Deck 2: Cost Concepts, Behaviour, and Estimation

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Learning curves lead to greater productivity over time.

Question 11

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

Question 12

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

Question 13

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

Question 14

The learning curve refers to increases in sunk costs as production volume decreases.

Question 15

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

Question 16

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

Question 17

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

Question 18

A new product's learning curve rate can be expressed as (direct material cost/total cost).

Question 19

The learning curve refers to declines in the cost of materials as production volume increases.

Question 20

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

Question 21

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is cost per day of boarding, which of the following is a direct cost?

A)Pet food
B)Front office staff salaries
C)Grooming supplies
D)Depreciation on shelving and equipment used in the grooming and retail area

Question 22

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 23

Which of the following 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 24

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 25

When the cost object is a unit produced, straight-line depreciation on manufacturing equipment would be a: Variable Cost Fixed Cost Direct Cost

A)No Yes No
B)Yes No No
C)Yes No Yes
D)No Yes Yes

Question 26

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Which of the following is a sunk cost for any cost object related to Jackie's Kennels?

A)Cost of the automobile Jackie 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 27

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

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

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

Question 30

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Which of the following is the best example of a discretionary cost for Jackie's Kennels?

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

The labour cost to construct the first unit of a special piece of equipment was $126,000. If labour costs are subject to a 90% learning curve, what will be the cost to build the second unit? Use the following values as needed to respond:
Ln(95%)/ ln(2)= -0.074
Ln(90%)/ ln(2)= -0.152
Ln(85%)/ ln(2)= -0.234
Ln(80%)/ ln(2)= -0.322
Ln(75%)/ ln(2)= -0.415
Ln(70%)/ ln(2)= -0.515

A)$126,000
B)$113,000
C)$100,800
D)$113,400

Question 36

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Assume Jackie's Kennels 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 37

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. If the cost object is the total cost of the grooming product line, which of the following is an indirect cost?

A)Front office staff salaries
B)Labour cost of employees who groom pets
C)Cost of grooming supplies
D)Depreciation on grooming tables

Question 38

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

Question 39

Jackie's Kennels is located in a small city in Western Canada. The company employs three pet attendants, four pet groomers, and two front office staff who book appointments and keep records. The Kennel provides a range of services for dogs and cats including boarding, grooming, and obedience training. The grooming area includes a small retail section that carries dog and cat food, pet supplies, and toys. Jackie'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 40

Estimates of future costs can be used in budgeting.

Question 41

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 42

Managers at Art's Custom Saddle Manufacturers believe that the learning rate for new employees is about 90%. If it takes a new employee 10 hours to make the first saddle, estimate the cumulative average time per saddle for a new employee to make four saddles. Use the following values as needed to respond:
Ln(95%)/ ln(2)= -0.074
Ln(90%)/ ln(2)= -0.152
Ln(85%)/ ln(2)= -0.234
Ln(80%)/ ln(2)= -0.322
Ln(75%)/ ln(2)= -0.415
Ln(70%)/ ln(2)= -0.515

A)8)1 hours per saddle
B)5)3 hours per saddle
C)7)6 hours per saddle
D)Cannot be determined

Question 43

The cumulative average-time learning curve can be represented mathematically as:

A)ln(percent learning)/ ln(2) Use the following values as needed to respond:
Ln(95%)/ ln(2)= -0.074
Ln(90%)/ ln(2)= -0.152
Ln(85%)/ ln(2)= -0.234
Ln(80%)/ ln(2)= -0.322
Ln(75%)/ ln(2)= -0.415
Ln(70%)/ ln(2)= -0.515
B)Y = αX^r
C)Y = αXr
D)α = YX^r

Question 44

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 45

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 46

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 47

A firm will build 8 units of a product. All costs are subject to an 85% learning curve. The first unit cost $75,000 to build. If the firm values inventory and cost of goods sold at the average cost for all units in the production run, what will be the cost to produce the second unit? Use the following values as needed to respond:
Ln(95%)/ ln(2)= -0.074
Ln(90%)/ ln(2)= -0.152
Ln(85%)/ ln(2)= -0.234
Ln(80%)/ ln(2)= -0.322
Ln(75%)/ ln(2)= -0.415
Ln(70%)/ ln(2)= -0.515

A)$63,750
B)$69,375
C)$75,000
D)Some other amount

Question 48

The major disadvantage of the high-low method is that:

A)It uses the two most extreme data points in determining a cost function
B)It is difficult to calculate
C)It is difficult to understand
D)It involves more judgmental factors than do other methods

Question 49

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 50

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Direct Maintenance
Month Labour Hours Costs Incurred
January 4,000 $ 900
February 6,500 1,325
March 7,000 1,500
April 5,500 1,150
Using the high-low method, what is the cost function for maintenance costs?

A)$500 + $1.00 per direct labour hour
B)$300 + $1.50 per direct labour hour
C)$100 + $0.20 per direct labour hour
D)$200 + $0.10 per direct labour hour

Question 51

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available: Machine Hours Repair Costs
4,800 $6,385
3,400 4,585
4,000 5,285
5,900 7,085
Using the high-low method, what is the variable repair cost per machine hour?

A)$0.15
B)$1.00
C)$4.00
D)$5.00

Question 52

Assume an 80% learning curve and that the first unit takes 6 hours. How long does it take to produce the second unit? Use the following values as needed to respond:
Ln(95%)/ ln(2)= -0.074
Ln(90%)/ ln(2)= -0.152
Ln(85%)/ ln(2)= -0.234
Ln(80%)/ ln(2)= -0.322
Ln(75%)/ ln(2)= -0.415
Ln(70%)/ ln(2)= -0.515

A)4)1 hours
B)3)6 hours
C)4)8 hours
D)Some other amount

Question 53

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Direct Maintenance
Month Labour Hours Costs Incurred
January 4,000 $ 900
February 6,500 1,325
March 7,000 1,500
April 5,500 1,150
Using the high-low method, what is the variable maintenance cost per direct labour hour?

A)$1.00
B)$0.10
C)$0.20
D)$1.50

Question 54

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 55

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 56

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 57

Bob and James are installing new flooring in their home. The house has 5 rooms of approximately equal size where the flooring will be replaced. Bob and James spent 3 hours removing the old flooring from the first room. If Bob and James are operating with an 85% learning curve, what is the estimated average time to remove the flooring from all 5 rooms? Note: ln(85%)/ ln(2)= -0.234.

A)2)05 hours total
B)2)05 hours per room
C)2)55 hours total
D)2)55 hours per room

Question 58

Which of the following statements is true?

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

Question 59

A learning curve is the rate at which:

A)Students learn material for an exam
B)Direct labour employees are provided training by their organizations
C)Labour hours decrease as production increases when a new product is manufactured
D)Profitability decreases because employees have become less efficient.

Question 60

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Direct Maintenance
Month Labour Hours Costs Incurred
January 4,000 $ 900
February 6,500 1,325
March 7,000 1,500
April 5,500 1,150
Using the high-low method, what is the fixed maintenance cost?

A)$500
B)$300
C)$200
D)$100

Question 61

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25. The company managers wish to estimate the overhead cost function. What is the fixed overhead cost?

A)$15,750
B)$36,750
C)$21,000
D)$18,000

Question 62

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 63

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 64

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 65

(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 66

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 67

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 behaviour when only one period of data is available

Question 68

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25. The company managers wish to estimate the overhead cost function. What is the variable overhead cost per machine hour?

A)$1.00
B)$2.00
C)$6.00
D)$8.00

Question 69

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 70

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 71

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 72

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 73

Reviewing cost behaviour 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 74

An organization's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labour hours and the other based upon machine hours. The results were: Total overhead = $150,000 + $4 x direct labour 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 labour 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 75

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available: Machine Hours Repair Costs
4,800 $6,385
3,400 4,585
4,000 5,285
5,900 7,085
Using the high-low method, what is the fixed repair cost?

A)$1,185
B)$850
C)$475
D)$565

Question 76

Assuming that a cost is mixed and linear, and that past cost behaviour 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 77

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available: Machine Hours Repair Costs
4,800 $6,385
3,400 4,585
4,000 5,285
5,900 7,085
Using the high-low method, what is the estimated repair cost for 4,500 machine hours?

A)$5,785
B)$5,585
C)$5,685
D)$5,985

Question 78

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

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

Question 79

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 80

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