Fundamentals of Cost Accounting 4th Edition Lanen Test Bank 1

Fundamentals of Cost Accounting 4th Edition Lanen
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Chapter 05
Cost Estimation
True / False Questions
1. Cost behavior is the most important characteristic for managerial decision making.
True False
2. In general, accounting records accumulate cost information according to its behavior (i.e., variable
and fixed).
True False
3. In general, cost behavior results are likely to differ between the engineering method and the
account analysis method.
True False
4. The engineering method of determining cost behavior is particularly useful for new activities or
products.
True False
5. One advantage of the engineering method is that it does not require data from prior periods to
estimate cost behavior.
True False
6. One advantage of the account analysis method for estimating cost behavior is that it includes
actual work conditions.
True False
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7. The account analysis method is more subjective than other cost estimation methods because it
relies heavily on the personal judgment and experience of accountants.
True False
8. In general, the account analysis method focuses on the underlying relationship between cost and
activities from the previous period.
True False
9. The relevant range represents those activity levels for which valid cost relationships have been
observed.
True False
10. A scattergraph is useful for identifying outliers/irrelevant data points.
True False
11. One disadvantage of the high-low method is the highest and lowest points may not be
representative of normal operating activities.
True False
12. One advantage that regression techniques have over other cost estimation methods is it
generates information that can be used to determine how well the estimated cost equation will
predict future costs.
True False
13. Because outliers are extreme data points, they can be included in the regression analysis and not
significantly affect the results.
True False
14. In general, the use of multiple independent variables increases the proportion of the variation in
the dependent variable explained by the cost equation.
True False
15. One way to control the effects of a nonlinear relation between total costs and volume is to reduce
the relevant range.
True False
16. The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.
True False
17. Cost estimates using regression analysis are always more accurate and dependable than cost
estimates using the scattergraph methods.
True False
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18. A basic assumption of most cost estimation methods is cost behavior patterns are linear within the
relevant range.
True False
19. The quality of the cost equation depends on collecting appropriate data.
True False
20. Different cost estimations methods may produce different cost equations, even when using the
same set of data.
True False
Multiple Choice Questions
21. Which of the following statements is (are) true regarding cost behaviors?
(A) In general, accounting records accumulate cost information according to its behavior.
(B) Cost behaviors are the most important consideration in managerial decision making.
A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.
22. Which cost estimation method does not use the company's cost information as its primary source
of information about the relationship between total costs and activity levels?
A. Scattergraph.
B. High-low.
C. Account analysis.
D. Regression analysis.
E. Engineering estimates.
23. A manager is trying to estimate the manufacturing costs of a new product. The company makes
several other products that utilize some of the same manufacturing procedures as the new
product. Which cost estimation method would be the best method to determine the total cost of
manufacturing the new product?
A. Engineering estimates.
B. Regression analysis.
D. Scattergraph.
E. High-low.
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24. Engineering cost estimates are usually based on operating conditions that are considered:
A. optimal.
B. practical.
C. attainable.
D. historical.
E. realistic.
25. Which of the following costs would most likely be classified as variable, assuming the account
analysis method is used to determine cost behaviors?
A. Indirect materials.
B. Supervisory salaries.
C. Equipment maintenance.
D. Annual Christmas party.
E. Building occupancy costs.
26. In the cost equation TC = F + VX, X is best described as the:
A. costs that do not vary with changes in the activity level.

B. costs that do vary with changes in the activity level.
C. total cost estimate at a particular activity level.
D. activity level used to estimate the total cost.
27. In the cost equation TC = F + VX, V is best described as the:

B. intercept of the cost equation.
C. slope of the cost equation.
D. activity level used to estimate the dependent variable.
28. Which of the following cost estimation methods finds the fixed portion of a mixed cost before
calculating the variable portion?
A. Scattergraph.
B. High-low method.
D. Linear regression.
E. Engineering approach.
29. The term "relevant range" as used in cost accounting means the range over which:
A. relevant costs are incurred.

B. costs may fluctuate.
C. cost relationships are valid.
D. cost data is available.
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30. Which of the following cost estimation methods finds the variable portion of a mixed cost before
calculating the fixed portion?
A. Scattergraph.
B. High-low method.
31. A disadvantage of the high-low method of cost analysis is that it:
A. typically results in a totally inaccurate cost formula.

B. is too time consuming to apply.
C. uses only two data points, which may not be representative of normal conditions.
D. relies totally on the judgment of the person performing the cost analysis.
32. In the standard regression equation of y = a + bx, the letter b is best described as the:
A. independent variable.
B. dependent variable.
C. slope of the equation.
D. intercept of the equation.
33. In the standard regression equation of y = a + bx, the letter a is best described as the:
34. In the standard regression equation of y = a + bx, the letter y is best described as the:
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35. The coefficient of correlation is:
A. the range of values over which the probability may be estimated based upon the regression
equation results.
B. the proportion of the total variance in the dependent variable explained by the independent
variable.
C. the measure of variability of the actual observations from the predicting (forecasting) equation
line.
D. the relative degree that changes in one variable can be used to estimate changes in another
variable.
36. Given actual amounts of a semivariable cost for various levels of output, the method that will
always give the most reliable measure of the fixed and variable components is the:
A. high-low method.
B. linear regression method.
C. scattergraph method.
D. account analysis method.
37. Which of the following statements regarding regression analysis is (are) true?
(A) One way to control the effects of a nonlinear relationship between total costs and activity is
reduce the relevant range.
(B) The linear cost estimate tends to understate the slope of the cost line in ranges close to
capacity.
A. Only A is true.
B. Only B is true.
38. Mount Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp
required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost was
$1.50 per direct labor hour?
A. $1,700.
B. $3,000.
C. $5,600.
D. $8,000.
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39. Given the following information, compute the total number of units for the period:
A. 360.
B. 432.
C. 640.
D. 840.
40. The Shapely Company uses the high-low method to determine its cost equation. The following
information was gathered for the past year:
What are the direct labor costs per machine hour?
A. $20.00.
B. $16.00.
C. $14.29.
D. $10.00.
If Shapely expects to use 10,000 machine hours next month, what are the estimated direct labor
costs?
A. $160,000.
B. $180,000.
C. $175,000.
D. $150,000.
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42. Hagler's Toupees has the following machine hours and production costs for the last six months of
last year:
If Hagler expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?
A. $8,750.00.
B. $11,142.50.
C. $22,400.00.
D. $10,889.10.
43. The controller of Joy Co has requested a quick estimate of the manufacturing supplies needed for
the Morton Plant for the month of July, when production is expected to be 470,000 units to meet
the ending inventory requirements and sales of 475,000 units. Joy Co's budget analyst has the
following actual data for the last three months.
Using the high-low method to develop a cost estimating equation, the estimate of needed
manufacturing supplies for July would be: (CMA adapted)
A. $681,500.
B. $688,750.
C. $749,180.
D. $752,060.
E. $759,310.
5-8
44. The Chambers Manufacturing Company recorded overhead costs of $14,182 at an activity level of
4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per machine
hour using the high-low method to estimate the cost equation?
A. $2.78.
B. $2.86.
C. $3.10.
D. $3.38.
45. The Wiscow Manufacturing Company recorded overhead costs of $14,182 at an activity level of
4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the total estimated cost for
2,600 machine hours using the high-low method to estimate the cost equation?
A. $9,730.
B. $9,606.
C. $9,106.
D. $8,788.
46. The cost accountants at the Doering Company regressed total overhead costs and direct labor
hours for the past 30-months and reported the following results:
What is the estimated overhead cost if 225 direct labor hours are expected to be used in the
upcoming period? (rounded to the nearest whole dollar)
A. $10,534.
B. $9,882.
C. $9,230.
D. $8,617.
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47. The Armer Company is accumulating data to be used in preparing its annual profit plan for the
coming year. The cost behavior pattern of the maintenance costs must be determined. The
accounting staff has suggested that linear regression be employed to derive an equation in the
form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last
year and the results of the regression analysis are as follows: (CMA adapted)
What would be the cost equation if regression analysis is used?
A. Maintenance Costs = 7.2884 + 684.65 × Hours of Activity.

B. Maintenance Costs = 684.65 + 49.515 × Hours of Activity.
C. Maintenance Costs = 684.65 + 7.2884 × Hours of Activity.
D. Maintenance Costs = 34.469 + .99724 × Hours of Activity.
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Based upon the data derived from the regression analysis, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar)
A. $3,797.
B. $3,780.
C. $3,746.
D. $3,600.
E. $3,461.
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What is the variable cost per hour using the high-low method to estimate the cost equation?
A. $9.00.
B. $7.50.
C. $0.1333.
D. $0.1111.
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What is the fixed cost per month using the high-low method to estimate the cost equation?
A. $570.
B. $600.
C. $1,140.
D. $2,250.
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Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would
mean the maintenance costs would be budgeted at:
A. $3,150.
B. $3,600.
C. $3,720.
D. $3,780.
E. $3,461.
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What would be the cost equation if the high-low method is used?
A. Maintenance Costs = 9.00 × Hours of Activity.

B. Maintenance Costs = 3,600 + 400 × Hours of Activity.
C. Maintenance Costs = 570 + 7.50 × Hours of Activity.
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53. The Business School at Eastern College is accumulating data as a first step in the preparation of
next year's budget development. One cost that is being looked at closely is administrative costs as
a function of student credit hours. Data on administrative costs and credit hours for the past
thirteen months are shown below:
The controller's office has analyzed the data and has given you the results from the regression
analysis:
If the controller uses the high-low method to estimate costs, the variable cost per credit hour is:
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A. $82.33.
B. $103.56.
C. $114.30.
D. $201.22.
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analysis:
If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost
equation for administrative salaries is:
5-18
A. $198,808.
B. $69,474.40.
C. $96,409.42.
D. $19,943.58.
5-19
analysis:
If the controller uses the high-low method to estimate costs, the cost equation for administrative
salaries is:
5-20
A. Cost = $96,409.42 + $103.56 × Credit-hours.
B. Cost = $69,474.40 + $114 30 × Credit-hours.
C. Cost = $201.21 × Credit-hours.
D. Cost = $198,808.
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analysis:
Based on the results of the high-low analysis, the estimate of administrative costs in a month with
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1,000 credit hours would be: (rounded to the nearest whole dollar)
A. $183,774.
B. $199,969.
C. $201,210.
D. $198,808.
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analysis:
If the controller uses regression analysis to estimate costs, the cost equation for administrative
salaries is:
5-24
C. Cost = $96,647.02 + $103.56 × Credit-hours.
D. Cost = $12,521.26 + $11.99 × Credit-hours.
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analysis:
If the controller uses regression analysis to estimate costs, the estimate of the variable portion of
administrative salaries is:
5-26
A. Cost = $8.63 × Credit-hours.
B. Cost = $0.87 × Credit-hours.
D. Cost = $11.99 × Credit-hours.
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analysis:
If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of
5-28
A. Cost = $103.56.
B. Cost = $12,521.26.
C. Cost = $19,943.58.
D. Cost = $96,647.02.
5-29
analysis:
Based on the results of the regression analysis, the estimate of administrative costs in a month
with 1,000 credit hours would be: (rounded to the nearest whole dollar)
5-30
A. $198,808.
B. $201,000.
C. $199,707.
D. $96,409.
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analysis:
The correlation coefficient for the regression equation for administrative costs is:
5-32
A. √0.931.
B. 0.871.
C. 0.859.
D. √0.933.
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analysis:
The percent of the total variance that can be explained by the regression is:
5-34
A. 93.3%.
B. 86.8%.
C. 85.9%.
D. 96.6%.
5-35
analysis:
Based on the results of the regression analysis, the estimate of the variable portion of
administrative costs in a month with 200 credit hours would be:
5-36
A. $198,808.
B. $20,612.
C. $117,121.
D. $40,242.
64. In determining cost behavior in business, the cost function is often expressed as Y = a + bX.
Which one of the following cost estimation methods should not be used in estimating fixed and
variable costs for the equation? (CMA adapted)
A. Scattergraph method.
B. Simple regression.
C. High and low point method.
D. Multiple regression.
E. Management analysis of data.
65. Which of the following is the difference between variable costs and fixed costs: (CMA adapted)
A. variable costs per unit fluctuate and fixed costs per unit remain constant.
B. variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
C. total variable costs are variable over the relevant range and fixed in the long term, while fixed
costs never change.
D. variable costs per unit change in varying increments, while fixed costs per unit change in equal
units.
E. total variable costs can be varied by management, while fixed costs are uncontrollable.
66. Which of the following may be used to estimate how inventory warehouse costs are affected by
both the number of shipments and the weight of the material handled? (CPA adapted)
A. Economic order quantity analysis.

B. Probability analysis.
C. Correlation analysis.
D. Multiple regression analysis.
67. A cost driver is defined as: (CMA adapted)
A. the largest cost in a manufacturing process.

B. a fixed cost that cannot be avoided.
C. the significant factor in developing a new product.
D. an indirect cost that cannot be traced to a particular cost objective but is essential to the
business.
E. a causal factor that increases the total cost of a cost objective.
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68. In the learning curve equation Y = aXb, the Y term represents:
A. the labor time required to produce the first unit.

B. the labor time required to produce the last single unit.
C. the cumulative number of units.
D. the index of learning.
69. In the learning curve equation Y = aXb, the X term represents:

70. In the learning curve equation Y = aXb, the "a" term represents:

71. In the learning curve equation Y = aXb, the "b" term represents:

72. Which of the following statements regarding the learning phenomenon is true?
A. The more units that are produced, the greater the average time to produce a single unit.
B. The relationship between number of units produced and the marginal time to produce the latest
unit is linear.
C. Total labor cost is a linear function of the total units produced.
D. As production doubles, the time to produce the latest unit decreases.
73. Which of the following is a common assumption of cost estimation?
A. Cost behavior depends on many cost drivers.

B. Cost behavior patterns are nonlinear outside of the relevant range.
C. Cost behavior patterns are linear within the relevant range.
D. Costs are curvilinear.
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74. Which of the following is not a data problem an analyst must watch for when estimating cost
behavior?
A. Missing data.
B. Outliers.
C. Allocated costs.
D. Depreciable assets.
behavior?
A. Non-numeric data.
B. Inflation.
C. Discretionary costs.
D. Mismatched time periods.
76. Hawkins Products, Inc., has found that new products follow a learning curve. The first two units
have been completed with the following results:
How much time will be needed to complete the 4th unit?
A. 74.00 hours.
B. 57.80 hours.
C. 56.00 hours.
D. 54.40 hours.
A. 74.00 hours.
B. 57.80 hours.
C. 56.00 hours.
D. 49.13 hours.
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78. Thul Company is interested in establishing the relationship between electricity costs and machine
hours. Data have been collected and a regression analysis prepared using Excel. The monthly
data and the regression output follow:
If the controller uses the high-low method to estimate costs, the variable cost per machine hour is:
A. $6.25.
B. $6.90.
C. $5.77.
D. $11.70.
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equation for electricity cost is:
A. $3,726.88.
B. $1,425.18.
C. $1,625.00.
D. $22,825.00.
5-41
If the controller uses the high-low method to estimate costs, the cost equation for electricity cost
is:
A. Cost = $3,726.88 + $5.77 × Machine-hours.

B. Cost = $1,625.00 + $6.25 × Machine-hours.
C. Cost = $6.90 × Machine-hours.
D. Cost = $22,825.
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Based on the results of the high-low analysis, the estimate of electricity costs in a month with
2,200 machine hours would be:
A. $15,375.
B. $22,825.
C. $15,180.
D. $16,427.
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If the controller uses regression analysis to estimate costs, the cost equation for electricity cost is:

B. Cost = $3,726.88 + $1,682.82 × Machine-hours.
C. Cost = $1,682.82 + $0.49 × Machine-hours.
D. Cost = $3,726.88 + $5.77 × Machine-hours.
5-44
If the controller uses regression analysis to estimate costs, the estimate of the variable portion of
electricity cost is:
A. Cost = $11.70 × Machine-hours.

B. Cost = $0.93 × Machine-hours.
D. Cost = $0.49 × Machine-hours.
5-45
A. Cost = $5.77.
B. Cost = $1,682.82.
C. Cost = $1,425.18.
D. Cost = $3,726.88
5-46
Based on the results of the regression analysis, the estimate of electricity costs in a month with
2,200 machine hours would be: (rounded to the nearest whole dollar)
A. $3,727.
B. $16,421.
C. $15,180.
D. $22,825.
5-47
The correlation coefficient for the regression equation for electricity costs is:
A. 0.965.
B. 0.932.
C. 0.925.
D. 0.982.
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A. 0.965.
B. 0.932.
C. 0.925.
D. 0.982.
Essay Questions
5-49
88. The Teal Company's total overhead costs at various levels of activity are presented below:
Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance.
The breakdown of these costs at the 9,000 direct labor hour level of activity is as follows:
Required:
(a.) Using the high-low method, determine the cost formula for maintenance.
(b.) Express the company's total overhead costs in linear equation form.
5-50
89. The following manufacturing costs were incurred by the RST Company in 2011:
These costs were incurred to produce 25,000 units of product. Variable manufacturing overhead
was 80% of the direct materials cost.
In 2012, the direct material and variable overhead costs per unit will increase by 15%, but the
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to
increase by 7.5%.
Required:
(a.) Prepare a cost estimate for an activity level of 20,000 units of product in 2012.
(b.) Determine the total product costs per unit for 2011 and 2012.
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90. The Grind Company has been having some difficulties estimating its manufacturing overhead
costs. In the past, manufacturing overhead costs have been related to production levels. However,
some production managers have indicated that the size of their production lots might also be
having an impact on the amount of their monthly manufacturing overhead costs. In order to
investigate this possibility, the company collected information on its monthly manufacturing
overhead costs, production in units, and average production lot size for 2012.
Required:
(a.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming
the company is planning to produce 92,000 units.
(b.) Use the high-low method to estimate next month's manufacturing overhead costs, assuming
the company is planning to run a 21-lot size.
5-52
91. A company ran a regression analysis using direct labor hours as the independent variable and
manufacturing overhead costs as the dependent variable. The results are summarized below:
The company is planning on operating at a level that would require 12,000 direct labor hours per
month in the upcoming year.
Required:
(a.) Use the information from the regression analysis to write the cost estimation equation for the
manufacturing overhead costs.
(b.) Compute the estimated manufacturing overhead costs per month for the upcoming year.
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costs. In the past, manufacturing overhead costs have been related to production levels. However,
some production managers have indicated that the size of their production lots might also be
having an impact on the amount of their monthly manufacturing overhead costs. In order to
investigate this possibility, the company collected information on its monthly manufacturing
overhead costs, production in units, and average production lot size for 2012.
Regression analysis results of the information presented above are as follows:

Ordinary regression:
Multiple regression:
Required:
(a.) Use the results from the ordinary regression and estimate next month's manufacturing
overhead costs, assuming the company is planning to produce 92,000 units. (final answer should
be rounded to the nearest whole dollar)
(b.) Use the results from the multiple regression and estimate the next month's manufacturing
costs, assuming the company is planning to produce 92,000 units with an average lot size of 21.
(final answer should be rounded to the nearest whole dollar)
(c.) Comment on which regression seems to be more appropriate under these circumstances.
What additional information would you like to see? Be specific.
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93. The Heidi Company produces a single product and has total costs ranging from $321,875 (at
20,000 units) to $966,875 (at 80,000 units). Sales volume in 2012 was 32,000, and operating
income was $45,125. Heidi's product is highly specialized; therefore, no units are kept in
inventory.
Required:
(a.) Determine the cost equation for Heidi's costs.

(b.) Prepare a contribution margin income statement for 2012 including separate columns for total
dollars, per unit dollars, and percentages.
(c.) Determine the break-even point (in units and in dollars).
94. Teeger Enterprises had an average cost of $10.75 during a month when 50,000 units were
produced. When production doubled several months later, the average cost dropped to $8.25.
Required:
(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 80,000 units?
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95. Sharona Products had costs of $600,000 when sales equaled 75,000 units. When sales increased
by 25,000 units, costs increased by $125,000. The selling price is $9 per unit.
Required:
(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 80,000 units.
96. Braxton, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 20%. Braxton found that the
first unit of a new product required 120 hours to complete. The second unit was completed using
only 114 hours. Braxton believes that the rate of learning that was observed will continue for all 8
units of the contract. The labor wage paid is $25/hour. The following factors are available for
various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b = -.1520; 95%, b = -
.0740.
Required:
(a.) What will the total labor cost be for the contract?
(b.) What will the total fee be for the contract?
5-56
97. Getz Products, Inc., has found that new products follow a learning curve. The first two units have
been completed with the following results:
Required:
(a.) How much time will be needed to complete the 4th unit?
(b.) How much time will be needed to complete the 8th unit?
(c.) How much time will be needed to complete the 16th unit?
5-57
98. Cameron Company is interested in establishing the relationship between utility costs and machine
Required:
(a.) What is the equation for utility costs using the regression analysis?
(b.) Does the variable "machine hours" have statistical significance? Explain.
(c.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.
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99. Cameron Company is interested in establishing the relationship between utility costs and machine
Required:
(a.) What is the equation for utility costs using the high-low method?
(b.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.
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100.Hawley Corp. wants to develop a cost equation for its administrative costs. The controller believes
the appropriate cost driver is units produced. Last year's data are presented below:
Required:
(a.) What is the equation for administrative costs using the high-low method?
(b.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.
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101.Hawley Corp. wants to develop a cost equation for its administrative costs. The controller believes
the appropriate cost driver is units produced. Last year's data are presented below:
Required:
(a.) What is the equation for administrative costs using the regression analysis?
(b.) Does the variable "units produced" have statistical significance? Explain.
(c.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.
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102.The following manufacturing costs were incurred by the BGH Company in 2011:
These costs were incurred to produce 50,000 units of product. Variable manufacturing overhead
was 70% of the direct materials cost.
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to
increase by 8%.
Required:
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103.The Mallard Company's total overhead costs at various levels of activity are presented below:
Assume that the overhead costs above consist of indirect labor, scheduling salaries, and
maintenance. The breakdown of these costs for the month of November is as follows:
Required:
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104.The Ottawa Company has traditionally estimated manufacturing overhead costs using production
volume. Some of the production managers believe that the number of set ups may also have an
impact on monthly manufacturing overhead costs. In order to investigate this possibility, the
company collected information on its monthly manufacturing overhead costs, production in units,
and number of setups for 2012.

Equation: $650,398 + $3.1061 × units
r-square: .707
Equation: $464,481 + $2.5356 × units + $11,631.6048 × lot size
r-square: .867
Required:
overhead costs, assuming the company is planning to produce 75,000 units. (final answer should
be rounded to the nearest whole dollar)
costs, assuming the company is planning to produce 75,000 units with an average lot size of 18.
(final answer should be rounded to the nearest whole dollar)
5-64
105.Disher Enterprises had an average cost of $8.60 during a month when 75,000 units were
produced. When production was 125,000 units several months later, the average cost dropped to
$6.98.
Required:

106.Stottlemeyer Products had costs of $950,000 when sales equaled 55,000 units. When sales
increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit.
Required:

5-65
107.Young, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 30%. Young found that the
only 76.5 hours. Young believes that the rate of learning that was observed will continue for all 8
units of the contract. The labor wage paid is $40/hour. The following factors are available for
various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b = -.1520; 95%, b = -
.0740.
Required:
(b.) What will be the total fee for the contract?
108.Webster Products, Inc., has found that new products follow a learning curve. The first two units
Required:
5-66
109.Explain the difference between the engineering method of cost estimation and the account
analysis method.
110.Describe the engineering method of cost estimation. Provide two advantages and two
disadvantages associated with the engineering approach to cost estimation.
111.Describe two advantages and two disadvantages of the high-low method of cost estimation.
112.What are "outliers" and what effect does their presence have when using regression analysis for
cost estimation?
5-67
113.Describe the effect on cost estimation of four of the following five problems: 1) missing data, 2)
outliers, 3) allocated and discretionary costs, 4) inflation, or 5) mismatched time periods.
5-68
Chapter 05 Cost Estimation Answer Key
True / False Questions
1. Cost behavior is the most important characteristic for managerial decision making.
TRUE
This is a fundamental concept.
AACSB: Analytic
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Understand the reasons for estimating fixed and variable costs.
Topic Area: Basic Cost Behavior Patterns
2. In general, accounting records accumulate cost information according to its behavior (i.e.,
variable and fixed).
FALSE
Accounting records accumulate cost information by account.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
3. In general, cost behavior results are likely to differ between the engineering method and the
account analysis method.
TRUE
Results are likely to differ from method to method.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Topic Area: What Methods Are Used to Estimate Cost Behavior?
5-69
4. The engineering method of determining cost behavior is particularly useful for new activities or
products.
TRUE
This is true because there often is no history to rely on.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 Estimate costs using engineering estimates.
Topic Area: Engineering Method
5. One advantage of the engineering method is that it does not require data from prior periods to
estimate cost behavior.
TRUE
The engineering method is based on what needs to be done, not what was done in prior
periods.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
6. One advantage of the account analysis method for estimating cost behavior is that it includes
actual work conditions.
TRUE
The account analysis method is based on existing circumstances.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 05-03 Estimate costs using account analysis.
Topic Area: Account Analysis Method
7. The account analysis method is more subjective than other cost estimation methods because it
relies heavily on the personal judgment and experience of accountants.
TRUE
Different accountants will have different experience and will classify items accordingly.
AACSB: Analytic
Blooms: Apply
5-70
8. In general, the account analysis method focuses on the underlying relationship between cost
and activities from the previous period.
TRUE
The identification of the relationship between this relationship (the dependent and independent
variable) is key to the analysis.
AACSB: Analytic
Blooms: Understand
9. The relevant range represents those activity levels for which valid cost relationships have been
observed.
TRUE
This is a definition of the term relevant range.
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 05-04 Estimate costs using statistical analysis.
Topic Area: Statistical Cost Estimation
10. A scattergraph is useful for identifying outliers/irrelevant data points.
TRUE
This visual representation gives an indication of unusual or extreme points that are outside the
area determined to be the norm.
AACSB: Analytic
Blooms: Understand
11. One disadvantage of the high-low method is the highest and lowest points may not be
representative of normal operating activities.
TRUE
High and low points may reflect unusual circumstances.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-71
12. One advantage that regression techniques have over other cost estimation methods is it
generates information that can be used to determine how well the estimated cost equation will
predict future costs.
TRUE
It is objective, provides a number of statistics not available from other methods, and could be
the only feasible method when more than one predictor is used.
AACSB: Analytic
Blooms: Understand
Learning Objective: 05-05 Interpret the results of regression output.
Topic Area: Obtaining Regression Estimates
13. Because outliers are extreme data points, they can be included in the regression analysis and
not significantly affect the results.
FALSE
Outliers will significantly affect the results as they did in the High and Low analysis.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
14. In general, the use of multiple independent variables increases the proportion of the variation in
the dependent variable explained by the cost equation.
TRUE
This is a basic principal. The adjusted R-squared (R2) is the correlation coefficient squared
and adjusted for the number of independent variables used to make the estimate. This
adjustment to R2 recognizes that as the number of independent variables increases, R2
(unadjusted) increases.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-72
15. One way to control the effects of a nonlinear relation between total costs and volume is to
TRUE
This is done as a basis for defining cost-volume-profit relationship by the use of a smaller
range of data in order to avoid the need to use differential calculus.
AACSB: Analytic
Blooms: Apply
Learning Objective: 05-06 Identify potential problems with regression data.
Topic Area: Practical Implementation Problems
16. The linear cost estimate tends to understate the slope of the cost line in ranges close to
capacity.
TRUE
As capacity is approached there are changes in the costs such as additional overtime due to
scheduling problems.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
17. Cost estimates using regression analysis are always more accurate and dependable than cost
estimates using the scattergraph methods.
FALSE
Not always. If the data is linear the scattergraph method will give the same results as
regression analysis.
AACSB: Analytic
Blooms: Understand
18. A basic assumption of most cost estimation methods is cost behavior patterns are linear within
the relevant range.
TRUE
Most cost estimation models are linear models and assume that the underlying data is linear.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-73
Learning Objective: 05-07 Evaluate the advantages and disadvantages of alternative cost estimation methods.
Topic Area: How Is an Estimation Method Chosen?
19. The quality of the cost equation depends on collecting appropriate data.
TRUE
The results obtained are only as good as the data used. If data improves, so will the results.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
20. Different cost estimations methods may produce different cost equations, even when using the
same set of data.
TRUE
The general rule is that moving up the hierarchy of cost estimation methods will cost more to
implement but will return a more accurate result.
AACSB: Analytic
Blooms: Understand
Multiple Choice Questions
21. Which of the following statements is (are) true regarding cost behaviors?
(A) In general, accounting records accumulate cost information according to its behavior.
(B) Cost behaviors are the most important consideration in managerial decision making.
A. Only A is true.
B. Only B is true.
Accounting records are by account and not by behavior.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-74
22. Which cost estimation method does not use the company's cost information as its primary
source of information about the relationship between total costs and activity levels?
A. Scattergraph.
B. High-low.
D. Regression analysis.
E. Engineering estimates.
The engineering method uses time and motion studies (estimates), rather than cost estimates.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
23. A manager is trying to estimate the manufacturing costs of a new product. The company
makes several other products that utilize some of the same manufacturing procedures as the
new product. Which cost estimation method would be the best method to determine the total
cost of manufacturing the new product?
A. Engineering estimates.
B. Regression analysis.
D. Scattergraph.
E. High-low.
A new product has no previous history so there is no past data regression or account analysis
ability.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-75
24. Engineering cost estimates are usually based on operating conditions that are considered:
A. optimal.
B. practical.
C. attainable.
D. historical.
E. realistic.
Engineering estimates are often based on optimal conditions. This a difficulty in selecting this
technique.
AACSB: Analytic
Blooms: Understand
25. Which of the following costs would most likely be classified as variable, assuming the account
analysis method is used to determine cost behaviors?
A. Indirect materials.
B. Supervisory salaries.
C. Equipment maintenance.
D. Annual Christmas party.
E. Building occupancy costs.
Only indirect materials would have variable behavior. All the other items have fixed behavior.
AACSB: Analytic
Blooms: Understand
26. In the cost equation TC = F + VX, X is best described as the:

B. costs that do vary with changes in the activity level.
C. total cost estimate at a particular activity level.
D. activity level used to estimate the total cost.
For example, this would be the volume in number of units of output, by definition
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-76
27. In the cost equation TC = F + VX, V is best described as the:

B. intercept of the cost equation.
C. slope of the cost equation.
D. activity level used to estimate the dependent variable.
This is the variable cost per unit which makes up the slope of the variable cost curve.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
28. Which of the following cost estimation methods finds the fixed portion of a mixed cost before
calculating the variable portion?
A. Scattergraph.
B. High-low method.
All of the other methods estimate the variable portion either first or simultaneously with fixed
costs.
AACSB: Analytic
Blooms: Understand
29. The term "relevant range" as used in cost accounting means the range over which:
A. relevant costs are incurred.

B. costs may fluctuate.
C. cost relationships are valid.
D. cost data is available.
This is the level of activity for which a cost estimate may be valid.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
5-77
30. Which of the following cost estimation methods finds the variable portion of a mixed cost before
calculating the fixed portion?
A. Scattergraph.
B. High-low method.
Account analysis finds the fixed first; regression and engineering find fixed and variable
simultaneously.
AACSB: Analytic
Blooms: Understand
31. A disadvantage of the high-low method of cost analysis is that it:
A. typically results in a totally inaccurate cost formula.

B. is too time consuming to apply.
C. uses only two data points, which may not be representative of normal conditions.
D. relies totally on the judgment of the person performing the cost analysis.
The estimates are not always inaccurate, it is fast to apply, and it doesn't rely solely on
judgment.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Topic Area: High-Low Cost Estimation
32. In the standard regression equation of y = a + bx, the letter b is best described as the:
This a basic definition of the term of the formula.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-78
33. In the standard regression equation of y = a + bx, the letter a is best described as the:
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
34. In the standard regression equation of y = a + bx, the letter y is best described as the:
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
35. The coefficient of correlation is:
A. the range of values over which the probability may be estimated based upon the regression
equation results.
B. the proportion of the total variance in the dependent variable explained by the independent
variable.
C. the measure of variability of the actual observations from the predicting (forecasting)
equation line.
D. the relative degree that changes in one variable can be used to estimate changes in
another variable.
This is the definition.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-79
36. Given actual amounts of a semivariable cost for various levels of output, the method that will
always give the most reliable measure of the fixed and variable components is the:
A. high-low method.
B. linear regression method.
C. scattergraph method.
D. account analysis method.
Linear regression will always give the best line, high-low may give the best line, scattergraph
and account analysis rely on judgment.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
37. Which of the following statements regarding regression analysis is (are) true?
(A) One way to control the effects of a nonlinear relationship between total costs and activity is
(B) The linear cost estimate tends to understate the slope of the cost line in ranges close to
capacity.
A. Only A is true.
B. Only B is true.
When capacity is approached there are more scheduling problems and overtime may be
needed, changing the variable cost.
AACSB: Analytic
Blooms: Understand
5-80
38. Mount Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp
required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost
was $1.50 per direct labor hour?
A. $1,700.
B. $3,000.
C. $5,600.
D. $8,000.
$8,600 = FC + $1.50(400)(5); FC = $5,600
AACSB: Analytic
Blooms: Apply
39. Given the following information, compute the total number of units for the period:
A. 360.
B. 432.
C. 640.
D. 840.
$132,600 = $75(units) + 12,000($2.70) + .50(12,000)($2.70) + $36,000; Units = 640
AACSB: Analytic
Blooms: Apply
5-81
What are the direct labor costs per machine hour?
A. $20.00.
B. $16.00.
C. $14.29.
D. $10.00.
VC per M/C Hr. = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
If Shapely expects to use 10,000 machine hours next month, what are the estimated direct
labor costs?
A. $160,000.
B. $180,000.
C. $175,000.
D. $150,000.
VC per unit = ($200,000 - 120,000)/(14,000 - 6,000) = $10.00: FC = $120,000 - $10(6,000) =

$60,000; TC = $60,000 + $10 (10,000) = $160,000
AACSB: Analytic
Blooms: Apply
5-82
42. Hagler's Toupees has the following machine hours and production costs for the last six months
of last year:
If Hagler expects to incur 14,000 machine hours in January, what will be the estimated total
production cost using the high-low method?
A. $8,750.00.
B. $11,142.50.
C. $22,400.00.
D. $10,889.10.
VC per unit = ($12,080 - 9,580)/(15,500 - 11,500) = $.625; FC = $12,080 - $.625(15,500) =

$2,392.50; TC = $2,392.50 + $.625(14,000) = $11,142.50
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-83
43. The controller of Joy Co has requested a quick estimate of the manufacturing supplies needed
for the Morton Plant for the month of July, when production is expected to be 470,000 units to
meet the ending inventory requirements and sales of 475,000 units. Joy Co's budget analyst
has the following actual data for the last three months.
Using the high-low method to develop a cost estimating equation, the estimate of needed
manufacturing supplies for July would be: (CMA adapted)
A. $681,500.
B. $688,750.
C. $749,180.
D. $752,060.
E. $759,310.
VC per unit = ($853,560 - 723,060)/(540,000 - 450,000) = $1.45 per unit; FC = $853,560 -

$1.45(540,000) = $70,560; TC = $70,560 + $1.45(470,000) = $752,060
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
44. The Chambers Manufacturing Company recorded overhead costs of $14,182 at an activity
level of 4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated
that overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per
machine hour using the high-low method to estimate the cost equation?
A. $2.78.
B. $2.86.
C. $3.10.
D. $3.38.
($14,182 - 8,748)/(4,200 - 2,300) = $2.86
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
5-84
45. The Wiscow Manufacturing Company recorded overhead costs of $14,182 at an activity level
of 4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that
overhead of $9,730 was incurred at 2,600 machine hours. What is the total estimated cost for
2,600 machine hours using the high-low method to estimate the cost equation?
A. $9,730.
B. $9,606.
C. $9,106.
D. $8,788.
VC = ($14,182 - 8,748)/(4,200 - 2,300) = $2.86; FC = $14,182 - 2.86(4,200) = $2,170; TC =

$2,170 + $2.86(2,600) = $9,606
AACSB: Analytic
Blooms: Apply
46. The cost accountants at the Doering Company regressed total overhead costs and direct labor
hours for the past 30-months and reported the following results:
What is the estimated overhead cost if 225 direct labor hours are expected to be used in the
upcoming period? (rounded to the nearest whole dollar)
A. $10,534.
B. $9,882.
C. $9,230.
D. $8,617.
$596.36 + $41.27(225) = $9,882.11
AACSB: Analytic
Blooms: Apply
Topic Area: Statistical Cost Estimation Using Regression Analysis
5-85
form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for
last year and the results of the regression analysis are as follows: (CMA adapted)
What would be the cost equation if regression analysis is used?
A. Maintenance Costs = 7.2884 + 684.65 × Hours of Activity.

B. Maintenance Costs = 684.65 + 49.515 × Hours of Activity.
C. Maintenance Costs = 684.65 + 7.2884 × Hours of Activity.
This relies on the definition of the A and B coefficient.
AACSB: Analytic
Blooms: Apply
5-86
Based upon the data derived from the regression analysis, 420 maintenance hours in a month
would mean the maintenance costs would be budgeted at: (rounded to the nearest whole
dollar)
A. $3,797.
B. $3,780.
C. $3,746.
D. $3,600.
E. $3,461.
$684.65 + $7.2884(420) = $3,746
AACSB: Analytic
5-87
Blooms: Analyze
5-88
What is the variable cost per hour using the high-low method to estimate the cost equation?
A. $9.00.
B. $7.50.
C. $0.1333.
D. $0.1111.
($4,470 - 2,820)/(520 - 300) = $7.50
AACSB: Analytic
Blooms: Apply
5-89
What is the fixed cost per month using the high-low method to estimate the cost equation?
A. $570.
B. $600.
C. $1,140.
D. $2,250.
VC = ($4,470 - 2,820)/(520 - 300) = $7.50; FC = $2,820 - 7.50 × 300 = $570
AACSB: Analytic
Blooms: Apply
5-90
Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would
mean the maintenance costs would be budgeted at:
A. $3,150.
B. $3,600.
C. $3,720.
D. $3,780.
E. $3,461.
$570 + $7.50(420) = $3,720
AACSB: Analytic
5-91
Blooms: Analyze
5-92
What would be the cost equation if the high-low method is used?
A. Maintenance Costs = 9.00 × Hours of Activity.

B. Maintenance Costs = 3,600 + 400 × Hours of Activity.
C. Maintenance Costs = 570 + 7.50 × Hours of Activity.
VC = ($4,470 - 2,820)/(520 - 300) = $7.50; FC = $2,820 - 7.50 × 300 = $570
AACSB: Analytic
Blooms: Apply
5-93
5-94
53. The Business School at Eastern College is accumulating data as a first step in the preparation
of next year's budget development. One cost that is being looked at closely is administrative
costs as a function of student credit hours. Data on administrative costs and credit hours for the
past thirteen months are shown below:
analysis:
If the controller uses the high-low method to estimate costs, the variable cost per credit hour
is:
5-95
A. $82.33.
B. $103.56.
C. $114.30.
D. $201.22.
VC = ($228,580 - 82,613)/(1,392 - 115) = $114.30
AACSB: Analytic
Blooms: Apply
5-96
analysis:
equation for administrative salaries is:
5-97
A. $198,808.
B. $69,474.40.
C. $96,409.42.
D. $19,943.58.
VC = ($228,580 - 82,613)/(1,392 - 115) = $114.30; FC = $228,580 - 114.30 × 1,392 =

69,474.40
AACSB: Analytic
Blooms: Apply
5-98
analysis:
If the controller uses the high-low method to estimate costs, the cost equation for administrative
salaries is:
5-99
D. Cost = $198,808.
VC = ($228,580 - 82,613)/(1,392 - 115) = $114.30; FC = $228,580 - 114.30 × 1,392 =

69,474.40
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-100
analysis:
Based on the results of the high-low analysis, the estimate of administrative costs in a month
5-101
A. $183,774.
B. $199,969.
C. $201,210.
D. $198,808.
$69,474.40 + $114.30 × 1,000 credit-hours = $183,774
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-102
analysis:
If the controller uses regression analysis to estimate costs, the cost equation for administrative
salaries is:
5-103
C. Cost = $96,647.02 + $103.06 x Credit-hours.
D. Cost = $12,521.26 + $11.99 × Credit-hours.
Reading the correct values from the excel output.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-104
analysis:
If the controller uses regression analysis to estimate costs, the estimate of the variable portion
of administrative salaries is:
A. Cost = $8.63 × Credit-hours.

B. Cost = $0.87 × Credit-hours.
D. Cost = $11.99 × Credit-hours.
Correctly reading the Excel output.
AACSB: Analytic
Blooms: Apply
5-105
analysis:
5-106
A. Cost = $103.56.
B. Cost = $12,521.26.
C. Cost = $19,943.58.
D. Cost = $96,647.02
Correctly reading the Excel output.
AACSB: Analytic
Blooms: Apply
5-107
analysis:
Based on the results of the regression analysis, the estimate of administrative costs in a month
5-108
A. $198,808.
B. $201,000.
C. $199,707.
D. $96,409.
$96,647.02 + $103.06 x 1000=$199,707
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-109
analysis:
The correlation coefficient for the regression equation for administrative costs is:
5-110
A. √0.931.
B. 0.871.
C. 0.859.
D. √0.933
This is multiple r.
AACSB: Analytic
Blooms: Apply
5-111
analysis:
5-112
A. 93.3%.
B. 86.8%.
C. 85.9%.
D. 96.6%.
This is r-squared.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
5-113
analysis:
Based on the results of the regression analysis, the estimate of the variable portion of
administrative costs in a month with 200 credit hours would be:
5-114
A. $198,808.
B. $20,612.
C. $117,121.
D. $40,242.
$103.06 × 200 = $20,612
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
64. In determining cost behavior in business, the cost function is often expressed as Y = a + bX.
Which one of the following cost estimation methods should not be used in estimating fixed and
variable costs for the equation? (CMA adapted)
A. Scattergraph method.
B. Simple regression.
C. High and low point method.
D. Multiple regression.
E. Management analysis of data.
Management analysis of data is a judgmental approach.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
65. Which of the following is the difference between variable costs and fixed costs: (CMA adapted)
A. variable costs per unit fluctuate and fixed costs per unit remain constant.
B. variable costs per unit are fixed over the relevant range and fixed costs per unit are
variable.
C. total variable costs are variable over the relevant range and fixed in the long term, while
fixed costs never change.
D. variable costs per unit change in varying increments, while fixed costs per unit change in
equal units.
E. total variable costs can be varied by management, while fixed costs are uncontrollable.
Variable costs per unit are constant, fixed costs in total are constant; in the long term all costs
are variable.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
5-115
66. Which of the following may be used to estimate how inventory warehouse costs are affected by
both the number of shipments and the weight of the material handled? (CPA adapted)
A. Economic order quantity analysis.

B. Probability analysis.
C. Correlation analysis.
D. Multiple regression analysis.
Only multiple regression analysis is a cost estimation approach.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
67. A cost driver is defined as: (CMA adapted)
A. the largest cost in a manufacturing process.

B. a fixed cost that cannot be avoided.
C. the significant factor in developing a new product.
D. an indirect cost that cannot be traced to a particular cost objective but is essential to the
business.
E. a causal factor that increases the total cost of a cost objective.
Definition of the term cost driver.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
68. In the learning curve equation Y = aXb, the Y term represents:

Definition of the terms.
AACSB: Analytic
Blooms: Understand
Learning Objective: 05-09 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.
5-116
Topic Area: Learning Curves
69. In the learning curve equation Y = aXb, the X term represents:

AACSB: Analytic
Blooms: Understand
70. In the learning curve equation Y = aXb, the "a" term represents:

AACSB: Analytic
Blooms: Understand
71. In the learning curve equation Y = aXb, the "b" term represents:

AACSB: Analytic
Blooms: Understand
5-117
72. Which of the following statements regarding the learning phenomenon is true?
A. The more units that are produced, the greater the average time to produce a single unit.
B. The relationship between number of units produced and the marginal time to produce the
latest unit is linear.
C. Total labor cost is a linear function of the total units produced.
D. As production doubles, the time to produce the latest unit decreases.
Learning curves are nonlinear. Learning means the latest unit takes less time than the previous
units.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic Area: Learning Phenomenon
73. Which of the following is a common assumption of cost estimation?
A. Cost behavior depends on many cost drivers.

B. Cost behavior patterns are nonlinear outside of the relevant range.
C. Cost behavior patterns are linear within the relevant range.
D. Costs are curvilinear.
Two basic assumptions: single (or few) cost driver(s) and linearity of costs.
AACSB: Analytic
Blooms: Apply
behavior?
A. Missing data.
B. Outliers.
C. Allocated costs.
D. Depreciable assets.
Depreciable assets do not create data problems.
AACSB: Analytic
Blooms: Apply
5-118
behavior?
A. Non-numeric data.
B. Inflation.
C. Discretionary costs.
D. Mismatched time periods.
Non-numeric data is easily incorporated into the analysis using indicator variables.
AACSB: Analytic
Blooms: Apply
A. 74.00 hours.
B. 57.80 hours.
C. 56.00 hours.
D. 54.40 hours.
68/80 = 85% × 68 = 57.80 hours
AACSB: Analytic
Blooms: Apply
5-119
A. 74.00 hours.
B. 57.80 hours.
C. 56.00 hours.
D. 49.13 hours.
68/80 = 85% × 68 = 57.80 hours for 4th unit × 85% = 49.13 hours for 8th unit
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-120
78. Thul Company is interested in establishing the relationship between electricity costs and
machine hours. Data have been collected and a regression analysis prepared using Excel. The
monthly data and the regression output follow:
If the controller uses the high-low method to estimate costs, the variable cost per machine hour
is:
A. $6.25.
B. $6.90.
C. $5.77.
D. $11.70.
VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25
AACSB: Analytic
Blooms: Apply
5-121
equation for electricity cost is:
A. $3,726.88.
B. $1,425.18.
C. $1,625.00.
D. $22,825.00.
VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25; FC = $31,000 - (6.25 × 4,700) = $1,625
AACSB: Analytic
Blooms: Apply
5-122
If the controller uses the high-low method to estimate costs, the cost equation for electricity
cost is:

B. Cost = $1,625.00 + $6.25 × Machine-hours.
D. Cost = $22,825.
VC = ($31,000 - 13,500)/(4,700 - 1,900) = $6.25; FC = $31,000 - (6.25 × 4,700) = $1,625
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-123
Based on the results of the high-low analysis, the estimate of electricity costs in a month with
2,200 machine hours would be:
A. $15,375.
B. $22,825.
C. $15,180.
D. $16,427.
$1,625 + $6.25 × 2,200 machine-hours = $15,375
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-124
If the controller uses regression analysis to estimate costs, the cost equation for electricity cost
is:

B. Cost = $3,726.88 + $1,682.82 × Machine-hours.
C. Cost = $1,682.82 + $0.49 × Machine-hours.
D. Cost = $3,726.88 + $5.77 × Machine-hours.
Reading the correct values from the excel output.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-125
If the controller uses regression analysis to estimate costs, the estimate of the variable portion
of electricity cost is:
A. Cost = $11.70 × Machine-hours.

B. Cost = $0.93 × Machine-hours.
D. Cost = $0.49 × Machine-hours.
Reading the correct value from the excel output.
AACSB: Analytic
Blooms: Apply
5-126
A. Cost = $5.77.
B. Cost = $1,682.82.
C. Cost = $1,425.18.
D. Cost = $3,726.88
Reading the correct value from the excel output.
AACSB: Analytic
Blooms: Apply
5-127
Based on the results of the regression analysis, the estimate of electricity costs in a month with
2,200 machine hours would be: (rounded to the nearest whole dollar)
A. $3,727.
B. $16,421.
C. $15,180.
D. $22,825.
$3,726.88 + $5.77 × 2,200 = $16,421
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-128
The correlation coefficient for the regression equation for electricity costs is:
A. 0.965.
B. 0.932.
C. 0.925.
D. 0.982.
This is multiple r.
AACSB: Analytic
Blooms: Apply
5-129
A. 0.965.
B. 0.932.
C. 0.925.
D. 0.982.
This is r-squared.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Essay Questions
5-130
88. The Teal Company's total overhead costs at various levels of activity are presented below:
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is as
follows:
Required:
(a.) $12,000 + 8.36667 × Direct Labor Hour

(b.) $92,000 + 23.6667 × Direct Labor Hour
Feedback: (a.) Utilities per hour = $137,700/9,000 = $15.30 per direct labor hour
Utility cost at the high point = $15.30(10,500) = $160,650
Utility cost at the low point = $15.30(6,000) = $91,800
Maintenance cost at the high point = $340,500 - 80,000 - 160,650 = $99,850
Maintenance cost at the low point = $234,000 - 80,000 - 91,800 = $62,200
Maintenance cost per hour = ($99,850 - 62,200)/(10,500 - 6,000) = $8.36667
Fixed Maintenance costs per month = $99,850 - ($8.36667 × 10,500) = $12,000
Total maintenance costs = $12,000 + $8.36667 per Direct Labor Hour
(b.) Total overhead costs = ($80,000 + 12,000) + ($15.30 + 8.36667) × Direct Labor Hours =
$92,000 + $23.66667 × Direct Labor Hours
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-131
89. The following manufacturing costs were incurred by the RST Company in 2011:
These costs were incurred to produce 25,000 units of product. Variable manufacturing
overhead was 80% of the direct materials cost.
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected
to increase by 7.5%.
Required:
(a.) $482,175 (2012)

(b.) 2011 unit cost: $522,500/25,000 = $20.90; 2012 unit cost: $482,175/20,000 = $24.11
Feedback: (a.) Variable overhead costs (2011) = .80($112,500) = $90,000

Fixed overhead costs (2011) = $235,000 - $90,000 = $145,000
(1) [($112,500)/25,000)(1.15)](20,000) = $103,500

(2) ($175,000/25,000)(20,000) = $140,000
(3) [($90,000)/25,000)(1.15)](20,000) = $82,800
(4) ($145,000)(1.075) = $155,875
AACSB: Analytic
Blooms: Analyze
5-132
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots might
also be having an impact on the amount of their monthly manufacturing overhead costs. In
order to investigate this possibility, the company collected information on its monthly
manufacturing overhead costs, production in units, and average production lot size for 2012.
Required:
(a.) Use the high-low method to estimate next month's manufacturing overhead costs,
assuming the company is planning to produce 92,000 units.
(b.) Use the high-low method to estimate next month's manufacturing overhead costs,
assuming the company is planning to run a 21-lot size.
(a.) $999,498
(b.) $922,929
Feedback: (a.) Variable cost per unit = ($1,053,500 - 825,000)/(105,000 - 50,000) = $4.154
Fixed costs = $1,053,500 - ($4.154)(105,000) = $617,330
TC = $617,330 + ($4.154)(92,000) = $999,498
(b.) Variable cost per unit = ($1,053,500 - 825,000)/(25 - 18) = $32,642.857
Fixed costs = $1,053,500 - ($32,642.857)(25) = $237,429
TC = $237,429 + ($32,642.857)(21) = $922,929
AACSB: Analytic
Blooms: Analyze
5-133
91. A company ran a regression analysis using direct labor hours as the independent variable and
manufacturing overhead costs as the dependent variable. The results are summarized below:
The company is planning on operating at a level that would require 12,000 direct labor hours
per month in the upcoming year.
Required:
(a.) Use the information from the regression analysis to write the cost estimation equation for
the manufacturing overhead costs.
(b.) Compute the estimated manufacturing overhead costs per month for the upcoming year.
(a.) Total manufacturing overhead costs = $14,600 + ($12.55 × Direct Labor Hours)
(b.) $165,200
Feedback: (b.) Total manufacturing overhead costs = $14,600 + ($12.55)(12,000) = $165,200
AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
5-134
costs. In the past, manufacturing overhead costs have been related to production levels.
However, some production managers have indicated that the size of their production lots might
also be having an impact on the amount of their monthly manufacturing overhead costs. In
order to investigate this possibility, the company collected information on its monthly
manufacturing overhead costs, production in units, and average production lot size for 2012.

Required:
overhead costs, assuming the company is planning to produce 92,000 units. (final answer
should be rounded to the nearest whole dollar)
costs, assuming the company is planning to produce 92,000 units with an average lot size of
21. (final answer should be rounded to the nearest whole dollar)
(a.) $974,107
(b.) $958,606
(c.) The multiple regression improves the fit over the ordinary regression. The r-square
improves from .628 to .777. Additional information may include tests to determine the
significance of the coefficients.
5-135
Feedback: (a.) Total manufacturing costs = $691,741 + ($3.0692 × 92,000) = $974,107
(b.) Total manufacturing costs = [$482,171 + ($2.4918 × 92,000) + ($11,770.939 × 21)] =
$958,606
AACSB: Analytic
Blooms: Analyze
93. The Heidi Company produces a single product and has total costs ranging from $321,875 (at
20,000 units) to $966,875 (at 80,000 units). Sales volume in 2012 was 32,000, and operating
income was $45,125. Heidi's product is highly specialized; therefore, no units are kept in
inventory.
Required:
(a.) Determine the cost equation for Heidi's costs.

(b.) Prepare a contribution margin income statement for 2012 including separate columns for
total dollars, per unit dollars, and percentages.
(c.) Determine the break-even point (in units and in dollars).
(a.) $106,875 + 10.75 × units

(b.)
(c.) 22,500 units; $348,750
Feedback: (a.) Variable cost per unit = ($966,875 - 321,875)/(80,000 - 20,000) = $10.75
Fixed costs = $966,875 - (80,000)(10.75) = $106,875
(b.) Total contribution margin = $45,125 + 106,875 = $152,000
Total variable costs = $10.75(32,000) = $344,000
Total sales = $344,000 + 152,000 = $496,000
Selling price per unit = $496,000/32,000 = $15.50
Contribution margin per unit = $152,000/32,000 = $4.75
Contribution margin ratio = $152,000/496,000 = 30.645%
(c.) BE = $106,875/4.75 = 22,500 units
BE = $106,875/.30645 = $348,752 (or 22,500 units × $15.50 = $348,750)
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-136
94. Teeger Enterprises had an average cost of $10.75 during a month when 50,000 units were
produced. When production doubled several months later, the average cost dropped to $8.25.
Required:

(a.) total cost = $250,000 + $5.75 × units

(b.) $8.875
Feedback: Total costs must be used rather than unit costs.

(a.) Month 1: 50,000 units × $10.75 = $537,500; Month 2: 100,000 × $8.25 = $825,000.
Variable cost = ($825,000 - 537,500)/(100,000 - 50,000) = $5.75. Fixed cost: $825,000 -
100,000 × $5.75 = $250,000
(b.) $250,000 + $5.75 × 80,000 = $710,000/80,000 units = $8.875
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
95. Sharona Products had costs of $600,000 when sales equaled 75,000 units. When sales
increased by 25,000 units, costs increased by $125,000. The selling price is $9 per unit.
Required:

(a.) Costs = $225,000 + $5 × units sold

(b.)
Feedback: (a.) Variable cost = $125,000/25,000 = $5.00. Fixed cost: $600,000 - 75,000 ×
$5.00 = $225,000
AACSB: Analytic
Blooms: Analyze
5-137
96. Braxton, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 20%. Braxton found that the
first unit of a new product required 120 hours to complete. The second unit was completed
using only 114 hours. Braxton believes that the rate of learning that was observed will continue
for all 8 units of the contract. The labor wage paid is $25/hour. The following factors are
available for various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b = -
.1520; 95%, b = -.0740.
Required:
(b.) What will the total fee be for the contract?
(a.) 871.36 hrs × $25 = $21,784

(b.) $21,784 × 120% = $26,140.80
Feedback: (a.) The learning rate is 114 hrs/120 hrs = 95% learning rate.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-08 (Appendix A) Use Microsoft Excel to perform a regression analysis.
5-138
97. Getz Products, Inc., has found that new products follow a learning curve. The first two units
Required:
(a.) 225 × .9 = 202.50

(b.) 202.50 × .9 = 182.25
(c.) 182.25 × .9 = 164.025
Feedback: Learning rate = 225/250 = 90%
AACSB: Analytic
Blooms: Analyze
5-139
98. Cameron Company is interested in establishing the relationship between utility costs and
Required:
(a.) What is the equation for utility costs using the regression analysis?
(b.) Does the variable "machine hours" have statistical significance? Explain.
(c.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.
(a.) $4,472.26 + $5.329 × machine hours

(b.) Yes, the t-stat of 11.70 exceeds the rough rule of thumb of 2.
(c.) $20,459.26
Feedback: (c.) $4,472.26 + $5.329 × 3,000 = $20,459.26
AACSB: Analytic
Blooms: Analyze
5-140
99. Cameron Company is interested in establishing the relationship between utility costs and
Required:
(a.) What is the equation for utility costs using the high-low method?
(b.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.
(a.) $1,950.19 + $5.7692 × units

(b.) $19,257.79
Feedback: (a.) Variable: ($37,200 - 16,200)/(6,110 - 2,470) = $5.7692; Fixed: $37,200 - 6,110
× 5.7692 = $1,950.19
(b.) $1,950.19 + $5.7692 × 3,000 = $19,257.79
AACSB: Analytic
Blooms: Analyze
5-141
100. Hawley Corp. wants to develop a cost equation for its administrative costs. The controller
believes the appropriate cost driver is units produced. Last year's data are presented below:
Required:
(a.) What is the equation for administrative costs using the high-low method?
(b.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.
(a.) $2,145.94 + $0.6346 × units

(b.) $21,183.94
Feedback: (a.) Variable: ($40,920 - 17,820)/(61,100 - 24,700) = $0.6346; Fixed: $40,920 -

61,100 × .6346 = $2,145.94
(b.) $2,145.94 + $0.6346 × 30,000 = $21,183.94
AACSB: Analytic
Blooms: Analyze
5-142
101. Hawley Corp. wants to develop a cost equation for its administrative costs. The controller
believes the appropriate cost driver is units produced. Last year's data are presented below:
Required:
(a.) What is the equation for administrative costs using the regression analysis?
(b.) Does the variable "units produced" have statistical significance? Explain.
(c.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.
(a.) $4,919.48 + $0.586154 × units

(b.) Yes, the t-stat of 11.70 exceeds the rough rule of thumb of 2
(c.) $22,504.10
Feedback: (c.) $4,919.48 + $0.586154 × 30,000 = $22,504.10
AACSB: Analytic
Blooms: Analyze
5-143
102. The following manufacturing costs were incurred by the BGH Company in 2011:
These costs were incurred to produce 50,000 units of product. Variable manufacturing
overhead was 70% of the direct materials cost.
direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected
to increase by 8%.
Required:
(a.) $960,220 (2012)

(b.) 2011 unit cost: $1,045,000/50,000 = $20.90; 2012 unit cost: $960,220/40,000 = $24.01
Feedback: (a.) Variable overhead costs (2011) = .70($225,000) = $157,500

Fixed overhead costs (2011) = $470,000 - $157,500 = $312,500
(1) [($225,0000)/50,000)(1.12)](40,000) = $201,600

(2) ($350,000/50,000)(40,000) = $280,000
(3) [($157,500)/50,000)(1.12)](40,000) = $141,120
(4) ($312,500)(1.08) = $337,500
AACSB: Analytic
Blooms: Analyze
5-144
103. The Mallard Company's total overhead costs at various levels of activity are presented below:
Assume that the overhead costs above consist of indirect labor, scheduling salaries, and
maintenance. The breakdown of these costs for the month of November is as follows:
Required:
(a.) $24,000 + $9.50 per Direct Labor Hour

(b.) $149,000 + $21.70 × Direct Labor Hour
Feedback: (a.) Indirect labor per hour = $219,600/18,000 = $12.20 per direct labor hour
Indirect labor cost at the high point = $12.20(21,000) = $256,200
Indirect labor cost at the low point = $12.20(12,000) = $146,400
Maintenance cost at the high point = $604,700 - 125,000 - 256,200 = $223,500
Maintenance cost at the low point = $409,400 - 125,000 - 146,400 = $138,000
Maintenance cost per hour = ($223,500 - 138,000)/(21,000 - 12,000) = $9.50
Fixed Maintenance costs per month = $223,500 - ($9.50) × (21,000) = $24,000
Total maintenance costs = $24,000 + $9.50 per Direct Labor Hour
(b.) Total overhead costs = ($125,000 + 24,000) + ($12.20 + 9.50) × Direct Labor Hours =
$149,000 + $21.70 × Direct Labor Hours
AACSB: Analytic
Blooms: Analyze
5-145
104. The Ottawa Company has traditionally estimated manufacturing overhead costs using
production volume. Some of the production managers believe that the number of set ups may
also have an impact on monthly manufacturing overhead costs. In order to investigate this
possibility, the company collected information on its monthly manufacturing overhead costs,
production in units, and number of setups for 2012.

Equation: $650,398 + $3.1061 × units
r-square: .707
Equation: $464,481 + $2.5356 × units + $11,631.6048 × lot size
r-square: .867
Required:
overhead costs, assuming the company is planning to produce 75,000 units. (final answer
should be rounded to the nearest whole dollar)
costs, assuming the company is planning to produce 75,000 units with an average lot size of
18. (final answer should be rounded to the nearest whole dollar)
(a.) $883,356
(b.) $864,020
(c.) The multiple regression improves the fit over the ordinary regression. The r-square
improves from .707 to .867. Additional information may include tests to determine the
significance of the coefficients.
Feedback: (a.) Total manufacturing costs = $650,398 + ($3.1061 × 75,000) = $883,356

(b.) Total manufacturing costs = [$464,481 + ($2.5356 × 75,000) + ($11,631.6048 × 18)] =
$864,020
5-146
AACSB: Analytic
Blooms: Analyze
105. Disher Enterprises had an average cost of $8.60 during a month when 75,000 units were
produced. When production was 125,000 units several months later, the average cost dropped
to $6.98.
Required:

(a.) Total cost = $303,750 + $4.55 × units

(b.) $7.3114
Feedback: Total costs must be used rather than unit costs.

(a.) Month 1: 75,000 units × $8.60 = $645,000; Month 2: 125,000 × $6.98 = $872,500. Variable
cost = ($872,500 - 645,000)/(125,000 - 75,000) = $4.55. Fixed cost: $872,500 - 125,000 ×
$4.55 = $303,750
(b.) $303,750 + $4.55 × 110,000 = $804,250/110,000 units = $7.3114
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-147
106. Stottlemeyer Products had costs of $950,000 when sales equaled 55,000 units. When sales
increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit.
Required:

(a.) Costs = $125,000 + $15 × units sold

(b.)
Feedback: (a.) Variable cost = ($1,400,000 - 950,000)/(85,000 - 55,000) = $15.00. Fixed cost:
$950,000 - 55,000 × $15.00 = $125,000
AACSB: Analytic
Blooms: Analyze
5-148
107. Young, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus
contract, with the total to be received equal to the total labor cost + 30%. Young found that the
only 76.5 hours. Young believes that the rate of learning that was observed will continue for all
8 units of the contract. The labor wage paid is $40/hour. The following factors are available for
various rates of learning: 80% learning, b = -.3219; 85%, b = -.2345; 90%, b = -.1520; 95%, b =
-.0740.
Required:
(b.) What will be the total fee for the contract?
(a.) 534.21 hrs × $40 = $21,368.40

(b.) $21,368.40 × 130% = $27,778.92
Feedback: (a.) The learning rate is 76.5 hrs/90 hrs = 85% learning rate.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-149
108. Webster Products, Inc., has found that new products follow a learning curve. The first two units
Required:
(a.) 90 × .8 = 72.00
(b.) 72.00 × .8 = 57.60
(c.) 57.60 × .8 = 46.08
Feedback: Learning rate = 90/112.5 = 80%
AACSB: Analytic
Blooms: Analyze
109. Explain the difference between the engineering method of cost estimation and the account
analysis method.
The engineering method is based on what must be done to perform an activity; the account
analysis analyzes what was done in the past to perform the activity. Engineering is what
should, account analysis is what was.
AACSB: Analytic
Blooms: Understand
5-150
110. Describe the engineering method of cost estimation. Provide two advantages and two
disadvantages associated with the engineering approach to cost estimation.
The engineering method is based on what needs to be performed in order to produce a good or
service. One advantage is it can detail each step required to perform the operation; a second
advantage is it does not require data from prior activities—it can be used for new activities.
One disadvantage is it can be expensive to conduct since it evaluates every activity; a second
disadvantage is the estimates are often based on optimal conditions.
AACSB: Analytic
Blooms: Understand
111. Describe two advantages and two disadvantages of the high-low method of cost estimation.
Advantages include it only requires two data points and is easy to apply. Disadvantages
include most of the information available is ignored and the high and low points may not be
representative of typical activity.
AACSB: Analytic
Blooms: Understand
112. What are "outliers" and what effect does their presence have when using regression analysis
for cost estimation?
An outlier is a data point that lies a significant distance away from the regression line. Since the
regression line is computed so the sum of the square of each error (distance between the
predicted value and the actual value) is minimized, one point situated at an extreme distance
will cause a very large impact on estimating the regression line.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Topic Area: Legal Practical Implementation Problems
5-151
113. Describe the effect on cost estimation of four of the following five problems: 1) missing data, 2)
outliers, 3) allocated and discretionary costs, 4) inflation, or 5) mismatched time periods.
Students should choose any 4 of the 5:

1) missing data: Depending on the data, this could have little impact (if the data are
representative) or have a very large impact (if the data include extreme values).
2) outliers: Extreme observations can unduly affect the cost estimates. Since regression
minimizes the sum of the square of the errors, the outlier has a larger impact on the estimation
than a more representative point.
3) allocated and discretionary costs: An allocated cost may in fact be fixed, but the allocation
relates it to activity, so it will appear variable. Discretionary cost behavior may be budgeted so
that it appears variable.
4) inflation: Historical data will not reflect future cost behavior due to changing prices.
5) mismatched time periods: This will cause inaccuracies in relating cost with the activity. The
cost will be for one period, the activity will be from a different period.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
Topic Area: Data Problems
5-152

Fundamentals of Cost Accounting 4th Edition Lanen Test Bank 1

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True / False Questions

10. A scattergraph is useful for identifying outliers/irrelevant data points.

Multiple Choice Questions

26. In the cost equation TC = F + VX, X is best described as the:

A. costs that do not vary with changes in the activity level.

27. In the cost equation TC = F + VX, V is best described as the:

A. costs that do not vary with changes in the activity level.

A. relevant costs are incurred.

31. A disadvantage of the high-low method of cost analysis is that it:

A. typically results in a totally inaccurate cost formula.

What are the direct labor costs per machine hour?

What would be the cost equation if regression analysis is used?

A. Maintenance Costs = 7.2884 + 684.65 × Hours of Activity.

What would be the cost equation if the high-low method is used?

A. Maintenance Costs = 9.00 × Hours of Activity.

A. Economic order quantity analysis.

67. A cost driver is defined as: (CMA adapted)

A. the largest cost in a manufacturing process.

A. the labor time required to produce the first unit.

69. In the learning curve equation Y = aXb, the X term represents:

A. the labor time required to produce the first unit.

A. the labor time required to produce the first unit.

A. the labor time required to produce the first unit.

73. Which of the following is a common assumption of cost estimation?

A. Cost behavior depends on many cost drivers.

How much time will be needed to complete the 4th unit?

How much time will be needed to complete the 8th unit?

A. Cost = $3,726.88 + $5.77 × Machine-hours.

A. Cost = $1,425.18 + $12.00 × Machine-hours.

A. Cost = $11.70 × Machine-hours.

Regression analysis results of the information presented above are as follows:

(a.) Determine the cost equation for Heidi's costs.

(a.) Determine the fixed and variable portions of production costs.

(a.) Determine the fixed and variable portions of costs.

Regression analysis results of the information presented above are as follows:

(a.) Determine the fixed and variable portions of production costs.

(a.) Determine the fixed and variable portions of costs.

True / False Questions

This is a fundamental concept.

Accounting records accumulate cost information by account.

Results are likely to differ from method to method.

This is true because there often is no history to rely on.

The account analysis method is based on existing circumstances.

This is a definition of the term relevant range.

10. A scattergraph is useful for identifying outliers/irrelevant data points.

High and low points may reflect unusual circumstances.

Multiple Choice Questions

Accounting records are by account and not by behavior.

26. In the cost equation TC = F + VX, X is best described as the:

A. costs that do not vary with changes in the activity level.

A. costs that do not vary with changes in the activity level.

A. relevant costs are incurred.

31. A disadvantage of the high-low method of cost analysis is that it:

A. typically results in a totally inaccurate cost formula.

This a basic definition of the term of the formula.

This a basic definition of the term of the formula.

This a basic definition of the term of the formula.

35. The coefficient of correlation is:

This is the definition.

$8,600 = FC + $1.50(400)(5); FC = $5,600

$132,600 = $75(units) + 12,000($2.70) + .50(12,000)($2.70) + $36,000; Units = 640