Deck 11: Cost Estimation

Question 1

Cost estimation is the process of estimating the relationship between costs and the cost drivers that cause those costs.

Answer 1

True

Question 2

In the formula, "TC = F + VX", X is considered to be the cost driver.

Answer 2

True

Question 3

A step or semifixed cost increases in a linear pattern as activity levels decrease.

Answer 3

False

Question 4

Step costs are common wherever people are hired in time increments, such as hourly, daily or monthly.

Question 5

All costs can be divided into variable and fixed costs

Question 6

In multiple regression analysis, we assume only one variable may impact the dependent variable

Question 7

A cellular telephone plan that charges $45 per month for up to 1000 minutes per month of airtime and then charges $0.50 per minute for each minute used over 1000 is an example of a step cost.

Question 8

Learning curve is the mathematical or graphic representation of the systematic relationship between the amount of experience in performing a task and the time required to perform it.

Question 9

If the learning curve for a production process is 80 percent, the time required to produce each unit is 80 percent of the time to produce the first unit.

Question 10

The learning curve formula "Y = aX raised to b"
is a linear relationship.

Question 11

In regression analysis, X is considered to be an independent variable.

Question 12

The high-low method is not considered as technically equal to the regression method.

Question 13

In the cost equation, TC = F + VX, the intercept is represented by "V".

Question 14

Multiple regression is a regression equation with more than one independent variable.

Question 15

The first step in performing multiple regression is to identify the activities that are logical cost drivers.

Question 16

The account analysis and regression approaches will cost approximately the same amount to analyze a company's costs.

Question 17

The fixed cost per unit increases as the activity level increases within the relevant range.

Question 18

Engineering estimates are cost estimates based on measurement and pricing of the work involved in the activities that go into a product.

Question 19

The cost estimation method of "statistical methods"
uses regression analysis.

Question 20

The engineering estimates method is less costly than the other cost estimation methods.

Question 21

The cost being estimated is the dependent variable in the regression analysis of cost behaviors.

Question 22

A scattergraph plots past costs against past cost-driver levels, and visually indicates differences in the relationship between costs and activity at different activity levels. It can reveal the presence of curvilinear relationships between costs and it can show any data that appear to be unusual.

Question 23

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

A) It uses two extreme data points, which may not be representative of normal conditions
B) It results in totally inaccurate cost formulas
C) It is very time consuming to apply
D) All of the above

Question 24

In the cost equation TC = F + VX, the slope is represented by which of the following?

A) TC
B) F
C) V
D) X

Question 25

In the cost formula TC = F + VX, which variable is considered to be the independent variable?

A) TC
B) F
C) V
D) X

Question 26

Which of the following cost estimation methods uses regression analysis?

A) Engineering estimates
B) Account analysis
C) Statistical methods
D) All of the above

Question 27

Which of the following statements best describes the account analysis approach to cost estimation?

A) Cost estimates are based on optimal or ideal operating conditions
B) Discernible patterns of the past are used to predict future behavior
C) Historical operating costs are plotted against some past operating activity
D) Accounting personnel must have adequate experience and good judgment

Question 28

Which of the following statements is not true regarding the scattergraph method of cost estimation?

A) It is useful in illustrating the relationship between costs and activity level
B) It points out any past data items that might be significantly out of line
C) The intercept cannot be interpreted as the fixed cost because it lies outside of the relevant range
D) The variable costs can be seen visually as the slope of the cost function

Question 29

The cost for a salesperson that is paid a flat salary of $2,000 per month plus a 3% commission on all sales is an example of what type of cost?

A) Fixed cost
B) Variable cost
C) Step cost
D) Mixed cost

Question 30

The learning curve phenomenon could apply to which of the following?

A) Painting
B) Legal work
C) Overhead costs related to labor time
D) All of the above

Question 31

Which of the following methods would be most helpful in identifying outliers?

A) Account analysis
B) Multiple regression
C) Scattergraph
D) All of the above

Question 32

In the cost estimation equation TC = F + VX, which of the variables would be considered the cost driver?

A) F
B) V
C) X
D) None of the above

Question 33

Which of the following cost estimation methods is typically more expensive to use to analyze a company's costs?

A) High-Low method
B) Account analysis
C) The costs would be relatively the same amount using each method
D) Cannot be determined

Question 34

Which of the following costs would most likely be classified as variable, assuming the account analysis approach to cost estimation is used?

A) Indirect material
B) Supervisory salaries
C) Equipment maintenance
D) Property taxes

Question 35

Which of the following would most likely increase when the activity level increases, within the relevant range?

A) Total fixed costs
B) Per unit fixed costs
C) Total variable costs
D) Per unit variable costs

Question 36

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

A) Slope of the equation
B) Activity level used to estimate the dependent variable
C) Dependent variable
D) Costs that do not vary with changes in the activity level

Question 37

Which of the following cost estimation techniques visually indicates differences in the relationship between costs and activity at different activity levels?

A) High-low method
B) Scattergraph
C) Account analysis
D) Regression analysis

Question 38

Organizations estimate costs primarily for what reason(s)?

A) To plan
B) To make decisions
C) To set standards
D) All of the above

Question 39

How would variable costs on a per unit basis be affected by a decrease in activity level, within the relevant range?

A) Increase
B) Decrease
C) Not change
D) Cannot be determined

Question 40

McNair School principal Dr. Ruth Gacoki wants to know whether the school recruitment program is successful. She used a spreadsheet to estimate the relationship between the number of advertisements and the number of phone inquiries received. Monthly data for the past two years were entered into the computer. Data includes months when no advertising was done through months with 1000 advertisements. Unfortunately, only part of the regression results printed before the computer froze. All Dr. Gacolki saw was "Intercept = 1200" R2 = .94. From that information she can conclude, with limited certainty, that:

A) For each advertisement, the school will receive 1200 more phone inquiries
B) There will be at least 1200 phone inquiries regardless of the advertisements
C) If 1,000 advertisements are placed, there will be 2130 phone inquiries
D) If 10 advertisements are placed, there will be 12,000 phone inquiries

Question 41

Processing costs in the billing department of Alfaro Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Given these data, at a budgeted level of 25,000 accounts:

A) Processing costs are expected to total $8,750
B) Fixed processing costs are expected to be $10,400
C) The variable processing costs are expected to be $0.35 per account processed
D) Processing costs are expected to total $13,000

Question 42

Using the high-low method, which of the following could be used to calculate the intercept?

A) Total cost at highest cost driver level - (Variable cost per unit times the highest level)
B) Total cost at lowest cost driver level - (Variable cost per unit times the lowest level)
C) Either of the above
D) Neither of the above

Question 43

Which of the following represent data problems when using regression or account analysis techniques?

A) Inflation
B) Outliers
C) Mismatched time periods
D) All of the above

Question 44

Which cost estimation method is based on both past and future data?

A) Engineering method
B) Account analysis method
C) Regression method
D) All of the above

Question 45

Which of the following would not be a reason that a company would use cost estimation?

A) Determining opportunities for reducing costs without reducing value to customers
B) Determining how much to pay an employee
C) Determining a pricing policy to discourage particular customers and attract others
D) All of the above

Question 46

Salaries for accounts payable clerks where one clerk can handle up to 500 accounts is an example of what type of cost?

A) Fixed cost
B) Variable cost
C) Step cost
D) Mixed cost

Question 47

Which method of cost estimation does not use the company records as its primary source of cost-activity data?

A) Engineering estimates
B) Regression analysis
C) Account analysis
D) High-low method

Question 48

The engineering method of cost estimation considers which of the following data?

A) Past data
B) Future data
C) Both of the above
D) None of the above

Question 49

The correlation coefficient that indicates the strongest linear association between two variables is:

A) -0.92
B) -0.74
C) 0.45
D) 0.74

Question 50

Use the following to answer questions:
Josh Corp. has the following sales and operating expense data for July and August:
(Hint: Use the high-low method to help you answer these questions)


-Cost A is considered to be a _____ cost.

A) Variable
B) Semi variable
C) Fixed
D) Step (semi fixed)

Question 51

Use the following to answer questions:
Josh Corp. has the following sales and operating expense data for July and August:
(Hint: Use the high-low method to help you answer these questions)


-Which of the costs is/are semi variable/mixed?

A) Cost A
B) Cost B
C) Both of the above
D) None of the above

Question 52

Use the following to answer questions:
Josh Corp. has the following sales and operating expense data for July and August:
(Hint: Use the high-low method to help you answer these questions)


- Which of the above graphs best depicts cost C?

A) 1
B) 2
C) 3
D) 4

Question 53

Use the following to answer questions:
Josh Corp. has the following sales and operating expense data for July and August:
(Hint: Use the high-low method to help you answer these questions)


-If 12,000 units are produced during December, what would be the projected total cost for Cost B during December?

A) $48,000
B) $55,000
C) $69,400
D) None of the above

Question 54

Use the following to answer questions:
Shumway Company is making plans for the introduction of a new product that it will sell for $10 per
unit. The following estimates have been made for manufacturing costs assuming 100,000 units will be
produced in the first year:
Direct materials - $180,000
Direct labor - $135,000 (the labor rate is $9 an hour for 15,000 hours)
Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on
the total production and overhead costs for the past 24 months have been analyzed using simple linear
regression. The following results were derived from the simple regression and will provide the basis for
overhead cost estimates for the new product.
Simple Regression Analysis Results
Dependent Variable - Factory overhead costs
Independent variable - Direct labor-hours
Computed values:


-What percentage of variation in the overhead costs is explained by the independent variable?

A) 9.0%
B) 65.0%
C) 90.9%
D) 95.2%

Question 55

Use the following to answer questions:
Shumway Company is making plans for the introduction of a new product that it will sell for $10 per
unit. The following estimates have been made for manufacturing costs assuming 100,000 units will be
produced in the first year:
Direct materials - $180,000
Direct labor - $135,000 (the labor rate is $9 an hour for 15,000 hours)
Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on
the total production and overhead costs for the past 24 months have been analyzed using simple linear
regression. The following results were derived from the simple regression and will provide the basis for
overhead cost estimates for the new product.
Simple Regression Analysis Results
Dependent Variable - Factory overhead costs
Independent variable - Direct labor-hours
Computed values:


-The total overhead cost for an estimated activity level of 20,000 direct labor hours would be:

A) $34,000
B) $95,500
C) $129,500
D) None of the above

Question 56

Use the following to answer questions:
Shumway Company is making plans for the introduction of a new product that it will sell for $10 per
unit. The following estimates have been made for manufacturing costs assuming 100,000 units will be
produced in the first year:
Direct materials - $180,000
Direct labor - $135,000 (the labor rate is $9 an hour for 15,000 hours)
Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on
the total production and overhead costs for the past 24 months have been analyzed using simple linear
regression. The following results were derived from the simple regression and will provide the basis for
overhead cost estimates for the new product.
Simple Regression Analysis Results
Dependent Variable - Factory overhead costs
Independent variable - Direct labor-hours
Computed values:


-What is the estimated total product cost per unit for the first year, assuming 100,000 units of the new product will be produced and sold? (Hint: 15,000 direct labor hours required).

A) $3.155
B) $5.805
C) $4.850
D) $5.165

Question 57

Leighlow Company has observed that at an activity level of 4,000 units the cost for maintenance is $30,000, and at 6,000 units the cost for maintenance is $40,000. Using the high-low method, the cost formula for maintenance is:

A) $10,000 plus $5.00 per unit
B) $8,000 plus $4.00 per unit
C) $4.67 per unit
D) $5.50 per unit

Question 58

A regression equation:

A) Estimates the independent variable
B) Is based on objective and constraint functions
C) Encompasses factors outside the relevant range
D) Estimates the dependent variable

Question 59

A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 40 labor hours to complete. What is the cumulative average time per unit after four units are completed?

A) 32.0 hours
B) 32.4 hours
C) 36.0 hours
D) 40.0 hours

Question 60

Use the following to answer questions:
YinLee Corp. is looking to introduce a new product with an 80% cumulative learning curve for production batches of 500 units. The variable production and selling costs, all subject to learning, are $20 per unit for the first 1,000-unit batch. There are $15,000 in fixed costs not subject to learning.

-What is the average cost per unit at a production level of 2,000 units?

A) $18.20
B) $23.50
C) $26.40
D) $32.60

Question 61

Use the following to answer questions:
YinLee Corp. is looking to introduce a new product with an 80% cumulative learning curve for production batches of 500 units. The variable production and selling costs, all subject to learning, are $20 per unit for the first 1,000-unit batch. There are $15,000 in fixed costs not subject to learning.

-If the YinLee Company can sell all it produces for $20 per unit, what is the profit or loss at a production and sales level of 4,000 units?

A) No profit or loss
B) $13,800 profit
C) $24,040 profit
D) $10,350 loss

Question 62

Ricardo Industries is preparing a bid for a special project requiring the production of 35,000 units. The engineering personnel have advised that the units can be produced in groups with the first group consisting of 1,000 units. A labor time needed per unit will be progressively smaller by a constant percentage rate as experience is gained in the production process. The method that would best estimate Ricardo's total cost for the project is:

A) Learning curve analysis
B) Multiple regression analysis
C) Account analysis
D) Engineering estimates analysis. (CMA adapted)

Question 63

Use the following to answer questions:
(CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows:

t-table for Single-Tailed Values of t


-If this company uses the high-low method of estimating the cost equation, the relationship between the hours of activity and the total maintenance costs would be:

A) TC = $3,600 + $7.50 per hour
B) TC = $570 + $7.50 per hour
C) TC = $3,600 + $9.00 per hour
D) TC = $570 + $9.00 per hour

Question 64

Use the following to answer questions:
(CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows:

t-table for Single-Tailed Values of t


-Based upon the information from the regression analysis, the total maintenance costs budgeted for 420 hours of activity would be (rounded to the nearest whole dollar):

A) $3,746
B) $3,780
C) $3,797
D) $3,461

Question 65

Use the following to answer questions:
(CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows:

t-table for Single-Tailed Values of t


-The percent of the change in the maintenance costs that can be explained by a change in the activity hours is:

A) 68.46%
B) 12.12%
C) 34.47%
D) 99.72%

Question 66

Use the following to answer questions:
(CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows:

t-table for Single-Tailed Values of t


-The Salem Company can be 95% confident that the true value of the variable maintenance cost per hour will be within which of the following ranges?

A) $6.29 - $8.29
B) $7.02 - $7.56
C) $7.07 - $7.51
D) D$7.17 - $7.41

Question 67

Use the following to answer questions:
Controller Vicky Menendez would like to predict the costs of producing chocolate candy bars for October. She reviews the cost for the last 9 months the results are presented below.


-Using the High Low Method, the fixed cost (rounded to the nearest dollar) she should expect for October are:

A) $(466)
B) $540
C) $603
D) 1,415

Question 68

Use the following to answer questions:
Controller Vicky Menendez would like to predict the costs of producing chocolate candy bars for October. She reviews the cost for the last 9 months the results are presented below.


-If she expects to product 1,575 bars in October and uses the High Low method to predict cost, she should expect variable costs (rounded to the nearest dollar) of:

A) $3,898
B) $1,417
C) $1,575
D) $2,914

Question 69

In the learning curve formula "Y = aXb", which component represents the number of labor hours required for the first cost-driver unit.

A) Y
B) A
C) X
D) B

Question 70

The regression results for Cruz Catering give the following results:
Total costs = $3,000 + $1.90 meals + $15 catering jobs + $100 new products + $100 new customers. What are the estimated total costs in a month in which there are 3,000 meals sold, 20 catering jobs, 2 new products and 4 new customers?

A) $4,167
B) $9,200
C) $9,600
D) $10,640

Question 71

In which cost estimation method would costs most likely be broken into unit-level, batch-level, product-level and facility-level costs?

A) Scattergraph method
B) Account analysis method
C) Regression method
D) Engineering estimates method

Question 72

A regression analysis of total labor costs (y) based upon the number of visitors (x) for the Wacky World Theme Park, yielded a coefficient of $2.75. The t statistic was t=6.141 and the R2=.921. Based upon those results, we can conclude

A) The cost driver rate is $2.75 and statistically significant
B) Visitors cause all labor costs
C) The relationship between the t-statistic and the R2 is weak
D) All of the above

Question 73

Engineers and accountants working together with present and future cost information predict the following cost information for the Chocolate Candy Bar Company's new HiCalcium Bar
? The cost of materials for each bar is $0.58
? The labor cost for each batch of bars is $12.50
? The Rate per New Customer is expected to be $185 per bar customer
? New Product Management Cost will be $840 for the product
? The associated Facility costs will be $1490
Assuming 5000 bars are produced in 100 batches for 80 new wholesale customers. Based upon the engineering analysis, estimated total cost for this new product isare

A) $84,280
B) $18,045
C) $17,920
D) $16,555

Question 74

An amusement park estimates average costs per day. Which of the following is true?

A) Average cost per day considers the relationship between labor costs and other variables such as temperature
B) Average cost per day can be useful in estimating labor costs
C) Average cost per day would include a component of variable labor costs but not fixed labor cost
D) All of the above

Question 75

The Hernandez Haunted House wants to predict Total Cost as a function of the number of visitors. They will ultimately use this information in pricing.
There results show the following information

1) Using the high-low method, determine the "TC=F + VX"
cost formula for total costs. What would you predict costs to be in October if we expect 265,000 visitors
2) Using linear regression, determine the "TC=F + VX"
cost formula for total costs. What would you predict costs to be in October if we expect 265,000275,000 visitors

Question 76

Information regarding processing costs for Holcomb Corporation for the first six months of the year is as follows:
Required:
1) Using the high-low method, determine the "TC = F + VX"
cost formula for processing costs.
2) Estimate the total processing costs if 75 orders are processed during July.
3) What is the one major limitation of the high-low method compared to the use of simple regression?

Question 77

Petruska Corp. produces a product that is very machine intensive. They have determined that machine hours are a likely explanation for manufacturing overhead costs. Therefore, machine hours is the independent variable and manufacturing overhead is the dependent variable. The results of their regression analysis produced the following:

Petruska is planning on operating at a level of 15,000 machine hours for the year. Required:
1) What is the "TC = F + VX"
cost formula for manufacturing overhead?
2) Based on the cost equation in part 1, compute the estimated overhead cost that Petruska could expect for the coming year.
3) What does the R-squared indicate? Would Petruska likely benefit from going to multiple regression analysis to determine their cost formula for manufacturing overhead?

Question 78

Mundy Missiles Corp. is negotiating with the government for the production of cruise missiles. The government is considering purchasing either eight missiles for $2,500,000 or sixteen missiles for $5,000,000. Mundy requires a margin of 30 percent to cover administrative costs, research and development, and to make a profit. Mundy has started a chart for this product assuming the production costs are subject to an 80 percent cumulative learning curve.
83.
1) Complete the chart (items a - f) by filling in the cost amounts for volumes 4, 8, and 16 units.
2) Should Mundy sell eight units? Sixteen units?

Question 79

Strain Corporation currently has a plant capacity (i.e., relevant range) to produce 5,000 units per month. Their accounting department has used regression analysis to determine their cost structure and this analysis has resulted in the following:
Total costs = $3,582 + $4.26X.
Required:
1) What are the estimated total costs for a month in which 4,000 units will be produced?
2) What are the estimated fixed costs for a month in which 4,000 units will be produced?
3) What are the estimated total variable costs for a month in which 4,000 units will be produced?
4) During the month of December, Strain estimates that they will need to produce 6,000 units to meet customer demand. What problems might result from trying to predict the total cost incurred using the regression equation listed above?

Question 80

Stringham Catering has determined the following regression equation to estimate their costs: Total costs =$4,333 + $2.53 Meals + $37.90 Jobs + $219.87 New Products +
$393.91 New Customers Required:
What are the estimated total costs in a month in where there are: 3,721 meals sold
40 jobs
3 new products
3 new customers