Question 1

Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available: $$\begin{array} { c c } 
\underline{\text { Machine Hours} } & \underline{\text { Repair Costs }} \
 4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$$ Using the high-low method, what is the estimated repair cost for 4,500 machine hours?

Accepted Answer

First, identify the highest and lowest activity levels. The highest is 5,900 hours with costs of $7,085, and the lowest is 3,400 hours with costs of $4,585. The variable cost per machine hour is calculated as: $$ \frac{\$7,085 - \$4,585}{5,900 - 3,400} = \frac{\$2,500}{2,500} = \$1 $$ per machine hour. The fixed cost is found by subtracting the total variable cost at either level from the total cost at that level. Using the high level: $$ \$7,085 - (5,900 \times \$1) = \$1,185 $$ The total cost function is: $$ \text{Total Cost} = \$1,185 + \$1 \times \text{Machine Hours} $$ For 4,500 machine hours, the estimated repair cost is: $$ \$1,185 + \$1 \times 4,500 = \$5,685 $$

Question 2

Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available: $$\begin{array} { c c } 
\underline{\text { Machine Hours }} &\underline{ \text { Repair Costs }} \
4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$$ Using the high-low method, what is the variable repair cost per machine hour?

Accepted Answer

The high-low method involves taking the highest and lowest activity levels and using them to calculate the variable cost per unit. The formula is: $$ \text{Variable Cost per Unit} = \frac{\text{Cost at Highest Activity Level} - \text{Cost at Lowest Activity Level}}{\text{Highest Activity Level} - \text{Lowest Activity Level}} $$Using the given data:- Highest activity level: 5,900 machine hours with repair costs of $7,085- Lowest activity level: 3,400 machine hours with repair costs of $4,585$$ \text{Variable Cost per Unit} = \frac{7,085 - 4,585}{5,900 - 3,400} = \frac{2,500}{2,500} = 1 $$Therefore, the variable repair cost per machine hour is $1.00.

Question 3

Design Fashion has an average overhead cost per hour of $21.00 at 3,500 machine hours, and at 3,000 hours it is $22.50. The company managers wish to estimate the overhead cost function. What is the variable overhead cost per machine hour?

Accepted Answer

The answer of Design Fashion has an average overhead cost...

Question 4

Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $$\begin{array} { | l | l | l | } 
\hline \text { Manth } & \text { Machine Hours } & \begin{array} { l } 
\text { Maintenance Costs } \
\text { Incurred }
\end{array} \
\hline \text { January } & \mathbf { 8 0 0 0 } & \$ \$ , 600 \
\hline \text { February } & 13000 & \$ 5,300 \
\hline \text { March } & 14000 & \$ 6,000 \
\hline \text { April } & 11000 & \$ 4,600 \
\hline
\end{array}$$ Using the high-low method, what is the cost function for maintenance costs?

Accepted Answer

The high-low method uses the highest and lowest activity levels to estimate the variable cost per unit and the fixed cost. The variable cost per machine hour is ($6,000 - $4,600) / (14,000 - 11,000) = $0.40. The fixed cost is calculated using one of the points, e.g., $6,000 = Fixed Cost + ($0.40 * 14,000), resulting in a fixed cost of $400.

Question 5

Design fashion has an average overhead cost per hour of $21.00 at 3,500 machine hours, and at 3,000 hours it is $22.50. The company managers wish to estimate the overhead cost function. What is the fixed overhead cost?

Accepted Answer

The answer of Design fashion has an average overhead cost...

Question 6

Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment. The surgery has recently updated its communications plan and negotiated a plan with a new provider which includes a monthly line charge and a usage charge for internet activity. The cost structure for communications is best described as a:

Accepted Answer

The cost structure for communications includes a monthly line charge (a fixed cost) and a usage charge for internet activity (a variable cost), making it a mixed cost.

Question 7

Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $$\begin{array} { | l | l | l | } 
\hline \text { Manth } & \text { Machine Hours } & \begin{array} { l } 
\text { Maintenance Costs } \
\text { Incurred }
\end{array} \
\hline \text { January } & \mathbf { 8 0 0 0 } & \mathbf { \$ 3 , 6 0 0 } \
\hline \text { February } & 13000 & \$ 5,300 \
\hline \text { March } & 14000 & \$ 6,000 \
\hline \text { April } & 11000 & \$ 4,600 \
\hline
\end{array}$$ Using the high-low method, what is the fixed maintenance cost?

Accepted Answer

The answer of Hifi Company wants to develop a cost...

Question 8

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

Accepted Answer

C) Variable costs will change in total as activity levels change, but they are assumed to remain constant per unit, not constant in total. Mixed costs contain both variable and fixed cost elements, hence they change in total as activity levels change. Fixed costs are assumed to remain constant in total over the relevant range.

Question 9

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?

Accepted Answer

Regression analysis is the most comprehensive method for estimating future costs when dealing with mixed and linear costs, as it statistically analyzes past cost behavior to predict future costs, taking into account both fixed and variable components.

Question 10

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

Accepted Answer

Costs in accounting information systems are typically recorded and coded based on different cost objects, which are anything for which a separate measurement of costs is desired, such as products, projects, departments, or activities. This allows for the allocation and analysis of costs in a manner that is relevant to management's decision-making processes.

Question 11

Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $$\begin{array} { | l | l | l | } 
\hline \text { Manth } & \text { Machine Hours } & \begin{array} { l } 
\text { Maintenance Costs } \
\text { Incurred }
\end{array} \
\hline \text { January } & \mathbf { 8 0 0 0 } & \mathbf { \$ 3 , 6 0 0 } \
\hline \text { February } & 13000 & \$ 5,300 \
\hline \text { March } & 14000 & \$ 6,000 \
\hline \text { April } & 11000 & \$ 4,600 \
\hline
\end{array}$$ Using the high-low method, what is the variable maintenance cost per machine hour?

Accepted Answer

The high-low method involves taking the highest and lowest activity levels and their associated costs to determine the variable cost per unit. Here, the highest activity level is 14,000 hours with a cost of $6,000, and the lowest is 8,000 hours with a cost of $3,600. The difference in cost ($6,000 - $3,600 = $2,400) divided by the difference in hours (14,000 - 8,000 = 6,000 hours) results in a variable cost of $0.40 per machine hour.

Question 12

Which of the following statements is NOT true when using analysis at the account level to estimate a cost function:

Accepted Answer

Maintenance on buildings and facilities is typically treated as a fixed cost, not variable. This is because the cost does not change in direct proportion to the level of production or sales volume.

Question 13

There are a number of methods available for estimating cost functions. Which of the following is not one of them?

Accepted Answer

Modular analysis is not a recognized method for estimating cost functions. The other options, such as two-point method, regression analysis, and engineered estimates, are commonly used techniques for this purpose.

Question 14

Highland Rose Ltd is attempting to develop the cost function for repair costs. The following past data are available: $$\begin{array} { c c } 
\underline{\text { Machine Hours} } &\underline{ \text { Repair Costs} } \
 4,800 & \$ 6,385 \
3,400 & 4,585 \
4,000 & 5,285 \
5,900 & 7,085
\end{array}$$ Using the high-low method, what is the fixed repair cost?

Accepted Answer

The answer of Highland Rose Ltd is attempting to develop...

Question 15

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

Accepted Answer

The major disadvantage of the high-low method is that it uses only the two most extreme data points in determining a cost function, which can lead to inaccuracies if those points are not representative of the overall data set.

Question 16

Which of the following statements is true?

Accepted Answer

Past costs, also known as sunk costs, are not relevant for decision-making because they cannot be altered by any decision made now or in the future. However, analyzing past costs can be useful for estimating future cost behavior, helping in budgeting and forecasting.

Question 17

A fixed cost function which changes at some point but remains constant after the change is called a:

Accepted Answer

A stepwise linear cost function is characterized by fixed costs that remain constant over a range of activity, but then jump to a different fixed level once a certain threshold is crossed, which aligns with the description given.

Question 18

Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment. Keep Smiling has recently secured a contract with the Christchurch branch of a major bank to treat their staff. Currently each dentist can treat 35 patients per week. However the new contract means that they will have a total of 100 patients per week. This means that they will need to employ an additional dentist to cope with the increased demand. No other changes are required to the surgery. The cost attached to employing a new dentist is an example of a:

Accepted Answer

The cost of employing an additional dentist due to an increase in demand is an example of a stepwise linear cost function, as it remains constant over a range of activity (the number of patients a dentist can see), then jumps to a higher level at a certain point (when a new dentist is needed to handle additional patients).

Question 19

Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment. The surgery has recently updated its communications plan and negotiated a plan with a new provider which includes a monthly line charge and a usage charge for internet activity. The internet usage change is best described as a:

Accepted Answer

The internet usage charge varies with the amount of internet activity, making it a variable cost.

Question 20

Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment. The clinic's relevant range of activity would best be measured in terms of:

Accepted Answer

The relevant range of activity for Keep Smiling Dental Surgery, which provides various dental services, is best measured by the number of patients treated, as this directly reflects the clinic's service output and demand.

Quiz 2: Cost Concepts, Behaviour and Estimation