Deck 2: The Cost Function

Question 1

Simple regression analysis produces an equation of the form: Y = $\alpha$ + $\beta$ X + $\varepsilon$ .

Answer 1

False

Question 2

Learning curves lead to greater productivity over time.

Answer 2

False

Question 3

Past costs are irrelevant for decision making, but may be relevant for predicting future costs.

Answer 3

False

Question 4

Uncertainties and information quality are evaluated when determining relevant costs, then not considered again.

Question 5

The high-low method frequently distorts a cost function because it uses too many data points to make an estimate.

Question 6

A scatter plot provides helpful information about the relationship between a cost and a potential cost driver.

Question 7

Preparing a scatter plot is a requirement before applying the two-point method of cost estimation.

Question 8

Managers should be trained in engineering to calculate an engineered cost estimate.

Question 9

Past costs are relevant for decision making, but irrelevant for predicting future costs.

Question 10

Reviewing the pattern of a cost over time is a critical step in determining an engineered cost estimate.

Question 11

In regression analysis, the Adjusted R-square statistic is used to evaluate how well the cost driver explains the behavior in the cost.

Question 12

Traceability can be used as a criterion to differentiate direct and indirect costs.

Question 13

Steel used in the production of automobiles would generally be classified as a direct cost.

Question 14

Salaries and wages you could earn while in college constitute a sunk cost.

Question 15

Textbook costs are an opportunity cost of earning a college degree.

Question 16

The high-low method is a specific application of the two-point method of cost estimation.

Question 17

Past costs are irrelevant for both decision making and predicting future costs.

Question 18

Categorizing costs by their behavior is one step in estimating relevant costs for a cost object.

Question 19

The first step in estimating a cost function for relevant costs is to select a cost estimation technique.

Question 20

Regression analysis is classified as simple or multiple depending upon the number of dependent variables to be estimated.

Question 21

Regression analysis usually provides a higher quality cost function than the high-low method.

Question 22

When the cost object is a unit produced, lubricating oil for production machines would be a(n)

A) Direct cost
B) Indirect cost
C) Sunk cost
D) Opportunity cost

Question 23

Janice's relevant range of activity would best be measured in terms of:

A) The number of staff she employs
B) The number of pets she services
C) The maximum amount of pet food she can buy each month based on the current budget
D) The number of parking spaces available in the parking lot

Question 24

Changes in cost behavior over time are one source of uncertainty in estimating future costs.

Question 25

In most accounting information systems, costs are often recorded and coded so they can be summarized based on different

A) Cost drivers
B) Cost objects
C) Volumes of activity
D) Independent variables

Question 26

Assume Janice's Kennel and Pet Spa is currently boarding ten pets. The cost of food to board one more pet is best described as a

A) Fixed cost
B) Marginal cost
C) Sunk cost
D) Mixed cost

Question 27

When the cost object is a unit produced, straight-line depreciation on manufacturing equipment would be a

Question 28

Mixed costs

A) Vary with production in direct proportion to volume
B) Vary with production but not in direct proportion to volume
C) Do not vary with production
D) Include only different types of fixed costs

Question 29

The relevant range is defined as

A) The period of time over which costs do not change
B) The volume of production over which the cost assumptions hold
C) The volume of production over which step-wise fixed costs increase
D) The time period in which the level of production does not change

Question 30

Which of the following statements is true?

A) Past costs are always relevant for decisions and are often useful in estimating future cost behavior
B) Past costs are always relevant for decisions, but are rarely useful in estimating future cost behavior
C) Past costs are never relevant for decisions, nor are they useful in estimating future cost behavior
D) Past costs are never relevant for decisions, but are often useful in estimating future cost behavior

Question 31

Discretionary costs reflect

A) The costs that managers incur to purchase new production machines when the old machines need replacing
B) Decisions about the maximum amount that will be spent next period for activities such as travel and marketing
C) Decisions about the amount of variable costs that will be incurred next period
D) The costs that managers incur to pay overtime when production levels are high

Question 32

Past cost information, although accurate in predicting future costs, may be I. Unavailable
II) Irrelevant
III) Outdated

A) I and II only
B) II and III only
C) II only
D) I, II, and III

Question 33

The best source for determining historical costs is usually

A) The Internet
B) Interviews with managers
C) The company's accounting information system
D) Financial statements

Question 34

Which of the following statements is false?

A) Information for some costs cannot easily be obtained from the accounting information system.
B) Useful cost information is rarely available from the accounting information system.
C) The accounting system design affects the availability of useful cost information.
D) The nature of cost information affects its usefulness for decision making.

Question 35

Which of the following is a sunk cost for any cost object related to Janice's Kennel and Pet Spa?

A) Cost of the automobile Janice is planning to buy for pet transportation
B) Cost of existing computer equipment used to keep company records
C) Cost of annual wages for full-time employees
D) Cost of rent for the next period

Question 36

Estimates of future costs are most useful in long term budgeting.

Question 37

Fixed costs per unit

A) Vary inversely with changes in volume
B) Change regardless of changes in volume
C) Will not change over the relevant range
D) Increase with an increase in volume

Question 38

Which of the following is the best example of a discretionary cost for Janice's Kennel and Pet Spa?

A) Pet food
B) Facility rent
C) Wages of pet groomers
D) Professional travel for Janice

Question 39

Which of the follow is not an assumption when estimating a cost function over the relevant range of activity?

A) Mixed costs will change in total
B) Mixed costs will change per unit
C) Variable costs will be constant in total
D) Fixed costs will be constant in total.

Question 40

Mixed costs

A) Consist of fixed and variable costs
B) Are constant in total
C) Consist of the variable portion of all costs
D) Have a constant per-unit value

Question 41

Which of the following are forms of regression analysis?

A) Quantitative and qualitative
B) Fixed and variable
C) Simple and multiple
D) Financial and managerial

Question 42

A manager might use this method to create a graph of cost behavior without any statistical techniques

A) Engineered estimate of cost
B) High-low method
C) Scatter plot
D) Regression analysis

Question 43

Managers analyze production activities and assign costs based on the estimated amount of resources used when they use this method.

A) A scatter plot
B) The high-low method
C) Regression analysis
D) Engineered estimate of cost

Question 44

Which of the following techniques relies on visual analysis?

A) Scatter plots
B) Analysis at the account level
C) High-low method
D) Engineered estimate of cost

Question 45

After estimating a past cost function, managers I. May need to update it for future changes.
II) Have all of the information they need to predict future costs
III) May or may not use it to estimate future costs.

A) I only
B) II only
C) II and III only
D) I and III only

Question 46

Simple regression minimizes the distance from each data point to

A) A trend line
B) The y-intercept
C) The error term
D) The x-axis

Question 47

A scatter plot is especially useful when managers wish to

A) Compute a cost function
B) Update a past cost function for future changes
C) Study the relationship between a cost and a potential cost driver
D) Analyze cost behavior when only one period of data is available

Question 48

Managers go through a series of questions to decide whether to use past costs to estimate future costs. Which of the following questions is least likely to be one of them?

A) Is the cost relevant to the decision?
B) Is the cost highly discretionary?
C) Is the cost an engineered estimate?
D) Is the cost expected to change?

Question 49

Estimating a cost function using past cost data to help determine future costs is useful if

A) Past costs are irrelevant and highly discretionary
B) Past costs are irrelevant and not discretionary
C) Past costs are relevant and highly discretionary
D) Past costs are relevant and not discretionary

Question 50

Which of the following is an alternative name for a cost driver in a regression analysis?

A) Dependent variable
B) Independent variable
C) Beta
D) Error term

Question 51

Which of the following is the most valid criticism of the high-low method?

A) It never produces accurate results
B) It is mathematically too complex for most managers to comprehend
C) It is a specialized case of the two-point method
D) Data points might be outside the normal range of activity

Question 52

(Appendix 2A) Which of the following is not an assumption of linear regression analysis

A) The error terms have a constant variance
B) The error terms are independent
C) A linear relationship exists between the dependent and independent variables
D) There is a cause and effect relationship between the dependent and independent variables

Question 53

An organization's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labor hours and the other based upon machine hours. The results were: Total overhead = $150,000 + $4 x direct labor hours
Adjusted R-square = 0.65
Total overhead = $130,000 + $5 x machine hours
Adjusted R-square = 0.77
For the next period the accountant anticipates using 28,000 direct labor hours and 26,000 machine hours. Based upon this information, what is the best estimate for overhead for the next period?

A) $262,000
B) $260,000
C) $254,000
D) $270,000

Question 54

The trend line from a scatter plot can be used to identify data points for

A) The two-point method
B) Analysis at the account level
C) Engineered estimate of cost
D) Regression analysis

Question 55

Reviewing cost behavior patterns over time from the accounting records and using that review to predict future costs best describes

A) Regression analysis
B) Scatter plots
C) Analysis at the account level
D) Two-point methods

Question 56

Which of the following cost estimation techniques makes assumptions about the data being analyzed? I. Analysis at the account level
II) Two-point method
III) Regression analysis

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 57

The high-low method is a specific application of this method of cost estimation

A) Two-point
B) Scatter plot
C) Engineered estimate of cost
D) Analysis at the account level

Question 58

Assuming that a cost is mixed and linear, and that past cost behavior is expected to continue into the future, which of the following is mostly likely the best technique for estimating future costs?

A) Engineered estimate of cost
B) Two-point method
C) Scatter plot
D) Regression analysis

Question 59

Simple regression analysis differs from multiple regression analysis based on the number of

A) Cost drivers used
B) Costs predicted
C) Data points incorporated
D) Personnel analyzing the data

Question 60

Which cost estimation technique is useful in all situations?

A) Analysis at the account level
B) Regression analysis
C) Two-point method
D) No one method is useful in all situations

Question 61

A p-value of 89% for the slope coefficient in a regression of a cost driver against a cost indicates

A) The true variable costs are statistically significantly different from zero
B) There is only an 11% chance the true variable costs are zero
C) The relationship between the cost and the cost driver is nonlinear
D) None of the above

Question 62

In a regression equation, variable costs are represented by the

A) Slope
B) Intercept
C) Adjusted R-square coefficient
D) t-statistic

Question 63

The rent on a store, where the landlord charges $1,200 per month plus a percentage of sales revenue, is a

A) Fixed cost
B) Variable cost
C) Mixed cost
D) Stepwise linear cost

Question 64

The total cost of materials, where the supplier charges $9/lb if 0-1000 pounds are purchased, $8/lb if 1001-2000 pounds are purchased and $7 if 2001 or more pounds are purchased, is a

A) Fixed cost
B) Variable cost
C) Mixed cost
D) Stepwise linear cost

Question 65

The depreciation on a factory machine is a

A) Fixed cost
B) Variable cost
C) Mixed cost
D) Stepwise linear cost

Question 66

If we are determining costs for a particular case at a law office, the cost of rent for the office would be

A) A direct cost
B) An indirect cost
C) A mixed cost
D) An irrelevant cost

Question 67

If firm A has a learning curve with 90% learning and firm B has a learning curve with 80% learning, then

A) Firm A has more experienced workers
B) Firm B will be more cost efficient over time
C) Firm A workers learn more quickly
D) Firm B has less experienced workers

Question 68

A p-value of 1% for the intercept term in a regression of a cost driver against a cost indicates

A) The true fixed costs are statistically significantly different from zero
B) There is only a 1% chance the true fixed costs are zero
C) The variable costs are immaterial in this cost function
D) Both (a) and (b)

Question 69

Which of the following statements is true?

A) Opportunity costs are never relevant for decision making
B) Discretionary costs are never relevant for decision making
C) Marginal costs are never relevant for decision making
D) Sunk costs are never relevant for decision making

Question 70

The difference between simple regression and multiple regression is that

A) Simple regression is easier to perform in Excel than multiple regression
B) Simple regression is only performed once when estimating a cost function, whereas multiple regression is performed more than once
C) Simple regression uses only one cost driver, whereas multiple regression uses more than one cost driver
D) Simple regression is for estimating only one cost, and multiple regression is for estimating more than one cost

Question 71

Which of the following statements is false?

A) A cost can be defined as a direct cost if the bookkeeping system can keep track of how much of the cost was consumed by the cost object
B) Whether a cost is direct or indirect cannot be determined until the cost object has been defined
C) If the cost object is a batch of 1000 units of production, then factory property taxes could be a direct cost if the bookkeeping system is detailed enough
D) Some indirect costs might have been considered direct costs if a company had better technology for capturing information

Question 72

Fixed costs

A) Do not vary in total within the relevant range
B) Do not vary on a per-unit basis within the relevant range
C) Vary on a per-unit basis in direct proportion to changes in the cost driver within the relevant range
D) Vary in total as the cost driver changes within the relevant range

Question 73

A high adjusted R-square for the regression of a cost against a cost driver indicates

A) The predicted linear relationship between the cost and the cost driver is probably correct
B) The relationship between the cost and the cost driver is probably linear
C) The cost driver explains a high percentage of the variation of the cost
D) The cost driver is statistically significant

Question 74

The total cost of salaries of production supervisors, where 2 supervisors are needed for each 8-hour shift, where the relevant range is 0 units to the number of units that can be produced at full capacity using 2 8-hour shifts is a

A) Fixed cost
B) Variable cost
C) Mixed cost
D) Stepwise linear cost

Question 75

Which of the following could be defined as a cost object?

A) A single unit of product in a manufacturing process
B) A batch of products in a manufacturing process
C) A business process, such as managing accounts receivable
D) All of the above

Question 76

Variable costs

A) Do not vary in total within the relevant range
B) Do not vary on a per-unit basis within the relevant range
C) Vary on a per-unit basis within the relevant range
D) Both (a) and (c)

Question 77

Which of the following is an alternative name for the cost being predicted in a regression analysis?

A) Dependent variable
B) Independent variable
C) Beta
D) Slope

Question 78

Regression analysis works best when the relationship between costs and cost drivers is

A) Positive and linear
B) Linear and direct
C) Positive and indirect
D) Positive, linear, and indirect

Question 79

A firm's production is expected to show an 85% learning rate. The first unit took 200 hours to produce. The second unit will take

A) 170 hours
B) 140 hours
C) 200 hours
D) 289 hours

Question 80

In a regression equation, fixed costs are represented by the

A) Slope
B) Intercept
C) Error term
D) Adjusted R-square coefficient