Deck 6: Activity Analysis, Cost Behaviour, and Cost Estimation

Question 1

Montgomery Company has a variable selling cost. If sales volume increases, how will the total variable cost and the variable cost per unit behave? $\begin{array} { | l | l | l | } \hline & \text { Total Variable Cost } & \underline { \text { Variable Cost Per Unit } } \\\hline 1 & \text { Increase } & \text { Increase } \\\hline 2 & \text { Increase } & \text { Remain constant } \\\hline 3 & \text { Increase } & \text { Decrease } \\\hline 4 & \text { Remain constant } & \text { Decrease } \\\hline 5 & \text { Decrease } & \text { Increase } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Answer 1

2

Question 2

What type of cost exhibits the behaviour that follows? $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Manufacturing } \\\text { Volume } \\\text { (Units) }\end{array} & \begin{array} { l } \text { Total } \\\text { Cost }\end{array} & \begin{array} { c } \text { Cost } \\\text { Per Unit }\end{array} \\\hline 50.000 &\$150,000 & \$ 3.00\\\hline 80.000 & 150,000 & 1.88 \\\hline\end{array}$

A)Variable cost.
B)Fixed cost.
C)Curvilinear cost.
D)Step-variable cost.
E)Mixed cost.

Answer 2

Fixed cost.

Question 3

Within the relevant range, a curvilinear cost function can sometimes be graphed as a:

A)straight line.
B)jagged line.
C)vertical line.
D)curved line.
E)horizontal line.

Answer 3

A

Question 4

Costs that remain the same over a wide range of activity, but jump to a different amount for activity levels outside that range, are termed as:

A)step-fixed costs.
B)step-variable costs.
C)semi-variable costs.
D)curvilinear costs.
E)mixed costs.

Question 5

Which of the following costs changes in total in direct proportion to a change in the activity level?

A)Variable cost.
B)Fixed cost.
C)Semi-variable cost.
D)Step-variable cost.
E)Step-fixed cost.

Question 6

A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parry anticipate at a volume of 85,000 units?

A)$680,000.
B)$1,020,000.
C)$1,040,000.
D)$1,060,000.
E)$1,080,000.

Question 7

Norman Company pays a sales commission of 5% on each unit sold. If a graph is prepared, with the vertical axis representing the per-unit cost and the horizontal axis representing the number of units sold, how would a line that depicts sales commissions per unit be drawn?

A)As a straight diagonal line, sloping upward to the right.
B)As a straight diagonal line, sloping downward to the right.
C)As a horizontal line.
D)As a vertical line.
E)As a curvilinear line.

Question 8

Each of Acorn Manufacturing's production managers can oversee 80,000 machine hours of manufacturing activity. The annual salary of a production manager is $55,000. If Acorn has 60,000 hours of manufacturing activity, one manager is needed; for 100,000 hours, two managers are needed; for 150,000 hours, three managers are needed; and so forth. Acorn's salary cost can best be described as a:

A)variable cost.
B)curvilinear cost.
C)step-variable cost.
D)fixed cost.
E)step-fixed cost.

Question 9

Within the relevant range of activity, costs:

A)can be estimated with reasonable accuracy.
B)can be expected to change radically.
C)exhibit decreasing marginal cost patterns.
D)exhibit increasing marginal cost patterns.
E)cannot be estimated satisfactorily.

Question 10

Miles Corporation has a fixed utilities cost. If sales volume increases, how will the total fixed cost and the fixed cost per unit behave? $\begin{array} { | r | l | l | } \hline & \text { Total Fixed Cost } & \text { Fixed Cost Per Unit } \\\hline \mathbf { 1 } & \text { Increase } & \text { Increase } \\\hline \mathbf { 2 } & \text { Increase } & \text { Remain Constant } \\\hline \mathbf { 3 } & \text { Increase } & \text { Decrease } \\\hline \mathbf { 4 } & \text { Remain Constant } & \text { Decrease } \\\hline \mathbf { 5 } & \text { Decrease } & \text { Increase } \\\hline\end{array}$

A)1.
B)2.
C)3.
D)4.
E)5.

Question 11

Which of the following choices denotes the typical cost behaviour of advertising and sales commissions? $\begin{array} { | l | l | l | l | } \hline & \text { Advertising } & &\text { Sales } \\&&&\text { Commissions }\\\hline 1 & \text { Variable } & & \text { Variable } \\\hline 2 & \text { Variable } & & \text { liixed } \\\hline 3 & \text { lixed } & & \text { Variable } \\\hline 4 & \text { Fixed } & & \text { Fixed } \\\hline 5 & \text { Semi-variable } & & \text { Variable } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 12

The relevant range is that range of activity:

A)where a company achieves its maximum efficiency.
B)where units produced equal units sold.
C)where management expects the company to operate.
D)where the company will earn a profit.
E)where expected results are abnormally high.

Question 13

What type of cost exhibits the behaviour that follows? $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Manufacturing } \\\text { Volume } \\\text { (Units) }\end{array} & \text { Cost Per Unit } \\\hline 50.000 & \$ 1.95 \\\hline 70.000 & 1.95 \\\hline\end{array}$

A)Variable cost.
B)Fixed cost.
C)Curvilinear cost.
D)Discretionary fixed cost.
E)Step-fixed cost.

Question 14

Straight-line depreciation is a typical example of a:

A)variable cost.
B)step-variable cost.
C)fixed cost.
D)mixed cost.
E)curvilinear cost.

Question 15

Rideau Manufacturing Company has only variable costs and fixed costs. A review of the company's records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $800,000 and the cost per unit manufactured was $11. On the basis of this information, how much total cost would Rideau anticipate at an activity level of 202,000 units?

A)$800,000.
B)$1,608,000.
C)$2,200,000.
D)$2,214,000.
E)$2,222,000.

Question 16

Lincoln Incorporated observed that when 30,000 units were sold, a particular cost amounted to $90,000, or $3.00 per unit. When the sales volume increased by 20%, the cost also increased to $108,000(i.e., $3.00 per unit). The cost that Lincoln is studying can best be described as a:

A)variable cost.
B)fixed cost.
C)mixed cost.
D)discretionary fixed cost.
E)step-fixed cost.

Question 17

The relationship between cost and activity is termed as:

A)cost estimation.
B)cost prediction.
C)cost behaviour.
D)cost analysis.
E)cost approximation.

Question 18

A company observed a decrease in the cost per unit. All other things being equal, which of the following is probably true?

A)The company is studying a variable cost, and total volume has increased.
B)The company is studying a variable cost, and total volume has decreased.
C)The company is studying a fixed cost, and total volume has increased.
D)The company is studying a fixed cost, and total volume has decreased.
E)The company is studying a fixed cost, and total volume has remained constant.

Question 19

Van Dijk Incorporated recently produced and sold 200,000 units. Fixed costs at this level of activity amounted to $60,000; variable costs were $100,000. How much total cost would the company anticipate if during the next period it produced and sold 202,000 units?

A)$60,000.
B)$160,000.
C)$160,600.
D)$464,000.
E)$465,000.

Question 20

Which of the following costs exhibits both decreasing and increasing marginal costs over a specific range of activity?

A)Semi-variable cost.
B)Curvilinear cost.
C)Step-fixed cost.
D)Step-variable cost.
E)Fixed cost.

Question 21

Costs that result from a company's ownership or use of facilities and its basic organizational structure are termed as:

A)discretionary costs.
B)committed fixed costs.
C)discretionary variable costs.
D)curvilinear costs.
E)engineered costs.

Question 22

A variable cost that has a definitive physical relationship to the activity measure is called a(n):

A)discretionary cost.
B)engineered cost.
C)managed cost.
D)programmed cost.
E)committed cost.

Question 23

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. $\begin{array}{|l|l|l|l|l|l|l|l|}\hline&\text { Type A}&&\text { Type B}&&\text { Type C}&&\text { Total } \\\hline 5,000 \text { units } & \$ 4 & & \$ 9 && \$ 4 & & \$ 17 \\\hline 7.500 \text { units } & \$ 4 && \$ 6 & &\$ 3 & & \$ 13 \\\hline\end{array}$ The cost types shown above are identified by behaviour as: $\begin{array}{l}\begin{array}{|l|l}\hline&\text { Type A }\\\hline 1 & \text { Fixed } \\\hline 2 & \text { Fixcd } \\\hline 3 & \text { Variable } \\\hline 4 & \text { Variable } \\\hline 5 & \text { Semivariable } \\\hline\end{array}\begin{array}{|l|l}\hline&{\text { Type B }} \\\hline &\text { Variable } \\\hline & \text { Semivariable } \\\hline &\text { Scmivariable } \\\hline &\text { Fixed } \\\hline & \text { Variable } \\\hline\end{array}\begin{array}{|l|l|}\hline&{\text { Type C }} \\\hline &\text { Semivariable } \\\hline &\text { Variable } \\\hline & \text { Fixed } \\\hline &\text { Semivariable } \\\hline &\text { Fixed }\\\hline\end{array}\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 24

Sweetland Company, which uses the high-low method to analyze cost behaviour, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 700 machine hours to a high of 1,200 machine hours, with the following data being available for the first six months of the year: $\begin{array} { | l | r | r | } \hline { \text { Month } } & \text { Utilities } & \text { Machine Hours } \\\hline \text { January } & \$ 8,900 & 800 \\\text { February } & \$ 8,560 & 720 \\\text { March } & \$ 9,150 & \$ 10 \\\text { April } & \$ 9,560 & 920 \\\text { May } & \$ 9,825 & 950 \\\text { June } & \$ 9,350 & 900 \\\hline\end{array}$ The variable utilities cost per machine hour is:

A)$0.18.
B)$1.33.
C)$2.53.
D)$2.94.
E)$5.50.

Question 25

Song Inc., uses the high-low method to analyze cost behaviour. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which is still within the relevant range, the total maintenance costs averaged $30.40 per machine hour. On the basis of this information, the variable cost per machine hour is:

A)$8.40.
B)$22.00.
C)$25.00.
D)$30.40.
E)$33.40.

Question 26

Sweetland Company, which uses the high-low method to analyze cost behaviour, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 700 machine hours to a high of 1,200 machine hours, with the following data being available for the first six months of the year: $\begin{array} { | l | r | r | } \hline{ \text { Month } } & \text { Utilities } & \text { Machine Hours } \\\hline \text { January } & \$ 8,900 & 800 \\\text { February } & \$ 8,560 & 720 \\\text { March } & \$ 9,150 & \$ 10 \\\text { April } & \$ 9,560 & 920 \\\text { May } & \$ 9,825 & 950 \\\text { June } & \$ 9,350 & 900 \\\hline\end{array}$ Using the high-low method, the utilities cost associated with 980 machine hours would be:

A)$9,900.
B)$12,422.
C)$12,812.
D)$13,952.
E)$15,044.

Question 27

Sweetland Company, which uses the high-low method to analyze cost behaviour, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 700 machine hours to a high of 1,200 machine hours, with the following data being available for the first six months of the year: $\begin{array} { | l | r | r | } \hline { \text { Month } } & \text { Utilities } & \text { Machine Hours } \\\hline \text { January } & \$ 8,900 & 800 \\\text { February } & \$ 8,560 & 720 \\\text { March } & \$ 9,150 & \$ 10 \\\text { April } & \$ 9,560 & 920 \\\text { May } & \$ 9,825 & 950 \\\text { June } & \$ 9,350 & 900 \\\hline\end{array}$ The fixed utilities cost per month is:

A)$4,600.
B)$7,032.
C)$7,422.
D)$8,562.
E)$9,564.

Question 28

Amounts spent for charitable contributions are an example of a(n):

A)committed cost.
B)mixed cost.
C)discretionary cost.
D)curvilinear cost.
E)engineered cost.

Question 29

The high-low method and the least-squares regression method are used by accountants to:

A)evaluate divisional managers for purposes of promotions.
B)choose among alternative courses of action.
C)maximize output.
D)estimate costs.
E)control operations.

Question 30

Zurbrigg Copy Solutions presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Zurbrigg made 9,000 copies and paid a total of $560 in July; in November, the firm paid $480 for 7,000 copies. The company uses the high-low method to analyze costs. Zurbrigg's monthly fixed fee is:

A)$200.
B)$461.
C)$480.
D)$515.
E)$560

Question 31

Which of the following methods of cost estimation relies on only two data points?

A)The least-squares regression.
B)The high-low method.
C)The visual-fit method.
D)The account analysis.
E)The multiple regression.

Question 32

Research and development costs are an example of a(n):

A)committed cost.
B)differential cost.
C)discretionary cost.
D)curvilinear cost.
E)engineered cost.

Question 33

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. $\begin{array}{|l|l|l|l|l|l|l|l|}\hline&\text { Type A}&&\text { Type B}&&\text { Type C}&&\text { Total } \\\hline 5,000 \text { units } & \$ 4 & & \$ 9 && \$ 4 & & \$ 17 \\\hline 7.500 \text { units } & \$ 4 && \$ 6 & &\$ 3 & & \$ 13 \\\hline\end{array}$ If Yang produces 10,000 units, the total cost would be:

A)$90,000.
B)$105,000.
C)$100,000.
D)$110,000.
E)$125,000.

Question 34

Zurbrigg Copy Solutions presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Zurbrigg made 9,000 copies and paid a total of $560 in July; in November, the firm paid $480 for 7,000 copies. The company uses the high-low method to analyze costs. Zurbrigg's variable cost per copy is:

A)$0.005.
B)$0.011.
C)$0.040.
D)$0.065.
E)$0.52.

Question 35

The non-statistical method of cost estimation that calls for the creation of a scatter diagram is the:

A)least-squares regression method.
B)high-low method.
C)visual-fit method.
D)account analysis method.
E)multiple regression method.

Question 36

The following data relate to the Lyle Company for May and August of the current year: $\begin{array} { | l | c | c | c | } \hline & \text { May } & & \text { August } \\\hline \text { Maintenance hours } & 25,000 & & 29.000 \\\hline \text { Maintenance cost } & \$ 1.175,000 & & \$ 1,247,000 \\\hline\end{array}$ May and August were the lowest and highest activity levels, and Lyle uses the high-low method to analyze cost behaviour. Which of the following statements is true?

A)The variable maintenance cost is $43 per hour.
B)The variable maintenance cost is $45 per hour.
C)The variable maintenance cost is $47 per hour.
D)The fixed maintenance cost is $1,725,000 per month.
E)The variable maintenance cost is $18 per hour and the fixed maintenance cost is $725,000.

Question 37

Northridge Inc., uses the high-low method to analyze cost behaviour. The company observed that at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine hours, which is still within the relevant range, the total maintenance costs averaged $9.75 per machine hour. On the basis of this information, the company's fixed maintenance costs are:

A)$20,000.
B)$24,000.
C)$90,000.
D)$210,000.
E)$234,000.

Question 38

Which of the following would not typically be classified as a discretionary cost?

A)Equipment depreciation.
B)Management development programs.
C)Advertising and promotion.
D)Research and development costs.
E)Contributions to charitable organizations.

Question 39

Which of the following techniques is not used to analyze cost behaviour?

A)The least-squares regression method.
B)The high-low method.
C)The visual-fit method.
D)The linear programming method.
E)The multiple regression method.

Question 40

Which type of fixed cost (1) tends to be more long-term in nature and (2) can be cut back more easily in bad economic times without doing serious harm to organizational goals and objectives? $\begin{array} { | l | c | c | } \hline & \text { Long Term in } & \text { Can be Cut Back More Easily In } \\&\text { Nature }&\text { Bad Ficonomic Times }\\\hline 1 & \text { Committed } & \text { Committed } \\\hline 2 & \text { Committed } & \text { Discretionary } \\\hline 3 & \text { Discretionary } & \text { Committed } \\\hline 4 & \text { Discretionary } & \text { Discretionary } \\\hline 5 & \text { Committed } & \text { No difference between committed and discretionary cost } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 41

Package Express Inc. operates a small package delivery service in the Jacksonville suburbs. If the company uses a regression equation to forecast total operating costs, the coefficient of the equation's independent variable would correspond to the:

A)variable operating cost per delivery.
B)fixed operating costs.
C)number of deliveries.
D)total variable operating costs.
E)total operating costs.

Question 42

Smith Products has determined that the number of machine hours worked (MH) drives the amount of manufacturing overhead incurred (MOH). On the basis of this relationship, a staff analyst has constructed the following regression equation: MOH = $240,000 + 8MH. Which of the choices correctly depicts the nature of Smith's variables? $\begin{array} { | l | l | l | l | } \hline & \text { Dependent } & & \text { Independent } \\\hline 1 & \mathrm { MOH } & & \mathrm { MOH } \\\hline 2 & \mathrm { MOH } & & \mathrm { MH } \\\hline 3 & \mathrm { MH } & & \mathrm { MOH } \\\hline 4 & \mathrm { MH } & & \mathrm { MH } \\\hline 5 & 8 & & 240.000 \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 43

A high R²measure in regression analysis is preferred because:

A)it indicates a good fit of the regression line through the data points.
B)it shows that a great deal of the change in the dependent variable is explained by change in the coefficient of determination.
C)it means that the independent variable is a good predictor of the outliers.
D)it means that the cost analyst can be relatively confident in his or her identification of the outliers.
E)it means that the dependent variable is based on mismatched time periods.

Question 44

Resource Consulting is studying the costs of several clients, and has found graphs of cost behaviour patterns would appear as follows:
1. A straight line that gradually slopes upward to the right
2. A curvilinear line that gradually slopes upward to the right
3. A straight line that is parallel to the graph's horizontal axis
4. A straight line that gradually slopes downward to the right
5. A curvilinear line that gradually slopes downward to the right
6. A straight line that gradually slopes upward to the right and then, at a specific point, flattens out to run parallel to the horizontal axis
7. A series of straight lines that appear to resemble a set of steps
8. A straight line that runs parallel to the graph's horizontal axis and then, at a specific point, drops to a lower level
Unless told otherwise, assume that the horizontal axis represents total activity and the vertical axis represents total cost.
Required:
For items A-F below, indicate the number of the graph that best represents the cost behaviour pattern described. Note: Graphs can be used more than once, and not all graphs need be used.

Question 45

George Henry Corporation has a machining capacity of 300,000 hours per year. Utilization of capacity is normally 60%; it has been as low as 25% and as high as 75%. An analysis of the accounting records revealed the following selected costs: George Henry uses the high-low method to analyze cost behaviour.
Required:
A. Classify each of the costs as being either variable, fixed, or semi-variable.
B. Calculate amounts for the two unknowns in the preceding table.
C. Calculate the total amount that George Henry would expect at a 60% utilization rate for Cost A, Cost B, and Cost C.
D. Develop an equation that George Henry can use to predict total cost for any level of hours within its range of operation.

Question 46

Sugarsweet Confections Inc. produces one of the best brands of all natural jam in Ontario. The following information was obtained through an analysis of the accounting records:
1. Raw materials and packaging (strawberries and sugar) cost the company $5.00 per jar produced.
2. Compensation of production employees is $6.00 per jar produced.
3. Supervisory salaries total $33,000 per month.
4. The company incurs utility costs of $8,000 per month plus $0.50 per jar produced.
5. Insurance and property taxes average $7,000 per month.
Required:
A. Classify each cost as variable, fixed, or semi-variable.
B. Write a formula to express the behaviour of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of jam produced.)

Question 47

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. $\begin{array}{|l|l|l|l|l|l|l|l|}\hline&\text { Type A}&&\text { Type B}&&\text { Type C}&&\text { Total } \\\hline 5,000 \text { units } & \$ 4 & & \$ 9 && \$ 4 & & \$ 17 \\\hline 7.500 \text { units } & \$ 4 && \$ 6 & &\$ 3 & & \$ 13 \\\hline\end{array}$ The cost formula that expresses the behaviour of Yang's total cost is:

A)Y = $0 + $17X.
B)Y = $20,000 + $13X.
C)Y = $40,000 + $9X.
D)Y = $45,000 + $4X.
E)Y = $60,000 + $5X.

Question 48

Dollah Corporation is studying its marketing cost and sales volume, and has generated the following information by use of a scatter diagram and a least-squares regression analysis: $\begin{array} { | l | r | r | } \hline & \text { Scatter Diagram } & \text { Regression Analysis } \\\hline \text { Vaiable cost per unit sold } & \$ 7.50 & \$ 7.80 \\\text { Total monthly fixed cost } & \$ 55,000 & \$ 52,500 \\\hline\end{array}$ Dollah is now preparing an estimate for monthly sales of 20,000 units. On the basis of the data presented, compute the most accurate sales forecast possible.

A)$156,000.
B)$202,500.
C)$205,000.
D)$208,500.
E)$211,000.

Question 49

The following data were taken from the accounting records of Guild Corporation:
October's costs consisted of machine supplies ($190,000), property taxes ($30,000), and plant maintenance ($1,080,000). These costs exhibit the following respective behaviour: variable, fixed, and semi-variable.
Required:
A. Determine the machine supplies and property taxes for August. Round all calculations to two decimal places.
B. By using the high-low method, analyze Guild's plant maintenance cost and calculate the monthly fixed portion and the variable cost per machine hour.
C. Assume that present cost behaviour patterns continue into future months. Estimate the total amount of manufacturing overhead Guild can expect in December if 56,000 machine hours are worked.

Question 50

Consider the graphs that follow (the horizontal axis represents activity; the vertical axis represents total dollars). Required:
For items A-I that follow, choose the graph that best represents the cost behaviour pattern described. Note: Graphs can be used more than once.
A. Straight-line depreciation on machinery.
B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a flight; it then drops to $600 per hour.
C. The wages of table service personnel in a restaurant. The employees are part-time workers who can be called upon for as little as 4 hours at a time.
D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made during the month.
E. The cost of tires used in the production of trucks.
Up to 20,000 kilowatt hours (KWH): $4,000
Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

Question 51

Walnut Corporation operates a small medical lab in Mississauga, one that conducts minor medical procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid by the month.
Required:
A. If the lab's patient count increases by, say, 15%, will the lab's total operating costs increase by 15%? Explain.
A. No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office manager are step-fixed in nature, meaning that a 15% hike in client load will likely do nothing to these expenditures. A possibility exists, though, that an increase in patient load could create the need for an added technician.
B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the original facility will continue with existing personnel and not implement a job-sharing arrangement through a cutback in operating hours.
B. Walnut is considering opening an additional lab in a new medical building in Milton. What will likely happen to the lab's level of fixed cost incurrence? Why?
C. Possible methods include account classification, visual fit, high-low, and least-squares regression.

Question 52

Consider the six costs that follow.
1. Advertising and promotion costs of a do-it-yourself retailer
2. Surgical supplies used in a hospital's operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimum-use fee, for a small business
5. Annual business licensing fee paid by a daycare centre
6. Truck fuel consumed by a road construction company
Required:
A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semi-variable.
B. Briefly describe the behaviour of a per-unit variable cost as activity changes.
C. What elements are present in a semi-variable cost that cause it to behave in a semivariable manner?
D. Generally speaking, does management have more flexibility when dealing with committed fixed costs or discretionary fixed costs?

Question 53

Compare and contrast the following types of costs: (1) variable and step-variable and (2) fixed and step-fixed.

Question 54

Which of the following is not an issue in the collection of data for cost estimation?

A)Outliers.
B)Missing data.
C)Mismatched time periods.
D)Inflation.
E)The use of predictions using the multiple regression method.

Question 55

A staff assistant at Cornwall Corporation recently determined that the first four units completed in a new manufacturing process took 800 hours to complete, or an average of 200 hours per unit. The assistant also found that when the cumulative output produced doubles, the average labour time declines by 20%. On the basis of this information, how many total hours would Cornwall use if it produces 16 units?

A)128.
B)160.
C)1,280.
D)2,048.
E)2,880.

Question 56

Checkers Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?

A)Total manufacturing overhead is represented by the variable "X."
B)"Y" is commonly known as the independent variable.
C)"X" is commonly known as the dependent variable.
D)"X" represents total manufacturing overhead.
E)The company anticipates $495,000 of fixed manufacturing overhead.

Question 57

Waller Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Waller should use:

A)simple regression.
B)multiple regression.
C)a scatter diagram.
D)complex regression.
E)the high-low method.

Question 58

In regression analysis, the variable -cost component that is being predicted is known as the:

A)independent variable.
B)dependent variable.
C)explanatory variable.
D)interdependent variable.
E)functional variable.

Question 59

Define the term "relevant range" and explain its importance in understanding cost behaviour.

Question 60

Around Town Incorporated operates a small package delivery service in the Chicago suburbs. If the company uses a regression equation to forecast total operating costs, the equation's intercept would correspond to the:

A)variable operating cost per delivery.
B)fixed operating costs.
C)number of deliveries.
D)total variable operating costs.
E)total operating costs.

Question 61

Distinguish between least-squares regression and multiple regression as cost estimation methods.

Question 62

Charger Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semi-variable. The company uses the high-low method and extracted the following data from its accounting records:
▪ At 180,000 hours of activity, Cost A totaled $2,610,000.
▪ At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point, Cost C's fixed portion amounted to $1.75 per hour.
▪ At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.
Required:
A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.
B. Compute Cost C (total) at 160,000 hours of activity.
C. Compute Cost B (total) at 160,000 hours of activity.

Question 63

SouthlakeMedical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $40 per patient day, annual fixed costs of $510,000, and semi-variable costs, which displayed the following behaviour at the "peak" and "valley" levels of activity.
March (2,500 patient days): $258,400
July (3,000 patient days): $278,900
Required:
A. Calculate the total cost for an upcoming month (3,200 patient days) if current cost behaviour patterns continue. Southlake uses the high-low method to analyze cost behaviour.
B. There is a high probability that Southlake's volume will increase in forthcoming months as patients take advantage of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 3,200 patient days be employed to estimate the costs for, say, 5,200 patient days? Why or why not?

Question 64

Ballard Manufacturing Inc. uses least-squares regression to analyze a variety of operating costs. A staff assistant determined that monthly machine hours (MH) have a strong cause-and-effect relationship with maintenance costs, and generated the following statistics:
Intercept: $200,000
b coefficient: $5.20
Total machine hours for the year: 40,500
Required:
A. Construct the company's regression equation.
B. Based on your answer in part "A," identify Wellington's dependent variable and independent variable.
C. What does the b coefficient really represent?
D. Predict the company's maintenance cost in a month when 4,000 machine hours are worked.

Question 65

Differentiate between committed costs and discretionary costs. Be sure to present two examples of each and explain which of the two cost types would likely be cut should a company encounter financial difficulties.

Question 66

Hebert Corporation extracts ore for eight different companies in Quebec. The firm anticipates variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred evenly throughout the year. These costs exclude the following semi-variable costs, which are expected to total the amounts shown for the high and low points of ore extraction activity:
March (850 tons): $39,900.
August (1,300 tons): $46,200
Hebert uses the high-low method to analyze cost behaviour.
Required:
A. Calculate the semi-variable cost for an upcoming month when 875 tons will be extracted.
B. Calculate the total cost for that same month.
C. Hebert uses Charron Trucking Limited to haul extracted ore. Charron's monthly charges are as follows. 1. From a cost behaviour perspective, what type of cost is this?
If Hebert plans to extract 875 tons, is the company being very "cost effective" with respect to Charron's billing rates? Briefly discuss.

Question 67

Managers in the Priming Department have been studying overhead cost and the relationship with machine hours. Data from the most recent 12 months follow. The manager of the department has requested a regression analysis of these two variables (labeled No. 1 below). However, the staff person performing the analysis decided to run another regression that excluded February (labeled No. 2). She observed that the volume of activity was very low for that month because of two factors: a severe flu outbreak and an electrical fire that disrupted operations for about 10 working days. Required:
A. Prepare an overhead cost breakdown by using the high-low method. The analysis should be useful in helping to predict variable and fixed costs under normal operating conditions.
B. Prepare an estimate of overhead cost for a volume of 3,100 machine hours by using regression no. 1.
C. You now have the ability to analyze three cost estimates from the high-low data in part (a) and the two regression equations. Which one do you feel would provide the best estimate? Explain the factors that support your choice. Note: Do not calculate an overhead cost estimate with regression no. 2.

Question 68

(p. 218 and 223.)
Shortly after being hired as an analyst with Hudson Rentals, which is located in eastern Quebec, Luis Gomez was asked to prepare a report that focused on the company's order processing costs-a cost driven largely by the number of rental invoices written. Luis knew that he could use several different tools to analyze cost behaviour, including scatter diagrams, least-squares regression, and the high-low method. In addition, he knew that he could present the results of his analysis in the form of algebraic equations. Those equations follow.
Scatter diagram: OP = $56,000 + $6.80RI
Least-squares regression: OP = $59,000 + $6.75RI
High-low method: OP = $53,500 + $7.25RI
where: OP = total order processing costs and RI = number of rental invoices written
Luis had analyzed data over the past 12 months and built equations based on these data, purposely including the slowest month of the year and the busiest month so that things would "tend to even out." He observed that February was especially slow because of a paralyzing blizzard across the entire province, one that forced the company to close for four days.
Required:
A. Will scatter diagrams, least-squares regression, and the high-low method normally result in the same equation? Why?
B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures represent.
C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Hudson expects to write 2,500 rental invoices.
D. Did Luiserr in constructing the equations on data of the past 12 months? Briefly discuss. If "yes," determine which of the three tools is likely to be affected the most and explain why.

Question 69

North Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year:
Direct material: $6,000,000
Direct labour: $2,100,000 (at $14 per hour).
Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost driver is direct labour hours, with the following results:
Computed values.
Fixed overhead cost: $3,200,000
Coefficient of independent variable: $2.25
Required:
A. Prepare the company's regression equation (Y = a + bX) to estimate overhead.
B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.
C. What is North's dependent variable in this case?
D. How can the company evaluate the "quality" of its regression equation?

Question 70

Lewis Company needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows. Lewis anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs.
Required:
A. Calculate the variable and fixed components of the utilities cost.
B. Using the data calculated above, estimate the utilities cost for August.
C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

Question 71

Both the visual-fit and high-low methods of cost estimation have inherent limitations. Briefly identify the major deficiency associated with each method.