Deck 2: Cost Concepts, Behaviour and Estimation

Question 1

Total costs that have both fixed and variable elements are call mixed costs.

Answer 1

A

Question 2

A hospital would have mainly fixed costs because its costs do not vary based on the number of patients it treats.

Answer 2

B

Question 3

Total fixed costs vary with small changes in activity levels.

Answer 3

B

Question 4

The incremental cost of an activity is known as the marginal cost.

Question 5

The marginal cost of an activity is not useful for decision making because managers only need to know the total cost.

Question 6

A stepwise linear cost function is a cost function in which total fixed costs change at some point but remain constant after the change.

Question 7

Most organisations ignore mixed costs because it is too difficult to predict their behaviour.

Question 8

Total variable costs change proportionately with changes in activity levels.

Question 9

Cost behaviour refers to the way that costs vary in relation to changes in an organisation's activities.

Question 10

The line rental paid on a telephone account is an example of a variable cost.

Question 11

The traditional basis for understanding cost behaviour uses an activity analysis cost framework.

Question 12

It is always easy to determine whether a cost is a variable or a fixed cost.

Question 13

Organisations need to understand how costs behave so they can predict the changes in costs that occur as a result of decisions made about production, sales and services.

Question 14

A relevant range is a span of activity for a given cost object where both total fixed costs and total variable costs per unit of activity remain constant.

Question 15

Distinguishing between fixed and variable costs is an important element of understanding cost behaviour.

Question 16

Rent on a building is usually a fixed cost.

Question 17

When an organisation changes their capacity or operations significantly it is likely that the relevant range will also change.

Question 18

The relevant range for an organisation never changes.

Question 19

To understand cost behaviour accountants need to consider the drivers of the organisation's costs.

Question 20

An example of a fixed cost is the cost of petrol in a transport company.

Question 21

The number of patients treated is an example of a cost driver for a hospital's cardiac ward.

Question 22

Cost drivers are always considered based on a specific cost object.

Question 23

A cost driver is also known as the variable cost per unit.

Question 24

Cost functions are most useful for estimating long term cost patterns.

Question 25

If the organisation has only operated for a short time several methods of determining the cost function cannot be used.

Question 26

When graphing a cost function the intercept represents the variable cost per unit.

Question 27

Cost functions are a mathematical representation of the total cost of a cost object over a relevant range.

Question 28

One method for determining cost functions that relies on past costs is regression analysis.

Question 29

Scatter plots provide a visual technique for exploring cost behaviour.

Question 30

The method of cost estimation that analyses accounting records to determine future cost patterns is called engineered cost analysis.

Question 31

When estimating future costs it is necessary to classify costs into fixed and variable components.

Question 32

Cost objects only ever have one cost driver.

Question 33

An input or activity that causes changes in total cost is a cost driver.

Question 34

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

Question 35

Past costs can be used for estimating future cost behaviour.

Question 36

The algebraic equation of a cost function is represented as: TC = F + V*Q

Question 37

Within the relevant range of activity the change in total cost is linear or close to linear.

Question 38

Within the relevant range the variable cost approximates the marginal cost.

Question 39

Engineered estimates of costs can only be used by manufacturing firms to estimate future costs.

Question 40

Computer programmes such as Excel can be used to improve the analysis when using scatter plots.

Question 41

Simple regression analysis produces an equation of the form: Y= α + βX + ε

Question 42

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

Question 43

When comparing the Adjusted R-squares from multiple regressions the best equation is represented by the regression with the lowest Adjusted R-square.

Question 44

Multiple regression analysis develops a cost function for the statistical relationship between total cost and two or more cost drivers.

Question 45

When only one coefficient is statistically greater than zero this means it is likely that the cost being estimated is not a mixed cost.

Question 46

The two point method uses the highest and lowest data points to estimate a mixed cost function.

Question 47

Regression analysis overcomes the deficiency in two point methods by using all of the available data points.

Question 48

The first step in estimating a cost function is to identify relevant costs for the cost object.

Question 49

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

Question 50

When using the two point method of cost estimation or the high low method, the calculation to derive the variable cost component of a mixed cost is: change in cost ÷ change in cost driver.

Question 51

The high low method is useful when there are limited data points to observe.

Question 52

The cost and time associated with using regression analysis means that it is likely that the costs of using outweigh the benefits of doing so.

Question 53

Regression analysis produces the most accurate results when there is a strong linear relationship between the cost and cost driver.

Question 54

Multiple methods of cost estimation techniques may be required to estimate total cost functions for a cost object.

Question 55

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

Question 56

The dependent variable in regression analysis is the cost driver.

Question 57

When generating a list of possible cost drivers it is important that the change in cost driver could potentially affect the cost.

Question 58

When estimating cost functions it is important to continuously evaluate uncertainties and quality of information.

Question 59

Regression analysis removes errors in cost estimation associated with changing cost patterns over time, unusual events and random fluctuations.

Question 60

The statistical technique that measure the average change in a dependent variable for every unit change in one or more independent variables is called regression analysis.

Question 61

Management accounting commonly uses average costs in reports because they are more useful for decision making purposes.

Question 62

In regression analysis it is not necessary to eliminate data from unusual periods because the statistical analysis is able to factor this in to the regression outputs.

Question 63

Scatter plots can be used for an initial evaluation of the data to determine whether the cost might be completely fixed, completely variable or mixed.

Question 64

Fixed costs per unit:

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

Question 65

The analysis at the account level method can be used when there is no past cost information available.

Question 66

It is necessary to know the relevant range for regression analysis.

Question 67

The relevant range is defined as:

A) A period of time over which total costs do not change
B) A span of activity where both total fixed costs and variable cost per unit of activity remain constant
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 68

Average costs incorrectly treat fixed costs as variable.

Question 69

Mixed costs:

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

Question 70

When an organisation operates in an environment where technologies and costs change rapidly the information quality of past cost data is reduced.

Question 71

Cost behaviour is:

A) another word for cost object.
B) irrelevant for service organisations.
C) the variation in costs relative to the variation in activities.
D) an old fashioned term for activity cost analysis.

Question 72

The calculation of average cost is total costs ÷ activity.

Question 73

Total variable costs:

A) Change proportionately with changes in activity levels
B) Increase with a decrease in activity.
C) Have no relevant range.
D) Are constant regardless of changes in activity

Question 74

In regression analysis the estimated fixed cost is represented by the intercept coefficient.

Question 75

Total fixed costs:

A) Vary inversely with changes in activity
B) Increase with an increase in activity
C) Decrease with a decrease in activity
D) Are constant regardless of changes in activity

Question 76

Mixed costs:

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

Question 77

Changes in cost behaviour due to inflation or deflation is one source of uncertainty in estimating future costs.

Question 78

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

Question 79

Cost estimates that are based on resources used is a characteristic of the engineered estimate of cost method.

Question 80

Overhead cost pools are used to allocate indirect fixed costs only.