[MASREV] MATERIAL 03: COST CONCEPTS & ESTIMATION

1. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the
scatter-diagram method
a. includes costs outside the relevant range.
b. considers more than two points.
c. can be used with more types of costs than the high-low method.
d. gives a precise mathematical fit of the points to the line.
2. The major objective of preparing a scatter-diagram is to
a. derive an equation to predict future costs.
b. perform regression analysis on the results.
c. determine the relevant range.
d. find the high and low points to use for the high-low method of estimating costs.
3. The cost estimation method that gives the most mathematically precise cost prediction equation is
a. the high-low method.
b. the scatter-diagram method.
c. the contribution margin method.
d. regression analysis.
4. Which cost is most likely to be mixed for a manufacturer?
a. Raw materials.
b. Direct labor.
c. Manufacturing overhead.
d. Insurance.
5. A cost is variable if it varies with the
a. number of units manufactured.
b. number of units sold.
c. level of some activity.
d. selling price of the product.
6. A non-value-adding cost is
a. usually direct to a product.
b. the same as a discretionary cost.
c. unavoidable.
d. not essential to manufacturing a product.
7. Fixed costs that cannot be reduced within a short period of time are
a. committed.
b. variable.
c. avoidable.
d. unnecessary.
8. Which cost is most likely to be committed?
a. Repairs and maintenance.
b. Sum-of-the-years'-digits depreciation on the factory building.
c. Fee for a consultant on the company's long-range planning.
d. Advertising.
9. RST's average cost per unit is the same at all levels of volume. Which of the following is true?
a. RST must have only variable costs.

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 b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.
10. A mixed cost
a. increases in steps as volume increases.
b. contains a fixed component and a variable component.
c. varies with more than one measure of volume.
d. cannot be accurately predicted.
11. A non-value-adding activity
a. cannot be a cost driver.
b. should be eliminated.
c. usually drives only variable costs.
d. cannot usually be observed by managers.
12. A cost-predicting equation determined through regression analysis
a. always gives close predictions.
b. will not work any better than one obtained using the high-low method.
c. can be used only for costs that vary with sales or production.
d. could be severely affected by outliers.
13. Which of the following do JIT operations try to eliminate?
a. Discretionary fixed costs.
b. Non-value-adding costs.
c. Avoidable costs.
d. Direct costs.
14. ABC Company breaks even at P600,000 sales and earns P60,000 at P700,000 sales. Which of the following is
true?
a. Fixed costs are P40,000.
b. Profit at sales of P800,000 would be P160,000.
c. The selling price per unit is P6.
d. Contribution margin is 60% of sales.
15. A seasonal business that sets selling prices at 20% above average cost for the preceding month will
a. be better off if it closed down during the off-season.
b. charge higher prices in the off-season than in the busy season.
c. always charge higher prices than its competitors.
d. make a consistent return on sales of 20%.
16. The components of manufacturing cost are
a. variable costs, fixed costs, and overhead costs.
b. materials, direct labor, and overhead.
c. purchases, wages, and manufacturing overhead.
d. wages and salaries, maintenance and repairs, utilities, and depreciation.
17. Fixed costs that managers can change on short notice are
a. value-adding costs.
b. variable costs.
c. unavoidable costs.
d. discretionary costs.
18. A(n) __________ relationship is one that appears to exist even though there is no causal relationship.

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 a. Correlation.
b. Outlier.
c. Spurious.
d. Value-added.
19. Identifying cost drivers
a. is not necessary with regression analysis.
b. is the same as identifying cost pools.
c. is an important part of cost management.
d. is useful only with step-variable costs.
20. A cost pool is
a. all of the costs of a particular department.
b. all costs in a group such as variable costs or discretionary fixed costs.
c. all costs related to a product or product line.
d. all costs that have the same driver.
21. As volume increases,
a. total fixed costs remain constant and per-unit fixed costs increase.
b. total fixed costs remain constant and per-unit fixed costs decrease.
c. total fixed costs remain constant and per-unit fixed costs remain constant.
d. total fixed costs increase and per-unit fixed costs increase.
22. A committed fixed cost
a. can never be eliminated.
b. can be eliminated in the short-term and in the long-term.
c. can be eliminated in the long-term, but not in the short-term.
d. can be eliminated in the short-term, but not in the long-term.
23. Avoidable costs are usually
a. committed.
b. common.
c. direct.
d. fixed.
24. Direct costs are
a. associated with a specific activity.
b. always variable.
c. usually committed.
d. usually discretionary.
25. Discretionary costs
a. are usually unavoidable.
b. are not necessary for successful operations.
c. can be either direct or indirect.
d. should be the first ones cut in a cost-reduction program.
26. Which cost is LEAST likely to be discretionary?
a. Salaries of salespeople.
b. Advertising.
c. Building maintenance.
d. Insurance.
27. Which cost is LEAST likely to be direct to a particular product?

MASREV MATERIAL
 a. Salaries of salespeople who sell all of the company's products.
b. Advertising of the product.
c. License fees paid to the designer of the product.
d. Cost of materials used to make the product.
28. Which cost is most likely to be avoidable in deciding whether to shut down one of the four assembly lines in a
factory?
a. Depreciation on the factory building.
b. Salaries of maintenance workers who service all assembly lines.
c. Power used to operate equipment on the assembly line.
d. Heat and light for the building.
29. Predicting costs at activity levels that are outside the relevant range is called
a. association.
b. correlation.
c. extrapolation.
d. none of the above.
30. A non-value-adding cost
a. is driven by a non-value-adding activity.
b. is discretionary.
c. is direct to a product.
d. allows the company to charge a higher price for the product.
31. The closeness of the relationship between the cost and the activity is called
a. correlation.
b. spurious.
c. regression analysis.
d. manufacturing overhead.
32. The cost of the cushions that are used to manufacture sofas is best described as a:
a. manufacturing overhead cost.
b. period cost.
c. variable cost.
d. conversion cost.
33. Manufacturing overhead includes:
a. all direct material, direct labor and administrative costs.
b. all manufacturing costs except direct labor.
c. all manufacturing costs except direct labor and direct materials.
d. all selling and administrative costs
34. Materials used in the operation of a factory, such as cleaning supplies, that are not an integral part of the final
product should be classified as:
a. direct materials.
b. a period cost.
c. administrative expense.
d. manufacturing overhead.
35. The one cost that would be classified as part of both prime cost and conversion cost would be:
a. indirect material.
b. direct labor.
c. direct material.

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 d. indirect labor.
36. Direct costs:
a. are incurred to benefit a particular accounting period.
b. are incurred due to a specific decision.
c. can be easily traced to a particular cost object.
d. are the variable costs of producing a product.
37. Prime costs consist of:
a. direct materials and the variable portion of manufacturing overhead.
b. direct labor and indirect labor.
c. indirect labor and the fixed portion of manufacturing overhead.
d. direct labor and direct materials.
38. Which of the following is NOT a period cost?
a. Monthly depreciation of the equipment in a fitness room used by factory workers.
b. Salary of a billing clerk.
c. Insurance on a company showroom, where current and potential customers can view new products.
d. Cost of a seminar concerning tax law updates that was attended by the company's controller.
39. Cobra Mining Company spent P200 million five years ago to develop underground mining and milling operations
in a remote area of a western state. Metals prices have since declined precipitously and the company is
considering abandoning the operation. The term that would best describe the P200 million expenditure when
considering the abandonment decision is:
a. sunk cost.
b. variable cost.
c. differential cost.
d. opportunity cost.
40. In a decision-making situation involving an asset, which of the following costs is generally NOT considered
relevant to the decision and should be ignored?
a. Incremental cost of selecting one alternative over another.
b. Opportunity cost of using the asset in an alternative.
c. Differential cost between two alternatives.
d. The original cost of the asset.
41. Indirect manufacturing costs:
a. can be traced to the product that created the costs
b. may have a cause-and-effect relationship with capacity rather than with individual units of production
c. generally include the cost of material and the cost of labor
d. are included in period costs
42. A manufacturing plant produces two product lines: football equipment and hockey equipment. An indirect cost
for the hockey equipment line is the:
a. material used to make the hockey sticks
b. labor to bind the shaft to the blade of the hockey stick
c. shift supervisor for the hockey line
d. plant supervisor
43. A manufacturing plant produces two product lines: football equipment and hockey equipment. Direct costs for
the football equipment line are the:
a. beverages provided daily in the plant break room

MASREV MATERIAL
 b. monthly lease payments for a specialized piece of equipment needed to manufacture the football
helmet
c. salaries of the clerical staff that work in the company administrative offices
d. utilities paid for the manufacturing plant
44. Cost behavior refers to:
a. how costs react to a change in the level of activity
b. whether a cost is incurred in a manufacturing, merchandising, or service company
c. classifying costs as either product or period costs
d. whether a particular expense has been ethically incurred
45. An understanding of the underlying behavior of costs helps in all of the following EXCEPT:
a. sales volume can be better estimated
b. costs can be better estimated as volume expands and contracts
c. true costs of processes can be better evaluated
d. process inefficiencies can be better identified and, as a result, improved

46. The scatter diagram method of cost estimation

a. is influenced by extreme observations
b. requires the use of judgment
c. uses the least-squares method
d. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs
47. Advantages of the method of least squares over the high-low method include all of the following except
a. a statistical method is used to mathematically derive the cost function
b. only two points are used to develop the cost function
c. the squared differences between actual observations and the line (cost function) are minimized
d. all the observations have an effect on the cost function
48. The major objective of preparing a scatter-diagram is to
a. develop an equation to predict future costs.
b. perform regression analysis on the results.
c. determine the relevant range.
d. find the high and low points to use for the high-low method of estimating costs.
49. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the
scatter-diagram method
a. includes cost outside the relevant range.
b. considers more than two points.
c. can be used with more types of costs than the high-low method.
d. gives a precise mathematical fit of the points to the line.
50. A cost-predicting equation determined through regression analysis
a. always gives close predictions.
b. will not work any better than one obtained using the high-low method.
c. can be used only for costs that vary with sales of production.
d. could be severely affected by outliers.

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51. Nite Corporation has developed the following flexible budget formula for annual indirect labor costs:
Total Cost = P480,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 20,000 machine hours of planned machine time.
Indirect labor costs included in this planning budget are?

52. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour
worked. For the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of
direct labor. Harem Company’s budgeted overhead for the month is?

53. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000 units
of budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs for 60,000
units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s budgeted variable
cost per unit of output?

54. Deakin Company is preparing a flexible budget for the coming year and the following maximum capacity
estimates for Department OZ are available:
Direct labor hours 60,000
Variable factory overhead P150,000
Fixed factory overhead P240,000
Assume that Deakin’s normal capacity is 80% of maximum capacity. What would be the total factory overhead
rate, based on direct labors, in a flexible budget at normal capacity?

55. Irma Company manufactures office furniture. During the most productive month of the year, 3,500 desks were
manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost of
P46,000. Using the high-low method of cost estimation, total fixed costs in August are?

56. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms
are occupied each day. The company’s operating cost is P21 per occupied room per day at this occupancy level,
assuming a 30-day month. This P21 figure contains both variable and fixed cost elements. During October, the
occupancy dropped to only 45 percent. A total of P792,000 in operating costs were incurred during the month.
What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during
November?

57. The controller of Jema Company has requested a quick estimate of the manufacturing supplies that it needs for
the month of July when the expected production are 470,000 units. Below are the actual data from the prior
three months of operations.
Production in units Manufacturing supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560
Using these data and the high-low method, what is the reasonable estimate of the cost of manufacturing
supplies that would be needed for July? (Assume that this activity is within the relevant range.)

58. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?

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59. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is direct labor hours.
According to this equation, a 100-hour change in total direct labor hours will change the cost of workers
compensation insurance by?

60. Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units, P1,000 of product level
costs for 40 products, and P3,500 of customer-level costs for ten customers. The cost of Job 002 which used 800
unit level activities, 4 product level activities, and one customer-level activities amounts to?

61. It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production doubles, the average
time (per unit) needed to make 8 units would be?

62. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for P6,000. Assuming a
cumulative learning curve of 90% as production doubles, the incremental cost of the third and fourth items will
be?

63. The Shepherd Company’s president would like to know the estimated fixed and variable components of a
particular cost. Actual data for this cost for four recent periods appear below.
Activity Cost
Period 1 24 P174
Period 2 25 179
Period 3 20 165
Period 4 22 169
Using the least-squares regression method, what is the cost formula for this cost?

64. The Overland Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the
following data:
Month Electricity Cost Direct Labor Hours
January P6,750 1,500
April 7,500 1,700
July 8,500 2,000
October 7,250 1,600
Using the high-low method, what is the best equation?

65. During the month of June, Behold Corporation produced 12,000 units and sold them for P20 per unit. Total fixed
costs for the period were P154,000, and the operating profit was P26,000. Based on the foregoing information,
the variable cost per unit for the month of June was?

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66. Tomas Ocampo has just been appointed chairperson of the Accountancy Department of ADEB College. In
reviewing the department’s cost records, Tomas has found the following total cost associated with MAS Part 2
subject over the last several terms:
Semester/Term Number of Subjects Offered Total Cost
AY2019, First Semester 4 P10,000
AY2019, Second Semester 6 14,000
AY2019, Summer 2 7,000
AY2020, First Semester 5 13,000
AY2020, Second Semester 3 9,500
Tomas knows that there are some variable costs, such as amounts paid to student assistants, associated with
the course. He would like to have variable and fixed cost components separated for planning purposes. Using
the least-squares method, what is the variable cost per section of MAS?

67. The following information was taken from a computer printout generated with the least squares method for use
in estimating overhead costs:
Slope 90
Intercept 11400
Correlation coefficient 0.6
Activity variable Direct labor hours
What is the cost formula?

68. TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined that if a truck is
driven 105,000 kilometers during a year, the average operating cost is P11.40 per kilometer. If a truck is driven
only 70,000 kilometers during a year, the average operating cost increases to P13.40 per kilometer. Assuming
that in a given year, a truck were driven 80,000 kilometers, what total cost would you expect to be incurred?

69. Total costs are P120,000 when 10,000 units are produced; of this amount, variable costs are P48,000. What are
the total costs when 12,000 units are produced?

70. Baxter Company, which pays a 10% commission to its salespeople, reported sales revenues of P210,000 for the
period just ended. If fixed and variable sales expenses totaled P56,000, what would these expenses total at
sales of P168,000?

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