c.) Comment on which regression seems to be more appropriate under these circumstances.

What additional information would you like to see? Be specific.

(a.) $974,107
(b.) $958,606
(c.) The multiple regression improves the fit over the ordinary regression. The r-square
improves from .628 to .777. Additional information may include tests to determine the

significance of the coefficients.

Feedback: (a.) Total manufacturing costs = $691,741 + ($3.0692 × 92,000) = $974,107

(b.) Total manufacturing costs = [$482,171 + ($2.4918 × 92,000) + ($11,770.939 × 21)] =
$958,606

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual

5-243
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-244
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
103. The Ornate Company produces a single product and has total costs ranging from $321,875 (at
20,000 units) to $966,875 (at 80,000 units). Sales volume in 2016 was 32,000, and operating
income was $45,125. Ornate's product is highly specialized; therefore, no units are kept in

inventory.

Required:

(a.) Determine the cost equation for Ornate's costs.

(b.) Prepare a contribution margin income statement for 2016 including separate columns for
total dollars, per unit dollars, and percentages.

(c.) Determine the break-even point (in units and in dollars).

(a.) $106,875 + 10.75 × units

(b.)

Total Per Unit %

Sales $496,000 $15.50 100.000

Variable
344,000 10.75 69.355
costs

Contribution
152,000 $4.75 30.645
margin

Fixed costs 106,875

Operating
$45,125
profits

(c.) 22,500 units; $348,750

Feedback: (a.) Variable cost per unit = ($966,875 - 321,875)/(80,000 - 20,000) = $10.75
Fixed costs = $966,875 - (80,000)(10.75) = $106,875
(b.) Total contribution margin = $45,125 + 106,875 = $152,000

5-245
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Total variable costs = $10.75(32,000) = $344,000
Total sales = $344,000 + 152,000 = $496,000
Selling price per unit = $496,000/32,000 = $15.50

Contribution margin per unit = $152,000/32,000 = $4.75

Contribution margin ratio = $152,000/496,000 = 30.645%

(c.) BE = $106,875/4.75 = 22,500 units
BE = $106,875/.30645 = $348,752 (or 22,500 units × $15.50 = $348,750)

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-246
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
104. Iowa Enterprises had an average cost of $10.75 during a month when 50,000 units were
produced. When production doubled several months later, the average cost dropped to $8.25.

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 80,000 units?

(a.) total cost = $250,000 + $5.75 × units

(b.) $8.875

Feedback: Total costs must be used rather than unit costs.

(a.) Month 1: 50,000 units × $10.75 = $537,500; Month 2: 100,000 × $8.25 = $825,000.
Variable cost = ($825,000 - 537,500)/(100,000 - 50,000) = $5.75. Fixed cost: $825,000 -

100,000 × $5.75 = $250,000

(b.) $250,000 + $5.75 × 80,000 = $710,000/80,000 units = $8.875

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-247
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
105. Washington Products had costs of $600,000 when sales equaled 75,000 units. When sales
increased by 25,000 units, costs increased by $125,000. The selling price is $9 per unit.

Required:

(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 80,000 units.

(a.) Costs = $225,000 + $5 × units sold

(b.)

Revenue (80,000 × $9) $720,000

Variable costs (80,000 × $5) 400,000

Contribution margin 320,000

Fixed cost 225,000

Operating profit $95,000

Feedback: (a.) Variable cost = $125,000/25,000 = $5.00. Fixed cost: $600,000 - 75,000 ×

$5.00 = $225,000

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-248
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
106. New Venture, Inc. has received a contract for 8 units of a new product. The contract is a cost-
plus contract, with the total to be received equal to the total labor cost + 20%. New Venture
found that the first unit of a new product required 120 hours to complete. The second unit was

completed using only 114 hours. New Venture believes that the rate of learning that was
observed will continue for all 8 units of the contract. The labor wage paid is $25/hour. The

following factors are available for various rates of learning: 80% learning, b = -.3219; 85%, b =
-.2345; 90%, b = -.1520; 95%, b = -.0740.

Required:

(a.) What will the total labor cost be for the contract?
(b.) What will the total fee be for the contract?

(a.) 871.36 hrs × $25 = $21,784

(b.) $21,784 × 120% = $26,140.80

Feedback: (a.) The learning rate is 114 hrs/120 hrs = 95% learning rate.

units marginal cumulative

produced labor time labor time

1 (120 × 1-0.074) 120.00 120.00

2 (120 × 2-0.074) 114.00 234.00

3 (120 × 3-0.074) 110.63 344.63

4 (120 × 4-0.074) 108.30 452.93

5 (120 × 5-0.074) 106.53 559.46

6 (120 × 6-0.074) 105.10 664.56

7 (120 × 7-0.074) 103.91 768.47

8 (120 × 8-0.074) 102.89 871.36

AACSB: Analytical Thinking

5-249
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-08 (Appendix A) Use Microsoft Excel to perform a regression analysis.
Topic: Learning Phenomenon

107. Market Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:

Units Produced Marginal Labor Time

1 250.00

2 225.00

Required:

(a.) How much time will be needed to complete the 4th unit?
(b.) How much time will be needed to complete the 8th unit?
(c.) How much time will be needed to complete the 16th unit?

(a.) 225 × .9 = 202.50

(b.) 202.50 × .9 = 182.25
(c.) 182.25 × .9 = 164.025

Feedback: Learning rate = 225/250 = 90%

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-08 (Appendix A) Use Microsoft Excel to perform a regression analysis.
Topic: Learning Phenomenon

5-250
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
108. Clough Company is interested in establishing the relationship between utility costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Machine Electricity
Month Hours Costs

January 3,250 22,080

February 3,770 25,200

March 2,470 16,200

April 4,030 27,600

May 4,940 33,900

June 4,290 26,400

July 5,330 29,700

August 4,550 27,300

September 2,600 18,600

October 4,810 31,200

November 6,110 37,200

December 5,460 33,300

SUMMARY OUTPUT

Regression
Statistics

Multiple R 96.5%

R Square 93.2%

Adjusted R-
92.5 %
Square

Standard
1,710.21
Error

Observations 12.00

Coefficients Standard t P- Lower Upper

5-251
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Error Stat value 95% 95%

-
Intercept 4,472.26 2,019.39 2.21 0.051 8971.74
27.23

Machine 3.69E-
5.329 0.455 11.7 4.314 6.343
Hours 07

Required:

(a.) What is the equation for utility costs using the regression analysis?

(b.) Does the variable "machine hours" have statistical significance? Explain.
(c.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

(a.) $4,472.26 + $5.329 × machine hours

(b.) Yes, the t-stat of 11.70 exceeds the rough rule of thumb of 2.

(c.) $20,459.26

Feedback: (c.) $4,472.26 + $5.329 × 3,000 = $20,459.26

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-252
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
109. Clough Company is interested in establishing the relationship between utility costs and
machine hours. Data have been collected and a regression analysis prepared using Excel.
The monthly data and the regression output follow:

Machine Electricity
Month Hours Costs

January 3,250 22,080

February 3,770 25,200

March 2,470 16,200

April 4,030 27,600

May 4,940 33,900

June 4,290 26,400

July 5,330 29,700

August 4,550 27,300

September 2,600 18,600

October 4,810 31,200

November 6,110 37,200

December 5,460 33,300

Required:

(a.) What is the equation for utility costs using the high-low method?
(b.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

(a.) $1,950.19 + $5.7692 × units

(b.) $19,257.79

Feedback: (a.) Variable: ($37,200 - 16,200)/(6,110 - 2,470) = $5.7692; Fixed: $37,200 - 6,110

× 5.7692 = $1,950.19

(b.) $1,950.19 + $5.7692 × 3,000 = $19,257.79

5-253
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AACSB: Analytical Thinking
AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-254
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
110. Yates Corp. wants to develop a cost equation for its administrative costs. The controller
believes the appropriate cost driver is units produced. Last year's data are presented below:

Units Administrative
Month produced Costs

January 32,500 $24,288

February 37,700 27,720

March 24,700 17,820

April 40,300 30,360

May 49,400 37,290

June 42,900 29,040

July 53,300 32,670

August 45,500 30,030

September 26,000 20,460

October 48,100 34,320

November 61,100 40,920

December 54,600 36,630

Total 516,100 $361,548

Average 43,008 $30,129

Required:

(a.) What is the equation for administrative costs using the high-low method?
(b.) Prepare an estimate of administrative costs for a month when 30,000 units are

produced.

(a.) $2,145.94 + $0.6346 × units

(b.) $21,183.94

Feedback: (a.) Variable: ($40,920 - 17,820)/(61,100 - 24,700) = $0.6346; Fixed: $40,920 -

5-255
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 61,100 × .6346 = $2,145.94
(b.) $2,145.94 + $0.6346 × 30,000 = $21,183.94

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-256
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
111. Yates Corp. wants to develop a cost equation for its administrative costs. The controller
believes the appropriate cost driver is units produced. Last year's data are presented below:

Units Administrative
Month produced Costs

January 32,500 $24,288

February 37,700 27,720

March 24,700 17,820

April 40,300 30,360

May 49,400 37,290

June 42,900 29,040

July 53,300 32,670

August 45,500 30,030

September 26,000 20,460

October 48,100 34,320

November 61,100 40,920

December 54,600 36,630

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.965383

R Square 0.931965

Adjusted R-
0.925162
Square

Standard
1,881.232
Error

Observations 12

Standard Lower Upper

Coefficients t Stat P-value
Error 95% 95%

5-257
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Intercept 4,919.48 2,221.329 2.21 0.051156 -29.9485 9,868.909

Units
0.586154 0.050082 11.70 3.69E-07 0.474566 0.697743
Produced

Required:

(a.) What is the equation for administrative costs using the regression analysis?

(b.) Does the variable "units produced" have statistical significance? Explain.
(c.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.

(a.) $4,919.48 + $0.586154 × units

(b.) Yes, the t-stat of 11.70 exceeds the rough rule of thumb of 2

(c.) $22,504.10

Feedback: (c.) $4,919.48 + $0.586154 × 30,000 = $22,504.10

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-258
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
112. The Wonder Drug Company's total overhead costs at various levels of activity are presented
below:

Direct Labor
Month Total Overhead
Hours

September 15,000 $472,000

October 12,000 409,400

November 18,000 542,000

December 21,000 604,700

Assume that the overhead costs above consist of indirect labor, scheduling salaries, and

maintenance. The breakdown of these costs for the month of November is as follows:

Indirect labor (V) $219,600

Maintenance (M) 197,400

Scheduling Salaries (F) 125,000

$542,000

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.
(b.) Express the company's total overhead costs in linear equation form.

(a.) $24,000 + $9.50 per Direct Labor Hour

(b.) $149,000 + $21.70 × Direct Labor Hour

Feedback: (a.) Indirect labor per hour = $219,600/18,000 = $12.20 per direct labor hour
Indirect labor cost at the high point = $12.20(21,000) = $256,200
Indirect labor cost at the low point = $12.20(12,000) = $146,400

Maintenance cost at the high point = $604,700 - 125,000 - 256,200 = $223,500

5-259
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Maintenance cost at the low point = $409,400 - 125,000 - 146,400 = $138,000
Maintenance cost per hour = ($223,500 - 138,000)/(21,000 - 12,000) = $9.50
Fixed Maintenance costs per month = $223,500 - ($9.50) × (21,000) = $24,000

Total maintenance costs = $24,000 + $9.50 per Direct Labor Hour

(b.) Total overhead costs = ($125,000 + 24,000) + ($12.20 + 9.50) × Direct Labor Hours =
$149,000 + $21.70 × Direct Labor Hours

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-260
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
113. The Norcross Company has traditionally estimated manufacturing overhead costs using
production volume. Some of the production managers believe that the number of setups may
also have an impact on monthly manufacturing overhead costs. In order to investigate this

possibility, the company collected information on its monthly manufacturing overhead costs,
production in units, and number of setups for 2016.

Manufacturing
Production
Overhead Number of
(Units)
Month Cost Setups

1 50,000 $800,100 17

2 65,000 752,500 16

3 40,000 795,100 21

4 55,000 822,750 16

5 30,000 771,225 21

6 25,000 706,200 15

7 60,000 843,000 19

8 80,000 935,200 22

9 77,000 901,750 20

10 43,000 786,400 17

11 50,000 819,600 19

12 70,000 880,900 21

Regression analysis results of the information presented above are as follows:

Ordinary regression:
Equation: $650,398 + $3.1061 × units

r-square: .707
Multiple regression:
Equation: $464,481 + $2.5356 × units + $11,631.6048 × number of set ups

r-square: .867

Required:

5-261
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 (a.) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 75,000 units. (final answer
should be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month's manufacturing

costs, assuming the company is planning to produce 75,000 units with 18 set ups. (final
answer should be rounded to the nearest whole dollar)
(c.) Comment on which regression seems to be more appropriate under these circumstances.
What additional information would you like to see? Be specific.

(a.) $883,356
(b.) $864,020

(c.) The multiple regression improves the fit over the ordinary regression. The r-square
improves from .707 to .867. Additional information may include tests to determine the

significance of the coefficients.

Feedback: (a.) Total manufacturing costs = $650,398 + ($3.1061 × 75,000) = $883,356

(b.) Total manufacturing costs = [$464,481 + ($2.5356 × 75,000) + ($11,631.6048 × 18)] =

$864,020

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-05 Interpret the results of regression output.
Topic: What Methods are Used to Estimate Cost Behavior?

5-262
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
114. Barnard Enterprises had an average cost of $8.60 during a month when 75,000 units were
produced. When production was 125,000 units several months later, the average cost dropped
to $6.98.

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 110,000 units?

(a.) Total cost = $303,750 + $4.55 × units

(b.) $7.3114

Feedback: Total costs must be used rather than unit costs.

(a.) Month 1: 75,000 units × $8.60 = $645,000; Month 2: 125,000 × $6.98 = $872,500.

Variable cost = ($872,500 - 645,000)/(125,000 - 75,000) = $4.55. Fixed cost: $872,500 -

125,000 × $4.55 = $303,750

(b.) $303,750 + $4.55 × 110,000 = $804,250/110,000 units = $7.3114

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-263
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
115. Doran Products had costs of $950,000 when sales equaled 55,000 units. When sales
increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per
unit.

Required:

(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 70,000 units.

(a.) Costs = $125,000 + $15 × units sold

(b.)

Revenue (70,000 × $21) $1,470,000

Variable costs (70,000 × $15) 1,050,000

Contribution margin 420,000

Fixed cost 125,000

Operating profit $295,000

Feedback: (a.) Variable cost = ($1,400,000 - 950,000)/(85,000 - 55,000) = $15.00. Fixed cost:

$950,000 - 55,000 × $15.00 = $125,000

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-264
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
116. Markham, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 30%. Markham found that
the first unit of a new product required 90 hours to complete. The second unit was completed

using only 76.5 hours. Markham believes that the rate of learning that was observed will
continue for all 8 units of the contract. The labor wage paid is $40/hour. The following factors

are available for various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b =
-.1520; 95%, b = -.0740.

Required:

(a.) What will the total labor cost be for the contract?
(b.) What will be the total fee for the contract?

(a.) 534.21 hrs × $40 = $21,368.40

(b.) $21,368.40 × 130% = $27,778.92

Feedback: (a.) The learning rate is 76.5 hrs/90 hrs = 85% learning rate.

units marginal cumulative

Produced labor time labor time

1 (90 × 1-0.2345) 90.00 90.00

2 (90 × 2-0.2345) 76.50 166.50

3 (90 × 3-0.2345) 69.56 236.06

4 (90 × 4-0.2345) 65.02 301.08

5 (90 × 5-0.2345) 61.71 362.79

6 (90 × 6-0.2345) 59.12 421.91

7 (90 × 7-0.2345) 57.03 478.94

8 (90 × 8-0.2345) 55.27 534.21

AACSB: Analytical Thinking

5-265
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-08 (Appendix A) Use Microsoft Excel to perform a regression analysis.
Topic: Learning Phenomenon

117. Woodman Products, Inc., has found that new products follow a learning curve. The first two
units have been completed with the following results:

Units Produced Marginal Labor Time

1 112.50

2 90.00

Required:

(a.) How much time will be needed to complete the 4th unit?
(b.) How much time will be needed to complete the 8th unit?
(c.) How much time will be needed to complete the 16th unit?

(a.) 90 × .8 = 72.00
(b.) 72.00 × .8 = 57.60
(c.) 57.60 × .8 = 46.08

Feedback: Learning rate = 90/112.5 = 80%

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Analyze
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-08 (Appendix A) Use Microsoft Excel to perform a regression analysis.
Topic: Learning Phenomenon

5-266
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
118. Below are several examples of costs that are labeled fixed or variable according to their typical
accounting designations. Under which circumstances would any of these costs behave in a
manner opposite to that listed?

a. Direct labor—variable.
b. Equipment depreciation—fixed.
c. Utilities (with a minimum charge)—variable.
d. Supervisory salaries—fixed.
e. Indirect materials purchased in given lot sizes that become spoiled within a few days—
variable.

a. Direct labor would be fixed if a union contract limited the company's ability to lay off

unneeded personnel or if management were contemplating a change in facilities but

maintaining the same labor force.

b. Equipment depreciation would be a variable cost if computed on a unit-of-production basis.

c. Utilities are variable above the minimum, but if the company's usage falls to the minimum or

below, the costs would be fixed.

d. Supervisory salaries normally increase in steps. If the activity range is narrow, the costs are
fixed; but if the range is wide enough so that several "steps" would fall within the range, then

the costs would appear to be variable.

e. A certain (fixed) level of spoilage may be a fact of life in some operations. An example might
be certain waste that occurs in setting up machines.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

5-267
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
119. When using past data to predict a cost that has fixed and variable components, it is possible to
have an equation with a negative intercept. Does this mean that at a zero production level, the
company will make money on its fixed costs? Explain.

It is possible for empirical data to show a negative intercept even though fixed costs cannot be
negative. It may be that the slope of the cost curve is particularly steep over the values used in

the estimation process. It may be that the operations are relatively far away from the intercept.
This would be particularly likely if the company were operating close to capacity. Negative
intercepts usually mean that there is some error in the specification of the cost estimate. If the
company is operating close to capacity, for example, then the assumption of a linear cost

function may be in error—or may only be a reasonable approximation in the range of activity

close to capacity.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic: Basic Cost Behavior Patterns

5-268
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
120. Describe the engineering method of cost estimation. Provide two advantages and two
disadvantages associated with the engineering approach to cost estimation.

The engineering method is based on what needs to be performed in order to produce a good
or service. One advantage is it can detail each step required to perform the operation; a
second advantage is it does not require data from prior activities—it can be used for new

activities. One disadvantage is it can be expensive to conduct since it evaluates every activity;
a second disadvantage is the estimates are often based on optimal conditions.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic: What Methods are Used to Estimate Cost Behavior?

121. Explain the difference between the engineering method of cost estimation and the account

analysis method.

The engineering method is based on what must be done to perform an activity; the account
analysis analyzes what was done in the past to perform the activity. Engineering is what
should, account analysis is what was.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-02 Estimate costs using engineering estimates.
Learning Objective: 05-03 Estimate costs using account analysis.

5-269
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
122. When preparing cost estimates for account analysis purposes, should the costs be extracted
from the historical accounting records?

Data in the historical accounting records should only be used as long as similar trends are
likely to continue in the future. In periods of price instability or technological innovation, use of
the historical data without adjustment is likely to result in incorrect estimates. A better

alternative is to use the costs that are expected to be incurred during the period for which the
cost estimate is prepared.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-03 Estimate costs using account analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

123. Describe two advantages and two disadvantages of the high-low method of cost estimation.

Advantages include it only requires two data points and is easy to apply. Disadvantages
include most of the information available is ignored and the high and low points may not be
representative of typical activity.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-270
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
124. Is it possible to compensate for the effects of price instability when preparing cost esti­mates
using high-low or regression techniques?

Yes, possible ways include:

• Adjusting the data to present all costs in some common dollar measure;
• Using activity measures that are expressed in dollars that move with the price change
effects in the cost to be estimated;

• Using a multiple regression approach with a suitable price index as one of the predictor
variables.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-271
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
125. J.C. Riley owns Riley's Auto Repair Shop. J.C. is trying to determine whether the company's
advertising pro­gram is successful. He has used a spreadsheet program to estimate the
relationship between advertising expenditures and sales dollars. Monthly data for the past two

years were entered into the program. The regression results indicated the following:
Sales dollars = $169, 000 - ($200 × Advertising expenditures)

Correlation coefficient = -.864

To J.C., the results imply that advertising is actually reducing sales. Can you help explain to

him what might cause the negative relationship between advertising expendi­tures and
sales?

This is a frequently encountered problem when applying analytical techniques to certain costs.

Quite often the advertising expenditures result in sales being generated in the following month
or so. In addition, many companies increase their advertising when sales are declining and cut
back on advertising when there is capacity business. A better model might be developed by

relating this month's sales to last month's advertising.

Explain to J.C. that problems similar to this exist also for repair and maintenance costs; this is

because machines are usually given routine repairs and maintenance during slow periods.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-272
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
126. Southside Hospital is trying to get a better idea of the costs in its cardiac surgical unit. Unit
cost data for supplies, labor, etc. have been collected for a three-year period. After analyzing
the data using Excel, the following output was generated, based on 1,500 procedures.

Intercept = $2,169, 000

Coefficient on procedures $972

Correlation coefficient = .448

R2 = .189

The controller asks you for advice on whether to rely on this estimate. Based on the output,
what would you say?

Since the R2 for the equation is only 18.9%, this is very low for this type of regression. The

controller might want to consider other methods.

More than likely, the problem centers on the amount of variation in the nature of procedures,
such that the estimate of an average procedure cost is not very precise or reliable. By their

very nature, an open-heart triple bypass surgery will be much more costly and require different
drivers than a heart catheterization where the patient requires no overnight hospital stay.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Gradable: manual
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic: What Methods are Used to Estimate Cost Behavior?

5-273
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
127. What are "outliers" and what effect does their presence have when using regression analysis
for cost estimation?

An outlier is a data point that lies a significant distance away from the regression line. Since
the regression line is computed so the sum of the square of each error (distance between the
predicted value and the actual value) is minimized, one point situated at an extreme distance

will cause a very large impact on estimating the regression line.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: What Methods are Used to Estimate Cost Behavior?

5-274
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
128. Describe the effect on cost estimation of four of the following five problems: 1) missing data, 2)
outliers, 3) allocated and discretionary costs, 4) inflation, or 5) mismatched time periods.

Students should choose any 4 of the 5:

1) missing data: Depending on the data, this could have little impact (if the data are
representative) or have a very large impact (if the data include extreme values).
2) outliers: Extreme observations can unduly affect the cost estimates. Since regression
minimizes the sum of the square of the errors, the outlier has a larger impact on the estimation

than a more representative point.

3) allocated and discretionary costs: An allocated cost may in fact be fixed, but the allocation

relates it to activity, so it will appear variable. Discretionary cost behavior may be budgeted so

that it appears variable.

4) inflation: Historical data will not reflect future cost behavior due to changing prices.

5) mismatched time periods: This will cause inaccuracies in relating cost with the activity. The
cost will be for one period, the activity will be from a different period.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-06 Identify potential problems with regression data.
Topic: How is an Estimation Method Chosen?

5-275
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
129. Your manager asks you for a cost estimate to open a new retail outlet and says, "I want you to
use statistical analysis, so it will be objective because it is based on real data." How would you
respond?

It is certainly possible that for this example a statistical analysis is best. However, it depends
on the goal of the analysis. Good data might not be available. For example, the new outlet

might be located in an area in which the company has no operations. In addition, historical
data might not be representative of the future. It would be best to use a combination of
methods and compare the estimates.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic: How is an Estimation Method Chosen?

130. Fast-food restaurants, like Taco Bell and McDonalds are known for high employee turnover,
high qual­ity, and low costs. Using your knowledge of the learning phenomenon, how do these

fast-food chains get high quality and low costs when they have so much employee turnover?

These chains use standardized techniques and process that are able to transmit information to
employees effectively so that they can learn quickly and learn on the job.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.

5-276
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
 Topic: Learning Phenomenon

131. Assume that as part of their recent merger, Dell and EMC are perfecting a new device that will
access and coordinate the Internet of Things. The new company is inter­ested in estimating

the impact of learning on the cost of producing this new device and plan to use data from
previous products to esti­mate the learning parameter. What are the advantages of doing this?

What are the disadvantages?

Data from previous products, which are likely to be similar, provide information about how
learning might affect the cost of the new product. The disadvantage is that the products are
different and these differences might lead to learning rates that are different and, as a result,

cost estimates that are not realistic. Also, since Dell is primarily a hardware company and

EMC primarily works with digital or cloud-based solutions, the learning curve of these two

different environments are very different in functionality and may result in unrealistic results.

AACSB: Analytical Thinking

AICPA: FN Decision Making
Blooms: Understand
Difficulty: 3 Hard
Gradable: manual
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
Topic: Learning Phenomenon

5-277
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.