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Chapter 08 - Cost Estimation
Chapter 08
Cost Estimation
Multiple Choice Questions
1. Which of the four types of cost drivers - activity-based, volume-based, structural and
executional - are often best related to linear cost estimation methods?
A. Activity-based only.
B. Activity-based and volume-based.
C. Structural and volume-based.
D. Executional and volume-based.
E. Structural and executional.
2. Which of the following five steps (out of six) of cost estimation is out of order?
A. Step 1: Define the cost object to be estimated.
B. Step 2: Determine the cost driver(s).
C. Step 3: Collect relevant data on the cost of the cost object and the cost driver.
D. Step 4: Evaluate the accuracy of the cost estimate.
E. Step 5: Graph the data.
3. The identification of cost drivers is perhaps the most important step in developing the cost
estimate because:
A. It is the first step in cost estimation.
B. It is the final step in cost estimation.
C. There may be a number of relevant drivers; some not immediately obvious.
D. The other steps are easier to execute.
E. It requires much more time than the other steps.
4. Technology and complexity issues often lead management to simplify and to:
A. Use linear estimation methods.
B. Use volume-based costing and nonlinear estimation methods.
C. Use volume-based costing methods.
D. Use nonlinear estimation methods.
E. Use activity-based costing and volume-based costing methods.
8-1
5. Data collected on the cost objects and cost drivers for cost estimation must be:
A. Brief and limited.
B. Exhaustive.
C. Concrete.
D. Consistent and accurate.
E. Varied.
6. The objective of the fourth step in cost estimation, graphing the data, is intended to:
A. Identify unusual patterns.
B. Show data in two dimensions.
C. Enhance the cost estimation process.
D. Allow for subjectivity in cost estimation.
7. Selection and employment of the correct estimation method is:

A. Easy once the data is gathered.
B. Relatively easy because only two effective methods exist.
C. Dependent on the precision/cost tradeoff for the estimation objectives.
D. Primarily subjective in nature.
E. Difficult because so many effective methods are available.
8. Regression analysis is better than the high-low method of cost estimation because regression
analysis:
A. Is mathematical.
B. Can provide greater precision and reliability.
C. Fits its data into a mathematical equation.
D. Takes less time.
E. Is a statistical method.
9. When there are two or more cost drivers, regression is termed:

A. Simple.
B. Binary.
C. Multiple.
D. Curvilinear.
E. Synergistic.
8-2
10. The independent variable in regression analysis is:

A. The cost to be estimated.
B. The cost driver used to estimate the value of the dependent variable.
C. Hard to define because of its independence.
D. Usually expressed as a range of values.
E. Not always necessary to perform regression analysis.
11. High-low and regression cost estimation methods are alike in that they both:
A. Have an intercept term and a slope term.
B. Have an intercept term but not a slope term.
C. Have a slope term but not an intercept term.
D. Use all data points.
E. Use only a few selected data points.
12. A data point that is outside the normal distribution of data, called an "outlier," is often
removed from the data set before analysis because it:
A. Is obviously due to an inaccuracy in the calculations.
B. Can distort the results of the data analysis.
C. Has an upward bias on the statistical measures in regression.
D. Will always add bias to the results of a high-low analysis.
13. A variable used in regression analysis that represents the presence or absence of a condition,
e.g., seasonality, is called a (n):
A. Random variable.
B. Dummy variable.
C. Extraneous variable.
D. Correlating variable.
E. Redundant variable.
8-3
14. An R-squared value that approaches one (1.0) would indicate:

A. An average degree of explanatory power.
B. A low degree of explanatory power.
C. A high degree of explanatory power.
D. The presence of outliers.
E. The absence of outliers.
15. Extending the length of a time period in regression cost analysis and prediction will result
in:
A. Fewer recording lags or cut-off errors.
B. Confounding data.
C. Increasing the explanatory power of the data.
D. Better results because more data is being used.
E. More recording lags or cut-off errors.
16. The learning curve in cost estimation is a good example of:

A. Non-linear cost behavior.
B. Machine-intensive production.
C. Simple regression.
D. A random variable.
E. Efficient labor.
17. Which one of the following cost estimation methods is the most accurate?
A. Regression analysis.
B. Visual fit.
C. Subjective forecasting.
D. The high-low method.
18. In least squares regression analysis, the cost to be estimated is the:

A. Independent variable.
B. Dependent variable.
C. Cost object.
D. Outlier.
E. Dummy variable.
8-4
19. Which one the following is a variable that takes on values of 1, 2, 3, for each period in
sequence?
A. Dummy variable.
B. Outlier.
C. Trend variable.
D. Dependent variable.
E. Independent variable.
20. Felinas Inc. produces floor mats for cars and trucks. The owner, Kenneth Felinas, asked you
to assist him in estimating his maintenance costs. Together, Mr. Felinas and you determined
that the single best cost driver for maintenance costs was machine hours. Below are data from
the previous fiscal year for maintenance expense and machine hours:
Using the high-low method, unit variable cost is calculated to be:

A. $1.31.
B. $1.59.
C. $1.36.
D. $1.14.
E. $1.20.
8-5
Using the high-low method, total monthly fixed cost is calculated to be:
A. $484.
B. $364.
C. $752.
D. $259.
E. $898.
8-6
22. Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To
do so, the company must forecast its total overhead cost. The actual machine hours and total
overhead cost are presented below for the past six months.
Using the high-low method, unit variable overhead cost is calculated to be:
A. $1.40
B. $1.50
C. $1.60
D. $1.80
E. $1.90
Using the high-low method, total monthly fixed overhead cost is calculated to be:
A. $2,626.
B. $2,698.
C. $2,512.
D. $2,590.
E. $2,722.
8-7
24. Thompson Refrigerators Inc. needs to prepare pro forma financial statements for the next
fiscal year. To do so, the company must forecast its total overhead cost. The actual machine
hours and total overhead cost are presented below for the past six months.
A. $1.35.
B. $1.15
C. $1.40.
D. $1.65.
E. $1.25.
A. $5,326.10
B. $5,462.80
C. $5,661.90
D. $5,890.30
E. $5,972.40
8-8
26. Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank.
The bank required that certain credit information and pro forma financial statements be
maintained through the life of the loan. In order to prepare the pro forma statements, Home
Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are
presented below for the past six months.
A. $2.49.
B. $3.40.
C. $2.06.
D. $2.60.
E. $2.00.
8-9
A. $626.
B. $696.
C. $612.
D. $690.
E. $722.
28. CalcuCo hired Effner & Associates to design a new computer-aided manufacturing facility.
The new facility was designed to produce 300 computers per month. The variable costs for each
computer are $660 and the fixed costs total $74,700 per month. The average cost per unit, if the
facility normally expects to operate at eighty-five percent of capacity, is calculated to be (round
to nearest cent):
A. $952.94.
B. $909.00.
C. $936.67.
D. $971.25.
E. $942.47.
8-10
29. Nellibell's Café bakes croissants that are sold to local restaurants and grocery stores in the
Columbia, South Carolina area. When 600 croissants are baked, the average cost is $0.70.
When 720 croissants are baked, the average cost is $0.65. What is the total cost when 670
croissants are baked?
A. $568.
B. $588.
C. $448.
D. $532.
E. $500.
30. The following costs were for Optimal View Inc., a contact lens manufacturer:
At an output level of 425 lenses, per unit variable cost is calculated to be:
A. $34.29.
B. $48.00.
C. $30.00.
D. $35.56.
E. $40.00.
8-11
At an output level of 500 lenses, per unit total cost is projected to be:
A. $45.85.
B. $56.67.
C. $39.45.
D. $50.40.
E. $48.56.
8-12
32. Burmer Co. has accumulated data to use in preparing its annual profit plan for the upcoming
year. The cost behavior pattern of the maintenance costs must be determined. The accounting
staff suggested that linear regression be employed to derive an equation for maintenance hours
and costs. Data regarding the maintenance hours and costs for the last year and the results of the
regression analysis are as follows:
Average cost per hour ($51,830  6,260) = $8.28 (rounded to the nearest cent) r = .99821;
r2= .99642.
Using the high-low method, unit variable cost is calculated to be (round to the nearest cent):
A. $6.83.
B. $8.67.
C. $6.78.
D. $7.88.
E. $6.48.
8-13
Average cost per hour ($51,830  6,260) = $8.28 (rounded to the nearest cent) r = .99821
r2= .99642
Using the high-low method, total monthly fixed cost is calculated to be (rounded):
A. $757.
B. $854.
C. $752.
D. $784.
E. $716.
8-14
r2= .99642.
Using the high-low method, total maintenance cost for 600 hours is calculated to be (rounded):
A. $5,293.
B. $4,814.
C. $5,528.
D. $4,913.
E. $5,106.
8-15
Average cost per hour ($51,830  6,260) = $8.28 (rounded to the nearest cent) r = .99821; r
2= .99642.
The percent of the total variance that can be explained by the regression equation is:
A. 99.821%.
B. 69.670%
C. 81.049%
D. 99.780%.
E. 99.642%.
8-16
36. Jennerson Co. produced a pilot run of sixty units of a recently developed piston used in the
finished products. The piston has a one-year life, and Jennerson expected to produce and sell
1,960 units annually. The pilot run required an average of.34 direct labor hours per piston for 60
pistons. The last piston in the pilot run required.23 direct labor hours. Jennerson experienced an
eighty percent learning curve on the direct labor hours needed to produce new pistons. Past
experience indicated that learning tends to cease by the time 960 parts are produced.
Jennerson's manufacturing costs for pistons are presented below.
Jennerson received a quote of $9 per unit from Kytel Machine Co. for the additional 1,900
needed pistons. Jennerson frequently subcontracts this type of work and has always been
satisfied with the quality of the units produced by Kytel. If the pistons are manufactured by
Jennerson Co., the average direct labor hours per unit for the first 960 pistons (including the
pilot run) produced is calculated to be:
A. 0.13926.
B. 0.1728.
C. 0.11141.
D. 0.13056.
E. 0.14797.
8-17
1,960 units annually. The pilot run required an average of. 34 direct labor hours per piston for
60 pistons. The last piston in the pilot run required. 23 direct labor hours. Jennerson
experienced an eighty percent learning curve on the direct labor hours needed to produce new
pistons. Past experience indicated that learning tends to cease by the time 960 parts are
produced. Jennerson's manufacturing costs for pistons are presented below.
Jennerson Co., the total direct labor hours for the first 960 pistons (including the pilot run)
produced is calculated to be:
A. 167.11.
B. 133.69
C. 106.95.
D. 125.33.
E. 142.04.
38. The maintenance expenses of a company are to be analyzed for purposes of constructing a
flexible budget. Examination of past records disclosed the following costs and volume
measures: Highest and Lowest: Cost per month $42,000and $34,000; Machine hours 46,000
and 30,000. Using the high-low method, the estimated variable cost per machine hour is:
A. $0.70
B. $0.60
C. $0.50
D. $0.90
E. $0.10
8-18
and 30,000. Using the high-low technique, estimate the annual fixed cost for maintenance
expenditures:
A. $447,000.
B. $240,000.
C. $230,000.
D. $384,000.
E. $228,000
measures: Highest and Lowest: Cost per month $86,000 and $74,000; Machine hours 96,000
and 66,000.
Using the high-low-point method of analysis, the estimated variable cost per machine hour is:
A. $0.40
B. $0.20
C. $0.90
D. $0.10
E. $0.70
and 66,000.
Using the high-low technique, estimate the annual fixed cost for maintenance expenditures.
A. $447,400.
B. $368,800.
C. $532,900.
D. $571,200.
E. $218,700.
8-19
and 35,000.
A. $0.40
B. $0.25
C. $0.30
D. $0.35
E. $0.70
and 35,000.
Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:
A. $42,000.
B. $40,000.
C. $30,000.
D. $44,000.
E. $38,000
measures:
A. $1.25.
B. $12.50.
C. $0.80.
D. $0.08.
8-20
45. Questions 44 and 45 are based on the maintenance expenses of a company, which are to be
analyzed for purposes of constructing a flexible budget. Examination of past records disclosed
the following costs and volume measures:
A. $447,360.
B. $240,000.
C. $230,400.
D. $384,000.
46. Jackson, Inc. is preparing a budget for the coming year and requires a breakdown of the cost
of electrical power used in its factory into the fixed and variable elements. The following data
on the cost of power used and direct labor hours worked are available for the last six months of
this year:
Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of
steam per direct labor hour is:
A. $4.00.
B. $5.42.
C. $5.82.
D. $6.00.
8-21
47. A company allocates its variable factory overhead based on direct labor hours. During the
past three months, the actual direct labor hours and the total factory overhead allocated were as
follows:
Based upon this information, monthly fixed factory overhead was:

A. $30,000.
B. $50,000.
C. $46,667.
D. $33,333.
48. Simple regression analysis involves the use of:
A. A
B. B
C. C
D. D
49. Multiple regression analysis:

A. Establishes a cause and effect relationship.
B. Does not produce measures of probable error.
C. Measures the change in one variable associated with the change in one other variable only.
D. Measures the change in one variable associated with the change in more than one other
variable.
8-22
50. A company using regression analysis to correlate income to a variety of sales indicators
found that the relationship between the number of sales managers in a territory and net income
for the territory had a correlation coefficient of -1. Which is the best description of this
situation?
A. More sales managers should be hired.
B. Imperfect negative correlation.
C. Perfect inverse correlation.
D. There is no correlation at all.
51. For a simple regression analysis model that is used to allocate factory overhead, an internal
auditor finds that the intersection of the line of best fit for the overhead allocation with the
y-axis is $5,000. The slope of the line is. 20. The independent variable, factory wages, amounts
to $900,000 for the month. What is the estimated amount of factory overhead to be allocated for
the month?
A. $65,000.
B. $180,000.
C. $230,000.
D. $92,500.
E. $185,000.
52. A retailer, in business for over 50 years, has developed the following regression model from
the past 60 months of operating data: Monthly sales dollars = $50,000 + $4.70A + $30B -
$1,000X. Where A = number of customers. B = advertising dollars per month. X = 1 if a winter
month. X = 0 if other months. An appropriate interpretation of this model is that:
A. The business is seasonal, generating higher sales in winter months than other months.
B. Advertising is not cost effective.
C. Within the relevant range, each additional customer will make a monthly purchase of $4.70
on average.
D. Sales are always expected to be at least $50,000.
8-23
53. A manager uses regression to express sales as a function of advertising expenditures (X1),
and per capita income (X2) in your sales area. The following multiple linear regression equation
is developed: Y = 10 + .51X1 + .45X2. The coefficient of determination is .96. This coefficient
of determination explains that:
A. 96% of sales variations are due to an error term.
B. The dependent variable is not related to advertising expenditures and per capita income.
C. 96% of sales variations are explained by the equation.
D. Only 4% of the sales variations are explained by advertising expenditures and per capital
income.
is developed: Y = 10 + .51X1 + .45X2. The coefficient of determination is. 96. Determine which
of the following conclusions is valid regarding the coefficient of determination:
A. More analysis is needed. The coefficient of determination leaves much unexplained.
B. The regression line fits the data used in the sample very well. There is a strong indication of
the relationship of the two variables with sales.
C. The coefficient of determination is positive because the constant term is positive.
D. The coefficient of determination should always be greater than one.
55. This question is based on analyzing the relationship of total factory overhead (Y) to direct
labor hours (X). The following relationship was found: Y = $1,000 + $2X. This relationship is:
A. Parabolic.
B. Curvilinear.
C. Linear.
D. Probabilistic.
labor hours (X). The following relationship was found: Y = $1,000 + $2X. This equation was
probably found through the use of which of the following mathematical techniques?
A. Linear programming.
B. Multiple regression analysis.
C. Simple regression analysis.
D. Excel tools.
E. Nonlinear regression.
8-24
labor hours (X). The following relationship was found: Y = $1,000 + $2X. The variable Y in the
equation is an estimate of:
A. Total variable costs.
B. Total factory overhead.
C. Total fixed costs.
D. Total direct labor hours.
labor hours (X). The following relationship was found: Y = $1,000 + $2X. The $2 in the
A. Total fixed costs.
B. Variable overhead costs per direct labor hour.
C. Total overhead costs.
D. Fixed overhead costs per direct labor hour.
59. The use of a relationship of total factory overhead to direct labor hours is said to be valid
only within the relevant range, which means:
A. Within a reasonable dollar amount for labor costs.
B. Within the range of observations of the cost driver.
C. Within the range of reasonableness as judged by the department supervisor.
D. Within the budget allowance for overhead.
8-25
60. As a preliminary step in the selection of variables to use in a statistical-forecasting model,

the management accountant has calculated the coefficient of correlation between the firm's
sales and three economic indexes. The results were as follows:
Which of the following statements indicates the best course of action for the auditor to take in
the development of a forecasting model?
A. Drop all three indexes from further consideration because a coefficient of correlation of +
1.0 is necessary for a statistically significant relationship.
B. Include only indexes B and C in the model because they have the only negative coefficients
of correlation.
C. Include only index C in the model because its coefficient of correlation is relatively high and
therefore probably statistically significant, while the coefficients of indexes A and B are likely
to be insignificant.
D. Include only index A in the model because it has the only positive coefficient of correlation.
61. Mulvey Company derived the following cost relationship from a regression analysis of its
monthly manufacturing overhead cost: C = $80,000 + $12M where: C = monthly
manufacturing overhead cost and M = machine hours. The standard error of estimate of the
regression is $6,000. The standard time required to manufacture one six-unit case of Mulvey's
single product is four machine hours. Mulvey applies manufacturing overhead to production on
the basis of machine hours, and its normal annual production is 50,000 cases. Mulvey's
estimated variable manufacturing overhead cost for a month in which scheduled production is
5,000 cases would be:
A. $80,000.
B. $320,000.
C. $240,000.
D. $360,000.
E. Some amount other than those given above.
8-26
62. If the coefficient of correlation between two variables is zero, how might a scatter diagram
of these variables appear?
A. Random points.
B. A least squares line that slopes up to the right.
C. A least squares line that slopes down to the right.
D. Under this condition, a scatter diagram could not be plotted on a graph.
63. Which of the following is required for multiple regression?

A. The use of dummy variables.
B. The use of more than one cost driver.
C. The use of more than one dependent variable.
D. The use of a trend variable.
64. The p-value measures:

A. The probability that the regression equation is reliable.
B. The statistical significance of the dependent variable.
C. The risk that a particular independent variable has only a chance relationship to the
dependent variable.
D. The confidence range around the regression prediction.
65. Which of these job characteristics would result in the learning curve having less of an
effect?
A. Repetitive tasks.
B. Working on an assembly line.
C. Use of robotics and computer-aided manufacturing.
D. Activities where teaching and learning take place.
8-27
66. Sterling Glass Company uses the high-low method to analyze mixed costs. The following
information relates to the production data for the first six months of the year.
How should the cost function be properly stated?

A. Y = $2,025 + $2.50H.
B. Y = $3,890 + $2.00H.
C. Y = $4,085 + $2.00H.
D. Y = $5,260 + $2.50H.
What is the estimated total cost at an operating level of 900 hours?

A. $5,275.
B. $5,745.
C. $5,115.
D. $5,885.
8-28

A. $4,385.00.
B. $4,785.20.
C. $4,185.65.
D. $4,875.00.
69. Pearson Electric Company uses the high-low method to analyze mixed costs. The following

A. Y = $6,025 + $2.00H.
B. Y = $6,520 + $3.00H.
C. Y = $6,085 + $2.00H.
D. Y = $6,250 + $3.00H.
8-29
What is the estimated total cost at an operating level of 1,180 hours?

A. $10,060.
B. $10,145.
C. $10,015.
D. $10,805.
71. Microdash Company uses the high-low method to analyze mixed costs. The following

A. Y = $1,025 + $1.24H.
B. Y = $875 + $1.15H.
C. Y = $8,542 + $0.145H.
D. Y = $9,263 + $0.162H.
8-30

A. $9,500.
B. $9,835.
C. $10,135.
D. $10,075.
73. Condor Airplane Company has built a new model jet aircraft which it intends to sell to high
net worth clients. This aircraft required 25,000 hours to complete. Condor believes an
incremental unit-time learning model with an 82% learning curve best reflects the company's
production efficiency. Condor just received a contract to make seven identical aircraft. What
will be the expected unit time for the eighth aircraft?
A. 20,500.00.
B. 16,810.00.
C. 13,784.20.
D. 11,303.04.
74. Which of the following is not one of the main issues regarding data collection which can
significantly affect precision and reliability when using regression or any other cost estimation
method?
A. Data accuracy.
B. Time period choice.
C. Nonlinearity.
D. Linearity.
8-31
75. The R-squared in a satisfactory regression should be:

A. greater than .5
B. greater than .6
C. greater than .75
D. greater than .9
76. The standard error of the estimate (SE) in a regression analysis is:
A. A measure indicating the amount of a data falling within the relevant range.
B. A measure of explanatory power which is a number between zero and 1.
C. A measure of the accuracy of the regression's estimates.
D. A measure of reliability of each independent variable.
77. Which of the following cannot be influenced by learning curve analysis?

A. Make-or-buy decisions.
B. Cost-volume-profit analysis.
C. Capital budgeting.
D. Development of standard product costs.
E. Theory of constraints.
78. A range around the regression line within which the management accountant can rely that
the actual value of the predicted cost will fall is referred to as:
A. A relevant range.
B. A goodness of fit.
C. A confidence interval.
D. An F-statistic.
E. Degrees of freedom.
79. Cost estimation includes all of the following steps except:

A. Defining the cost object for which the related costs are to be estimated.
B. Determining the cost drivers.
C. Graphing the data.
D. Selecting and employing the appropriate estimation method.
E. Calculating the multiple regression coefficient.
8-32
80. Place the six cost estimation steps into the correct order:
1. Determine the cost drivers
2. Graph the data
3. Select and employ the appropriate estimation method
4. Define the cost object for which the related costs are to be estimated
5. Evaluate the accuracy of the cost estimate
6. Collect consistent and accurate data on the cost object and the cost drivers
A. 6,4,1,3,5,2.
B. 4,1,6,2,3,5.
C. 2,1,4,3,6,5.
D. 1,3,4,6,5,2.
8-33
year. The cost behavior pattern of the maintenance costs must be determined. Data regarding
the machine hours and maintenance costs for the last year and the results of the regression
analysis are as follows:
8-34
A staff assistant has run regression analyses on the data and obtained the following output using
Excel:
The t statistic for the independent variable:

A. Is statistically significant at less than 5% risk.
B. At 11.46, is statistically significant.
C. At 52.78, is too large to be statistically significant.
D. Lies somewhere between 6.491 and 7.063.
8-35
82. Burmer Co. has accumulated data to use in preparing its annual profit plan for the
upcoming year. The cost behavior pattern of the maintenance costs must be determined. Data
regarding the machine hours and maintenance costs for the last year and the results of the
Excel:
8-36
The 95% confidence range for a prediction of monthly manufacturing cost using the model is:
A. From $631 to $936
B. From $6.49 to $7.06
C. The range of +/- $47.06 around the predicted amount
D. The range of +/- $47.06 x 2 = $94.12 around the predicted amount
Excel:
8-37
The F statistic is calculated by:

A. Determining the square root of sum of squares for the regression.
B. Using the square root of both the sum of squares and mean sum of squares for the regression.
C. Using the mean sum of squares of the regression and mean sum of squares for the errors.
D. Using the sum of squares for the errors and the square root of the sum of squares for the
regression.
8-38
8-39
Excel:
The statistic that indicates precision of the regression is:

A. .9982.
B. 47.0630.
C. 0.9981.
D. Lower 95% and Upper 95%.
E. Significance F (1.44E-13).
8-40
8-41
Excel:
The statistic that indicates statistical reliability of the regression is:

A. .9982.
B. 47.0630.
C. 0.9981.
E. F-statistic (1.44E-13).
8-42
Excel:
8-43
The Lower 95% and Upper 95% shown in the output suggests that:
A. We can be 95% confident that the precision of the regression equation will be within the
ranges specified.
B. We can be 95% confident that the statistical reliability of the regression equation will be
within the ranges specified.
C. We can be 95% confident that the coefficients of the dependent variable will be within the
ranges specified.
D. We can be 95% confident that the coefficients of the independent variables will be within the
ranges specified.
E. We can be 95% confident that the regression equation will be within the ranges specified.
8-44
Excel:
8-45
Using regression analysis, what is the estimated maintenance expense for a month that the firm
expects to operate 600 machine hours (using 3 decimal places in calculations)?
A. $88.
B. $4,050.
C. $4,850.
D. $6,934.
88. A measure of the statistical reliability of each independent variable is:

A. Correlation.
B. t-value.
C. R-Squared.
D. F value.
E. Multicollinearity.
89. Which of the following means that two or more independent variables are highly correlated
with each other?
A. Correlation.
B. t-value.
C. R-Squared.
D. F value.
90. Which of the following is not used for evaluating a regression analysis?
A. Correlation.
B. t-value.
C. R-Squared.
D. F value
91. Two aspects to consider when selecting the time period for cost estimation are:
A. Length of time period and unknown time periods.
B. Mismatched time periods and length of time period.
C. Multicollinearity and Correlation.
D. Time periods and correlation between time periods.
8-46
92. Which of the following is the percentage by which average time (or total time) falls from
previous levels as output doubles?
A. Learning speed.
B. Learning curve.
C. Learning analysis.
D. Learning average.
E. Learning rate.
93. Accurate cost estimates are required by strategic management for all except:
A. To facilitate strategic positioning analysis.
B. To facilitate target costing and life-cycle costing.
C. To facilitate value-chain analysis.
D. Accounting internal control.
94. The following costs were for Bikeway Inc., a bicycle manufacturer:
At an output level of 1,000 bicycles, per unit variable cost is calculated to be:
A. $100.00.
B. $101.50.
C. $125.00.
D. $126.32.
E. $131.58.
8-47
At an output level of 1,000 bicycles, per unit total cost is calculated to be:
A. $100.00.
B. $101.50.
C. $125.00.
D. $126.32.
E. $131.58.
Essay Questions
96. Based in Minneapolis, Minnesota, the Hubert Memorial Foundation has $300 million in
investments and contributes approximately 80 percent of the average annual return of $25
million to worthy causes. Individuals and groups requesting grants of $100,000 or more must
make an in-person presentation of their request. These presentations generally involve three to
five individuals and take an average of two hours each. The Executive Director of the Hubert
Foundation is concerned with the cost of resources used to schedule and accommodate the 500
to 600 group presentations each year. She has asked you for suggestions about what kind of cost
data to gather, and ways to classify the data to help her understand cause/effect relationships
between costs and results.
Required: Write a brief memo to the Executive Director giving her some basic information on
cost classification and behavior.
8-48
97. Green Mountain College is a 5,000 student state-supported, four-year institution located in
the mid-South. Physical facilities can accommodate another 1,000 students, and the college
administration is attempting to estimate the added yearly cost of educating the additional
students. The Business Manager of Green Mountain College has asked you to evaluate two
linear regressions given below, and recommend the better one to her.
Where: SC = Student cost

CH = Cost per credit hour
IS = Incremental cost per student
Required: (1) Explain your choice of cost function (regression 1 or regression 2) for predicting
added student educational costs per year. (2) What information value does the standard error of
estimate (SE) have in this situation?
98. US Best Corporation produces and distributes products nationwide, and competes on cost
leadership. In order to maintain its current industry cost and price leadership role, US Best uses
cost-based pricing techniques. One of the factors considered in determining future prices is the
Consumer Price Index (CPI). Considerable discussion over the past year on the national level
has strongly suggested the monthly CPI inflation adjustment figure is skewed upward by as
much as one percentage point.
Required: What implication does this purported inflation exaggeration in the Consumer Price
Index have on US Best Corporation's cost-based pricing changes in the near future?
8-49
99. Kumar Co. is attempting to predict its maintenance costs more accurately. Maintenance
costs are a mixed cost. Maintenance costs and machine hours for the first four months of the
year are as follows:
Required: Using the high-low method, calculate unit variable cost and monthly fixed costs.
100. Kennerson Co. produced a pilot run of seventy units of a recently developed part used in
the finished products. Kennerson Co. expects to produce and sell 2,380 units annually. The
pilot run required 20.16 direct labor hours for the seventy units, averaging .408 direct labor
hours per piston. Kennerson experiences an eighty percent learning curve on the direct labor
hours needed to produce new parts.
Required: Assuming the parts are manufactured by Kennerson Co., calculate the average direct
labor hours per unit for the first 1,120 parts (including the pilot run) produced.
8-50
101. School Kids' Compact Disc Store expanded the size of its store in Westfield, NJ two
months ago. The owner, Montgomery Brown, has asked you to develop an analysis of the cost
structure in his store, as a basis for assessing the profitability of his business. He provides you
with account data for the most recent month, which he explains is representative of what these
costs are in most months of the year; there is not much seasonality in his business. Last month,
May, 890 compact discs were sold. This month Montgomery expects to sell 1,100 CDs.
NOTE: Assume that Mr. Brown purchases promptly on a day-to-day basis to replace inventory,
so that the level of inventory remains constant.
Required:
(1) Develop the cost equation for Mr. Brown's store, using the account classification method,
assuming that the cost object is the individual compact disc.
(2) Mr. Brown plans to increase sales by 25% next month, July, by reducing the price of his
compact discs. Assuming a 25% increase in sales, what is the lowest price Mr. Brown can sell
his discs for if he wants to meet all costs plus make $1 profit per disc?
(3) What would the profit per disc be if sales actually increased by only 15% and the discs were
sold at the price calculated in (2)?
8-51
102. Learning Curves Moss Point Manufacturing recently completed and sold an order of 50
units that had the following costs:
* Applied on the basis of direct labor hours

The company has now been requested to prepare a bid for 150 units of the same product.
Required: If an 80 percent learning curve is applicable, estimate Moss Point's total cost on this
order.
103. Andrews & Henderson Inc. is a manufacturer of mining equipment in Colorado. Eric
Andrews, the founder of the corporation, has just won a new contract from Shakley Inc. to build
seven new tunneling machines for a price of $500,000 each. The machines are to be delivered in
the next seven months. The costs associated with the production of the first machine are listed
below. Eric estimates that an 85% cumulative average learning rate exists for these types of
projects. Following is the cost information for the first tunneling machine:
Required:
(1) Prepare an estimate of the total hours for producing the second through eighth machines.
(2) Determine the expected profit from this project.
8-52
104. Elisko Inc. is a major book distributor. Elisko's Shipping Department consists of a
manager plus ten other permanent positions- four supervisors and six loaders. The four
supervisors and six loaders provide the minimum staff and frequently must be supplemented by
additional workers, especially during the weeks when the volume of shipments is heavy. Thus,
the number of people shipping the orders frequently averages over 30 per week, i.e., ten
permanent persons plus 20 temporary workers. The temporary workers are hired through a local
agency. Elisko must use temporary workers to maintain a minimum daily shipment rate of 95
percent of orders presented for shipping. The loss of efficiency from using temporary workers
is minimal, and the $10.00 per hour cost of temporary workers is less than the $15.00 per hour
for the loaders and $22.50 per hour for the supervisors on Elisko's permanent staff. The agency
requires Elisko to utilize each temporary worker for at least four hours each day. Jim Locter,
Shipping Manager, schedules temporary help based on forecasted orders for the coming week.
Supervisors serve as loaders until temporary help is needed. A supervisor stops loading when
the ratio of loaders to supervisors reaches 7: 1. Locter knows that he will need temporary help
when the forecasted average daily orders exceed 300. Locter has frequently requested from two
to four extra temporary workers per day to guard against unexpected rush orders. If there was
not enough work, he would dismiss the extra people at noon after four hours of work. The
agency has not been pleased with Locter's practice of overhiring and has notified Elisko that it
is changing its policy. From now on, if a person is dismissed before an eight-hour assignment is
completed, Elisko will still be charged for an eight-hour day plus mileage back to the agency for
reassignment. This policy would go into effect the following week. Paula Brand, General
Manager, called Jim Locter to her office when she received the notice from the agency. She told
Locter, "Your staffing has to be better. This penalty could cost us up to $300-$500 per week in
labor cost for which we receive no benefit. Why can't you schedule better?" Locter replied, "I
agree that the staffing should be better, but I can't do it accurately when there are rush orders.
By being able to layoff people at noon, I have been able to adjust for the uncertain order
schedule without cost to the company. Of course, the agency's new policy changes this."
Locter and Brand contacted Elisko's Controller, Mitch Berg regarding Locter's problem on how
to estimate the number of people needed each week. Berg reasoned that Locter needed a quick
solution until he could study the work flow. Berg suggested a regression analysis using the
number of orders shipped as the independent variable and the number of workers (permanent
plus temporary) as the dependent variable. Berg indicated that data for the past year was
available 'and that the analysis could be done quickly using the accounting department's
software. Berg completed the two regression analyses that are presented below. The first
regression was based on the data for the entire year. The second regression excluded the weeks
when only the 10 permanent staff persons were used; these weeks were unusual and appeared to
be out of the relevant range. Locter was not familiar with regression analysis and, therefore,
was unsure how to implement this technique. He wondered which regression data he should
employ, i.e., which one was better. When he recognized that the regression was based on actual
orders shipped by week, Berg told him he could use the forecasted shipments for the week to
determine the number of workers needed.
8-53
Required:
(1) Using Regression 1 based on data from a full year, calculate the number of temporary
workers Jim Locter would plan to hire for a forecast indicating 1,200 shipments per day.
(2) Which one of the two regressions appears to be better? Explain your answer.
(3) Explain the circumstances under which Jim Locter can use the regression in his planning for
temporary workers.
(4) Explain whether the regression analysis that Elisko Inc. employed in this situation could be
improved. If it cannot be improved, explain why.
(5) How can the regression analysis help Elisko be more competitive?
8-54
105. Quick Telephone Response (QTR) was started several years ago to provide an outsource
telephone service for the growing number of small, specialty catalog mail-order companies that
commenced operations in recent years. Since most of the calls are received between 10 a.m. and
2 p.m., QTR began offering a telephone answering service to attempt to fill the remainder of the
day for its operators. However, as outsource competition has recently increased, QTR analyzed
its operations and concluded that it should focus on its core business of providing service to its
mail- order clients only. To bring operating costs into line, QTR concluded that it should shed
some of its full-time operators and replace them with part-time operators in order to cover the
peak mid-day calling period. Weldon Miller, director of the Telephone Response Operations
Department, engaged a consultant to assist in analyzing the situation and determining the
number of full-time and part-time employees that will be required to meet QTR's variable
operating schedule. Based on a study of one month's activity they concluded that the number of
daily orders received for their specialty clients averaged 3,450 with the mid-day period
averaging 2,250 orders. They calculated that there would be a need to retain twenty five (25)
full-time employees. They further developed two regression analyses. Regression 1 relates to
the average of 3,450 orders per day and Regression 2 relates to the average of 2,250 peak
mid-day orders. The data resulting from these analyses are presented below.
Regression Equation: where: E = a + bN E = Employees N = Number of orders
Required:
(1) Refer to the regression data in the previous column for Quick Telephone Response (QTR).
(a) Calculate the number of part-time employees that will be needed each day using the
regression results relating to the average number of daily orders handled. Round your response
to the nearest whole number.
(b) Apply the regression results that relate to the average number of orders handled during the
mid- day peak period. Calculate the number of part-time employees that will be needed daily.
Round your response to the nearest whole number.
(c) Of the two regression analyses used select the regression analysis which appears to be the
better one and explain the reason for your conclusion.
(2) Describe at least two ways that Weldon Miller could improve the regression predictions.
(CMA adapted)
8-55
106. Train Express Co., which manufactures train engines, is attempting to predict its
maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and
machine hours for the first four months of the year are as follows:
107. Manufacturers Inc. produced a pilot run of fifty units of a recently developed motor used
in the finished products. The company expected to produce and sell 5,526 units annually. The
pilot run required 21.2 direct labor hours for the fifty motors, averaging.424 direct labor hours
per motor. Manufacturers Inc. experienced an eighty-two percent learning curve on the direct
labor hours needed to produce new motors.
Required: Assuming the motors are manufactured by Manufacturers Inc., calculate the average
direct labor hours per unit for the first 800 motors (including the pilot run) produced.
8-56
108. Whittenberg Distributors, a major retailing and mail-order operation, has been in business
for the past 10 years. During that time, its mail-order operations have grown from a sideline to
represent more than 80 percent of the company's annual sales. Of course, the company has
suffered growing pains. At times, overloaded or faulty computer programs resulted in lost sales.
And scheduling temporary workers to augment the permanent staff during peak periods has
always been a problem. Peter Bloom, manager of mail-order operations, has developed
procedures for handling most problems. However, he is still trying to improve the scheduling of
temporary workers to take customer telephone orders. Under the current system, Peter keeps a
permanent staff of 60 employees who handle the base telephone workload and supplements this
staff with temporary workers as needed. The temporary workers are hired on a daily basis; he
determines the number needed for the next day the afternoon before based on his estimate of the
upcoming telephone volume. Peter has decided to try regression analysis to improve the hiring
of temporary workers. By summarizing the daily labor-hours into weekly totals for the past year,
he determined the number of workers used each week. In addition, he listed the number of
orders processed each week. After entering the data into a spreadsheet, Peter ran two
regressions. Regression 1 related the total number of workers (permanent staff plus temporary
workers) to the number of orders received. Regression 2 related only temporary workers to the
number of orders received. The output of these analyses follows: Regression model: W = a + b
 T where: W = workers; T = telephone orders
Required:
(1)Peter Bloom estimates that Whittenberg Distributors will receive 12,740 orders during the
second week of December.
(a)Predict the number of temporary workers needed for this week using regression 1. Round
your answer to the nearest whole number.
(b)Using regression 2, predict the number of temporary workers needed during this week.
Round your answer to the nearest whole number.
(2)Which of the two regression analyses appears to be better? Explain your answer.
(3)Describe at least three ways that Peter Bloom could improve his analysis to make better
predictions than either of these regression results provides. (CMA Adapted)
8-57
109. Regression analysis is increasingly being used in business applications, often called
"business analytics" (or "predictive analytics"), in which a company studies its customers to
gather information that can be used to make each customer more profitable. Companies that do
this include Harrah's and eHarmony, among many others.
Required:
(1) Briefly explain how a company could use regression to improve customer profitability.
(2) Do you see any ethical issues involved in the use of business analytics? Explain.
8-58
110. Clothes for U is a large merchandiser of apparel for budget-minded families. Management
recently became concerned about the amount of inventory carrying costs and transportation
costs between warehouses and retail outlets. As a starting point in further analyses, Gregory
Gonzales, the controller, wants to test different forecasting methods and then use the best one to
forecast quarterly expenses for 2010. The relevant data for the previous three years follows:
The results of a simple regression analysis using all 12 data points yielded an intercept of
$11,854.55 and a coefficient for the independent variable of $126.22 (R-squared = .19, t = 1.5,
SE = 974).
Required:
(1) Calculate the quarterly forecasts for 2010 using the high-low method and regression
analysis. Recommend which method Gregory should use and explain why.
(2) How does your analysis in requirement 1 change if Clothes for U is involved in global
sourcing of products for its stores?
8-59
8-60
Chapter 08 Cost Estimation Answer Key
Multiple Choice Questions
1. Which of the four types of cost drivers - activity-based, volume-based, structural and
executional - are often best related to linear cost estimation methods?
A. Activity-based only.
B. Activity-based and volume-based.
C. Structural and volume-based.
D. Executional and volume-based.
E. Structural and executional.
Difficulty: Medium
Learning Objective: 8-1
2. Which of the following five steps (out of six) of cost estimation is out of order?
A. Step 1: Define the cost object to be estimated.
B. Step 2: Determine the cost driver(s).
C. Step 3: Collect relevant data on the cost of the cost object and the cost driver.
D. Step 4: Evaluate the accuracy of the cost estimate.
E. Step 5: Graph the data.
Difficulty: Medium
3. The identification of cost drivers is perhaps the most important step in developing the cost
estimate because:
A. It is the first step in cost estimation.
B. It is the final step in cost estimation.
C. There may be a number of relevant drivers; some not immediately obvious.
D. The other steps are easier to execute.
E. It requires much more time than the other steps.
Difficulty: Easy
8-61
4. Technology and complexity issues often lead management to simplify and to:
A. Use linear estimation methods.
B. Use volume-based costing and nonlinear estimation methods.
C. Use volume-based costing methods.
D. Use nonlinear estimation methods.
E. Use activity-based costing and volume-based costing methods.
Difficulty: Medium
5. Data collected on the cost objects and cost drivers for cost estimation must be:
A. Brief and limited.
B. Exhaustive.
C. Concrete.
D. Consistent and accurate.
E. Varied.
Difficulty: Easy
6. The objective of the fourth step in cost estimation, graphing the data, is intended to:
A. Identify unusual patterns.
B. Show data in two dimensions.
C. Enhance the cost estimation process.
D. Allow for subjectivity in cost estimation.
Difficulty: Easy
8-62
7. Selection and employment of the correct estimation method is:

A. Easy once the data is gathered.
B. Relatively easy because only two effective methods exist.
C. Dependent on the precision/cost tradeoff for the estimation objectives.
D. Primarily subjective in nature.
E. Difficult because so many effective methods are available.
Difficulty: Easy
8. Regression analysis is better than the high-low method of cost estimation because regression
analysis:
A. Is mathematical.
B. Can provide greater precision and reliability.
C. Fits its data into a mathematical equation.
D. Takes less time.
E. Is a statistical method.
Difficulty: Easy
9. When there are two or more cost drivers, regression is termed:

A. Simple.
B. Binary.
C. Multiple.
D. Curvilinear.
E. Synergistic.
Difficulty: Easy
8-63
10. The independent variable in regression analysis is:

A. The cost to be estimated.
B. The cost driver used to estimate the value of the dependent variable.
C. Hard to define because of its independence.
D. Usually expressed as a range of values.
E. Not always necessary to perform regression analysis.
Difficulty: Easy
11. High-low and regression cost estimation methods are alike in that they both:
A. Have an intercept term and a slope term.
B. Have an intercept term but not a slope term.
C. Have a slope term but not an intercept term.
D. Use all data points.
E. Use only a few selected data points.
Difficulty: Medium
12. A data point that is outside the normal distribution of data, called an "outlier," is often
removed from the data set before analysis because it:
A. Is obviously due to an inaccuracy in the calculations.
B. Can distort the results of the data analysis.
C. Has an upward bias on the statistical measures in regression.
D. Will always add bias to the results of a high-low analysis.
Difficulty: Easy
8-64
13. A variable used in regression analysis that represents the presence or absence of a condition,
e.g., seasonality, is called a (n):
A. Random variable.
B. Dummy variable.
C. Extraneous variable.
D. Correlating variable.
E. Redundant variable.
Difficulty: Easy
14. An R-squared value that approaches one (1.0) would indicate:

A. An average degree of explanatory power.
B. A low degree of explanatory power.
C. A high degree of explanatory power.
D. The presence of outliers.
E. The absence of outliers.
Difficulty: Easy
15. Extending the length of a time period in regression cost analysis and prediction will result
in:
A. Fewer recording lags or cut-off errors.
B. Confounding data.
C. Increasing the explanatory power of the data.
D. Better results because more data is being used.
E. More recording lags or cut-off errors.
Difficulty: Medium
8-65
16. The learning curve in cost estimation is a good example of:

A. Non-linear cost behavior.
B. Machine-intensive production.
C. Simple regression.
D. A random variable.
E. Efficient labor.
Difficulty: Easy
Learning Objective: Appendix A
17. Which one of the following cost estimation methods is the most accurate?
A. Regression analysis.
B. Visual fit.
C. Subjective forecasting.
D. The high-low method.
Difficulty: Easy
18. In least squares regression analysis, the cost to be estimated is the:

A. Independent variable.
B. Dependent variable.
C. Cost object.
D. Outlier.
E. Dummy variable.
Difficulty: Easy
8-66
19. Which one the following is a variable that takes on values of 1, 2, 3, for each period in
sequence?
A. Dummy variable.
B. Outlier.
C. Trend variable.
D. Dependent variable.
E. Independent variable.
Difficulty: Easy
8-67
Using the high-low method, unit variable cost is calculated to be:

A. $1.31.
B. $1.59.
C. $1.36.
D. $1.14.
E. $1.20.
High and low points are 6 and 11. Unit variable cost = ($3,680 -$2,780)/(2,440 - 1,690) = $1.20
Difficulty: Medium
8-68
Using the high-low method, total monthly fixed cost is calculated to be:
A. $484.
B. $364.
C. $752.
D. $259.
E. $898.
Fixed cost = $3,680 - ($1.20 x 2,440) = $752 or Fixed cost = $2,780 - ($1.20 x 1,690) = $752
Difficulty: Medium
8-69
A. $1.40
B. $1.50
C. $1.60
D. $1.80
E. $1.90
Unit variable cost = ($6,460 - $5,506)/(2,090 - 1,560) = $1.80
Difficulty: Medium
8-70
A. $2,626.
B. $2,698.
C. $2,512.
D. $2,590.
E. $2,722.
$6,460 - ($1.80 x 2,090) = $2,698 or 5,506 - ($1.80 x 1,560) = $2,698
Difficulty: Medium
8-71
A. $1.35.
B. $1.15
C. $1.40.
D. $1.65.
E. $1.25.
Difficulty: Medium
8-72
A. $5,326.10
B. $5,462.80
C. $5,661.90
D. $5,890.30
E. $5,972.40
$8,921 - (1.15 x 2,834) = $5,661.90 or $8,001 - ($1.15 x 2,034) = $5,661.90
Difficulty: Medium
8-73
A. $2.49.
B. $3.40.
C. $2.06.
D. $2.60.
E. $2.00.
High and low points are February and March. Unit variable cost = ($3,484 - $2,996)/(1,394 -
1,150) = $2.00.
Difficulty: Medium
8-74
A. $626.
B. $696.
C. $612.
D. $690.
E. $722.
FC = $3,484 - (2.00 x 1,394) = $696 or $2,996 - (2.00 x 1,150) = $696
Difficulty: Medium
8-75
28. CalcuCo hired Effner & Associates to design a new computer-aided manufacturing facility.
The new facility was designed to produce 300 computers per month. The variable costs for each
computer are $660 and the fixed costs total $74,700 per month. The average cost per unit, if the
facility normally expects to operate at eighty-five percent of capacity, is calculated to be (round
to nearest cent):
A. $952.94.
B. $909.00.
C. $936.67.
D. $971.25.
E. $942.47.
$660 + [$74,700/(300 x.85)] = $952.94
Difficulty: Easy
29. Nellibell's Café bakes croissants that are sold to local restaurants and grocery stores in the
Columbia, South Carolina area. When 600 croissants are baked, the average cost is $0.70.
When 720 croissants are baked, the average cost is $0.65. What is the total cost when 670
croissants are baked?
A. $568.
B. $588.
C. $448.
D. $532.
E. $500.
Use high-low:
1. (720x$.65 - 600x$.70)/(720-600) = $.40 = unit variable cost
2. Fixed cost = 720x($.65 -.40) = 180; 600x($.70-$.40) = $180
3. at 670; $180 + $.40 x 670 = $448; (average cost is $448/670 = $.67)
Difficulty: Medium
8-76
At an output level of 425 lenses, per unit variable cost is calculated to be:
A. $34.29.
B. $48.00.
C. $30.00.
D. $35.56.
E. $40.00.
Unit variable cost = ($23,200 - $17,200)/(450-300) = $402. The per unit cost variable cost of
$40 is constant through the relevant range, including 425 units.
Difficulty: Easy
8-77
At an output level of 500 lenses, per unit total cost is projected to be:
A. $45.85.
B. $56.67.
C. $39.45.
D. $50.40.
E. $48.56.
1. Unit variable cost = ($23,200 - $17,200)/(450-300) = $40

2. Fixed cost = $23,200 - ($40 x 450) = $5,200
3. Total cost = $5,200 + ($40 x 500) = $25,200
4. Total cost per unit = $25,200/500 = $50.40
5. Note this figure is only a projection, since 500 is outside the range of data used in the
calculation of the high-low model.
Difficulty: Easy
8-78
r2= .99642.
Using the high-low method, unit variable cost is calculated to be (round to the nearest cent):
A. $6.83.
B. $8.67.
C. $6.78.
D. $7.88.
E. $6.48.
1. High-low points are August and April

2. Unit variable cost = ($5,360 - $3,380)/(680 - 390) = $6.83
Difficulty: Easy
8-79
Average cost per hour ($51,830  6,260) = $8.28 (rounded to the nearest cent) r = .99821
r2= .99642
Using the high-low method, total monthly fixed cost is calculated to be (rounded):
A. $757.
B. $854.
C. $752.
D. $784.
E. $716.
FC = $5,360 - ($6.83 x 680) = $715.60; $3,380 -($6.83x390) = $716.30 Rounded = 716.
Difficulty: Medium
8-80
r2= .99642.
Using the high-low method, total maintenance cost for 600 hours is calculated to be (rounded):
A. $5,293.
B. $4,814.
C. $5,528.
D. $4,913.
E. $5,106.
TC = $716 + ($6.83 x 600) = $4,814
Difficulty: Medium
8-81
Average cost per hour ($51,830  6,260) = $8.28 (rounded to the nearest cent) r = .99821; r
2= .99642.
The percent of the total variance that can be explained by the regression equation is:
A. 99.821%.
B. 69.670%
C. 81.049%
D. 99.780%.
E. 99.642%.
Difficulty: Easy
Learning Objective: Appendix B
8-82
1,960 units annually. The pilot run required an average of.34 direct labor hours per piston for 60
pistons. The last piston in the pilot run required.23 direct labor hours. Jennerson experienced an
eighty percent learning curve on the direct labor hours needed to produce new pistons. Past
experience indicated that learning tends to cease by the time 960 parts are produced.
Jennerson's manufacturing costs for pistons are presented below.
Jennerson Co., the average direct labor hours per unit for the first 960 pistons (including the
pilot run) produced is calculated to be:
A. 0.13926.
B. 0.1728.
C. 0.11141.
D. 0.13056.
E. 0.14797.
133.69344/960 = .13926
Difficulty: Hard
8-83
1,960 units annually. The pilot run required an average of. 34 direct labor hours per piston for
60 pistons. The last piston in the pilot run required. 23 direct labor hours. Jennerson
experienced an eighty percent learning curve on the direct labor hours needed to produce new
pistons. Past experience indicated that learning tends to cease by the time 960 parts are
produced. Jennerson's manufacturing costs for pistons are presented below.
Jennerson Co., the total direct labor hours for the first 960 pistons (including the pilot run)
produced is calculated to be:
A. 167.11.
B. 133.69
C. 106.95.
D. 125.33.
E. 142.04.
Total direct labor hours for 960 units = 133.69344, rounded to 133.69
Difficulty: Medium
8-84
and 30,000. Using the high-low method, the estimated variable cost per machine hour is:
A. $0.70
B. $0.60
C. $0.50
D. $0.90
E. $0.10
Difficulty: Easy
and 30,000. Using the high-low technique, estimate the annual fixed cost for maintenance
expenditures:
A. $447,000.
B. $240,000.
C. $230,000.
D. $384,000.
E. $228,000
Fixed cost = ($42,000 x 12 months) - (46,000 x 12 x $0.50) = $228,000 or Fixed cost =

($34,000 x 12 months) - (30,000 x 12 x $0.50) = $228,000
Difficulty: Medium
8-85
and 66,000.
A. $0.40
B. $0.20
C. $0.90
D. $0.10
E. $0.70
Difficulty: Easy
and 66,000.
Using the high-low technique, estimate the annual fixed cost for maintenance expenditures.
A. $447,400.
B. $368,800.
C. $532,900.
D. $571,200.
E. $218,700.
Fixed cost = ($86,000 x 12 months) - (96,000 x 12 x $0.40) = $571,200 or Fixed cost =

($74,000 x 12 months) - (66,000 x 12 x $0.40) = $571,200.
Difficulty: Medium
8-86
and 35,000.
A. $0.40
B. $0.25
C. $0.30
D. $0.35
E. $0.70
Difficulty: Easy
and 35,000.
A. $42,000.
B. $40,000.
C. $30,000.
D. $44,000.
E. $38,000
FC = ($20,000 x 12 months) - (55,000 x 12 x $0.30) = $9,000 or FC = ($14,000 x 12 months) -

(35,000 x 12 x $0.30) = $13,000
Difficulty: Easy
8-87
measures:
A. $1.25.
B. $12.50.
C. $0.80.
D. $0.08.
Difficulty: Easy
45. Questions 44 and 45 are based on the maintenance expenses of a company, which are to be
analyzed for purposes of constructing a flexible budget. Examination of past records disclosed
the following costs and volume measures:
A. $447,360.
B. $240,000.
C. $230,400.
D. $384,000.
Fixed cost = ($39,200 x 12 months) - (24,000 x 12x $0.80) = $240,000
Difficulty: Medium
8-88
46. Jackson, Inc. is preparing a budget for the coming year and requires a breakdown of the cost
of electrical power used in its factory into the fixed and variable elements. The following data
on the cost of power used and direct labor hours worked are available for the last six months of
this year:
Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of
steam per direct labor hour is:
A. $4.00.
B. $5.42.
C. $5.82.
D. $6.00.
= Unit variable cost = ($19,800 - $13,400)/(3,650 - 2,050) = $4.00
Difficulty: Easy
8-89
47. A company allocates its variable factory overhead based on direct labor hours. During the
past three months, the actual direct labor hours and the total factory overhead allocated were as
follows:
Based upon this information, monthly fixed factory overhead was:

A. $30,000.
B. $50,000.
C. $46,667.
D. $33,333.
Using January and March: Unit variable cost = ($200,000 - $80,000)/(5,000 - 1,000) = $30
Fixed cost = $200,000 - (5,000 x $30) = $50,000. = $80,000 - (1,000 x $30) = $50,000
Difficulty: Easy
48. Simple regression analysis involves the use of:
A. A
B. B
C. C
D. D
Difficulty: Easy
8-90
49. Multiple regression analysis:

A. Establishes a cause and effect relationship.
B. Does not produce measures of probable error.
C. Measures the change in one variable associated with the change in one other variable only.
D. Measures the change in one variable associated with the change in more than one other
variable.
Difficulty: Easy
50. A company using regression analysis to correlate income to a variety of sales indicators
found that the relationship between the number of sales managers in a territory and net income
for the territory had a correlation coefficient of -1. Which is the best description of this
situation?
A. More sales managers should be hired.
B. Imperfect negative correlation.
C. Perfect inverse correlation.
D. There is no correlation at all.
Difficulty: Easy
51. For a simple regression analysis model that is used to allocate factory overhead, an internal
auditor finds that the intersection of the line of best fit for the overhead allocation with the
y-axis is $5,000. The slope of the line is. 20. The independent variable, factory wages, amounts
to $900,000 for the month. What is the estimated amount of factory overhead to be allocated for
the month?
A. $65,000.
B. $180,000.
C. $230,000.
D. $92,500.
E. $185,000.
(0.2 x $900,000) + $5,000 = $185,000
Difficulty: Easy
8-91
52. A retailer, in business for over 50 years, has developed the following regression model from
the past 60 months of operating data: Monthly sales dollars = $50,000 + $4.70A + $30B -
$1,000X. Where A = number of customers. B = advertising dollars per month. X = 1 if a winter
month. X = 0 if other months. An appropriate interpretation of this model is that:
A. The business is seasonal, generating higher sales in winter months than other months.
B. Advertising is not cost effective.
C. Within the relevant range, each additional customer will make a monthly purchase of $4.70
on average.
D. Sales are always expected to be at least $50,000.
Difficulty: Medium
is developed: Y = 10 + .51X1 + .45X2. The coefficient of determination is .96. This coefficient
of determination explains that:
A. 96% of sales variations are due to an error term.
B. The dependent variable is not related to advertising expenditures and per capita income.
C. 96% of sales variations are explained by the equation.
D. Only 4% of the sales variations are explained by advertising expenditures and per capital
income.
Difficulty: Easy
8-92
is developed: Y = 10 + .51X1 + .45X2. The coefficient of determination is. 96. Determine which
of the following conclusions is valid regarding the coefficient of determination:
A. More analysis is needed. The coefficient of determination leaves much unexplained.
B. The regression line fits the data used in the sample very well. There is a strong indication of
the relationship of the two variables with sales.
C. The coefficient of determination is positive because the constant term is positive.
D. The coefficient of determination should always be greater than one.
Difficulty: Easy
labor hours (X). The following relationship was found: Y = $1,000 + $2X. This relationship is:
A. Parabolic.
B. Curvilinear.
C. Linear.
D. Probabilistic.
Difficulty: Easy
labor hours (X). The following relationship was found: Y = $1,000 + $2X. This equation was
probably found through the use of which of the following mathematical techniques?
A. Linear programming.
B. Multiple regression analysis.
C. Simple regression analysis.
D. Excel tools.
E. Nonlinear regression.
Difficulty: Easy
8-93
labor hours (X). The following relationship was found: Y = $1,000 + $2X. The variable Y in the
A. Total variable costs.
B. Total factory overhead.
C. Total fixed costs.
D. Total direct labor hours.
Difficulty: Easy
labor hours (X). The following relationship was found: Y = $1,000 + $2X. The $2 in the
A. Total fixed costs.
B. Variable overhead costs per direct labor hour.
C. Total overhead costs.
D. Fixed overhead costs per direct labor hour.
Difficulty: Easy
59. The use of a relationship of total factory overhead to direct labor hours is said to be valid
only within the relevant range, which means:
A. Within a reasonable dollar amount for labor costs.
B. Within the range of observations of the cost driver.
C. Within the range of reasonableness as judged by the department supervisor.
D. Within the budget allowance for overhead.
Difficulty: Medium
8-94
60. As a preliminary step in the selection of variables to use in a statistical-forecasting model,

the management accountant has calculated the coefficient of correlation between the firm's
sales and three economic indexes. The results were as follows:
Which of the following statements indicates the best course of action for the auditor to take in
the development of a forecasting model?
A. Drop all three indexes from further consideration because a coefficient of correlation of +
1.0 is necessary for a statistically significant relationship.
B. Include only indexes B and C in the model because they have the only negative coefficients
of correlation.
C. Include only index C in the model because its coefficient of correlation is relatively high and
therefore probably statistically significant, while the coefficients of indexes A and B are likely
to be insignificant.
D. Include only index A in the model because it has the only positive coefficient of correlation.
Difficulty: Easy
8-95
61. Mulvey Company derived the following cost relationship from a regression analysis of its
monthly manufacturing overhead cost: C = $80,000 + $12M where: C = monthly
manufacturing overhead cost and M = machine hours. The standard error of estimate of the
regression is $6,000. The standard time required to manufacture one six-unit case of Mulvey's
single product is four machine hours. Mulvey applies manufacturing overhead to production on
the basis of machine hours, and its normal annual production is 50,000 cases. Mulvey's
estimated variable manufacturing overhead cost for a month in which scheduled production is
5,000 cases would be:
A. $80,000.
B. $320,000.
C. $240,000.
D. $360,000.
E. Some amount other than those given above.
$12 x 5,000 x 4 hours = $240,000
Difficulty: Easy
62. If the coefficient of correlation between two variables is zero, how might a scatter diagram
of these variables appear?
A. Random points.
B. A least squares line that slopes up to the right.
C. A least squares line that slopes down to the right.
D. Under this condition, a scatter diagram could not be plotted on a graph.
Difficulty: Easy
63. Which of the following is required for multiple regression?

A. The use of dummy variables.
B. The use of more than one cost driver.
C. The use of more than one dependent variable.
D. The use of a trend variable.
Difficulty: Easy
8-96
64. The p-value measures:

A. The probability that the regression equation is reliable.
B. The statistical significance of the dependent variable.
C. The risk that a particular independent variable has only a chance relationship to the
dependent variable.
D. The confidence range around the regression prediction.
Difficulty: Easy
65. Which of these job characteristics would result in the learning curve having less of an
effect?
A. Repetitive tasks.
B. Working on an assembly line.
C. Use of robotics and computer-aided manufacturing.
D. Activities where teaching and learning take place.
Difficulty: Easy
8-97

A. Y = $2,025 + $2.50H.
B. Y = $3,890 + $2.00H.
C. Y = $4,085 + $2.00H.
D. Y = $5,260 + $2.50H.
Unit variable cost = ($5,685 - $4,485)/(800 - 200) = $2.00. Fixed cost = $5,685 - (800 x $2.00)
= $4,085 or $4,485 - (200 x $2.00) = $4,085
Difficulty: Easy
8-98

A. $5,275.
B. $5,745.
C. $5,115.
D. $5,885.
Total cost = $4,085 + ($2.00 x 900) = $5,885
Difficulty: Easy
8-99

A. $4,385.00.
B. $4,785.20.
C. $4,185.65.
D. $4,875.00.
TC = $4,085 + ($2.00 x 150) = $4,385
Difficulty: Medium
8-100

A. Y = $6,025 + $2.00H.
B. Y = $6,520 + $3.00H.
C. Y = $6,085 + $2.00H.
D. Y = $6,250 + $3.00H.
Unit variable cost = ($9,460 - $7,300)/(980 - 260) = $3.00. Fixed cost = $9,460 - (980 x $3.00)
= $6,520 or $7,300 - (260 x $3.00) = $6,520
Difficulty: Medium
8-101

A. $10,060.
B. $10,145.
C. $10,015.
D. $10,805.
Total cost = $6,520 + ($3.00 x 1,180) = $10,060
Difficulty: Medium
8-102

A. Y = $1,025 + $1.24H.
B. Y = $875 + $1.15H.
C. Y = $8,542 + $0.145H.
D. Y = $9,263 + $0.162H.
using March and May. Unit variable cost = ($9,500 - $7,200)/(7,500 - 5,500) = $1.15. Fixed
cost = $9,500 - (7,500 x $1.15) = $875. = $7,200 - (5,500 x $1.15) = $875
Difficulty: Medium
8-103

A. $9,500.
B. $9,835.
C. $10,135.
D. $10,075.
Total cost = $875 + (8,000 x $1.15) = $10,075
Difficulty: Medium
73. Condor Airplane Company has built a new model jet aircraft which it intends to sell to high
net worth clients. This aircraft required 25,000 hours to complete. Condor believes an
incremental unit-time learning model with an 82% learning curve best reflects the company's
production efficiency. Condor just received a contract to make seven identical aircraft. What
will be the expected unit time for the eighth aircraft?
A. 20,500.00.
B. 16,810.00.
C. 13,784.20.
D. 11,303.04.
T x Ln = time required for the nth time the task is done. T = 25,000 hours; L = 82%; n = # of
times the task is doubled = 3. 25,000 x 0.823 = 13,784.20
Difficulty: Medium
8-104
74. Which of the following is not one of the main issues regarding data collection which can
significantly affect precision and reliability when using regression or any other cost estimation
method?
A. Data accuracy.
B. Time period choice.
C. Nonlinearity.
D. Linearity.
Difficulty: Medium
75. The R-squared in a satisfactory regression should be:

A. greater than .5
B. greater than .6
C. greater than .75
D. greater than .9
Difficulty: Medium
76. The standard error of the estimate (SE) in a regression analysis is:
A. A measure indicating the amount of a data falling within the relevant range.
B. A measure of explanatory power which is a number between zero and 1.
C. A measure of the accuracy of the regression's estimates.
D. A measure of reliability of each independent variable.
Difficulty: Easy
8-105
77. Which of the following cannot be influenced by learning curve analysis?

A. Make-or-buy decisions.
B. Cost-volume-profit analysis.
C. Capital budgeting.
D. Development of standard product costs.
E. Theory of constraints.
Difficulty: Easy
78. A range around the regression line within which the management accountant can rely that
the actual value of the predicted cost will fall is referred to as:
A. A relevant range.
B. A goodness of fit.
C. A confidence interval.
D. An F-statistic.
E. Degrees of freedom.
Difficulty: Easy
79. Cost estimation includes all of the following steps except:

A. Defining the cost object for which the related costs are to be estimated.
B. Determining the cost drivers.
C. Graphing the data.
D. Selecting and employing the appropriate estimation method.
E. Calculating the multiple regression coefficient.
Difficulty: Easy
8-106
80. Place the six cost estimation steps into the correct order:
1. Determine the cost drivers
2. Graph the data
3. Select and employ the appropriate estimation method
4. Define the cost object for which the related costs are to be estimated
5. Evaluate the accuracy of the cost estimate
6. Collect consistent and accurate data on the cost object and the cost drivers
A. 6,4,1,3,5,2.
B. 4,1,6,2,3,5.
C. 2,1,4,3,6,5.
D. 1,3,4,6,5,2.
Difficulty: Medium
8-107
Excel:
8-108
The t statistic for the independent variable:

A. Is statistically significant at less than 5% risk.
B. At 11.46, is statistically significant.
C. At 52.78, is too large to be statistically significant.
D. Lies somewhere between 6.491 and 7.063.
The t statistic is 52.78, and is considerably larger than the desired level of 2.0; the p-value or
risk level is. 000000000000144 which is significantly less than a risk level of 5%.
Difficulty: Easy
8-109
Excel:
8-110
The 95% confidence range for a prediction of monthly manufacturing cost using the model is:
A. From $631 to $936
B. From $6.49 to $7.06
C. The range of +/- $47.06 around the predicted amount
D. The range of +/- $47.06 x 2 = $94.12 around the predicted amount
The standard error of the estimate is the basis for assessing the confidence range around the
predicted amount; for 95% confidence, the range is equal to two multiplied times SE
Difficulty: Medium
8-111
Excel:
8-112
The F statistic is calculated by:

A. Determining the square root of sum of squares for the regression.
B. Using the square root of both the sum of squares and mean sum of squares for the regression.
C. Using the mean sum of squares of the regression and mean sum of squares for the errors.
D. Using the sum of squares for the errors and the square root of the sum of squares for the
regression.
F = Mean sum of squares/mean square error
Difficulty: Medium
8-113
Excel:
8-114
The statistic that indicates precision of the regression is:

A. .9982.
B. 47.0630.
C. 0.9981.
E. Significance F (1.44E-13).
Standard error of the estimate
Difficulty: Easy
8-115
Excel:
8-116
The statistic that indicates statistical reliability of the regression is:

A. .9982.
B. 47.0630.
C. 0.9981.
E. F-statistic (1.44E-13).
F-value and related p-value
Difficulty: Easy
8-117
Excel:
8-118
The Lower 95% and Upper 95% shown in the output suggests that:
A. We can be 95% confident that the precision of the regression equation will be within the
ranges specified.
B. We can be 95% confident that the statistical reliability of the regression equation will be
within the ranges specified.
C. We can be 95% confident that the coefficients of the dependent variable will be within the
ranges specified.
D. We can be 95% confident that the coefficients of the independent variables will be within the
ranges specified.
E. We can be 95% confident that the regression equation will be within the ranges specified.
Difficulty: Hard
8-119
Excel:
8-120
Using regression analysis, what is the estimated maintenance expense for a month that the firm
expects to operate 600 machine hours (using 3 decimal places in calculations)?
A. $88.
B. $4,050.
C. $4,850.
D. $6,934.
$783.778 + ($6.777 x 600) = $4,850
Difficulty: Medium
88. A measure of the statistical reliability of each independent variable is:

A. Correlation.
B. t-value.
C. R-Squared.
D. F value.
Difficulty: Medium
89. Which of the following means that two or more independent variables are highly correlated
with each other?
A. Correlation.
B. t-value.
C. R-Squared.
D. F value.
Difficulty: Easy
8-121
90. Which of the following is not used for evaluating a regression analysis?
A. Correlation.
B. t-value.
C. R-Squared.
D. F value
Difficulty: Easy
91. Two aspects to consider when selecting the time period for cost estimation are:
A. Length of time period and unknown time periods.
B. Mismatched time periods and length of time period.
C. Multicollinearity and Correlation.
D. Time periods and correlation between time periods.
Difficulty: Easy
92. Which of the following is the percentage by which average time (or total time) falls from
previous levels as output doubles?
A. Learning speed.
B. Learning curve.
C. Learning analysis.
D. Learning average.
E. Learning rate.
Difficulty: Easy
8-122
93. Accurate cost estimates are required by strategic management for all except:
A. To facilitate strategic positioning analysis.
B. To facilitate target costing and life-cycle costing.
C. To facilitate value-chain analysis.
D. Accounting internal control.
Difficulty: Easy
At an output level of 1,000 bicycles, per unit variable cost is calculated to be:
A. $100.00.
B. $101.50.
C. $125.00.
D. $126.32.
E. $131.58.
Variable costs are $100 per bicycle; $80,000/800. Variable Cost per unit: $100,000/1,000 =
$100.
Difficulty: Easy
8-123
At an output level of 1,000 bicycles, per unit total cost is calculated to be:
A. $100.00.
B. $101.50.
C. $125.00.
D. $126.32.
E. $131.58.
Total Cost of 1,000 bicycles: $25,000 + 1,000 x $100 Total Cost per unit: $125,000/1,000 =
$125.00
Difficulty: Easy
8-124
Essay Questions
96. Based in Minneapolis, Minnesota, the Hubert Memorial Foundation has $300 million in
investments and contributes approximately 80 percent of the average annual return of $25
million to worthy causes. Individuals and groups requesting grants of $100,000 or more must
make an in-person presentation of their request. These presentations generally involve three to
five individuals and take an average of two hours each. The Executive Director of the Hubert
Foundation is concerned with the cost of resources used to schedule and accommodate the 500
to 600 group presentations each year. She has asked you for suggestions about what kind of cost
data to gather, and ways to classify the data to help her understand cause/effect relationships
between costs and results.
Required: Write a brief memo to the Executive Director giving her some basic information on
cost classification and behavior.
Please see Feedback for answers.
Feedback: Cost can be viewed in many different ways. Fixed costs (depreciation, salaries) do
not change because of activity, but are caused by time. Variable costs (some utilities, paper) are
not time-related, but change with activity. Sunk costs (buildings, equipment) are not impacted
by changes and activities and can be ignored in decisions about incremental activity.
Differential costs happen because of incremental activity. The majority of Hubert Foundation
costs are fixed: interview rooms, presentation equipment, and salaries of Hubert Foundation
administrators who hear and evaluate the presentations. The marginal/differential costs can and
should be identified, but are probably minor in comparison to the capacity costs needed to
handle the large number of yearly presentations.
Difficulty: Easy
8-125
97. Green Mountain College is a 5,000 student state-supported, four-year institution located in
the mid-South. Physical facilities can accommodate another 1,000 students, and the college
administration is attempting to estimate the added yearly cost of educating the additional
students. The Business Manager of Green Mountain College has asked you to evaluate two
linear regressions given below, and recommend the better one to her.
Where: SC = Student cost

CH = Cost per credit hour
IS = Incremental cost per student
Required: (1) Explain your choice of cost function (regression 1 or regression 2) for predicting
added student educational costs per year. (2) What information value does the standard error of
estimate (SE) have in this situation?
Feedback: (1) The coefficient of determination (R-squared) measures the degree to which
changes in student cost (SC) can be predicted by changing the cost per credit hour (CH) or
changing the incremental cost per student (IS). Regression 2 has better explanatory power
(R-squared = 0.594 vs. 0.707; 1.000 is perfect correlation), but the precision of regression 1 is
better, having a standard error of the estimate (SE) of $117 versus $133 for regression 2.
However, given just these two statistics, regression 1 appears to be the better of the two.
Additional statistics (t and F tests, analysis of variance, etc.) would allow for a better decision.
(2) The standard error of the estimate (SE) measures the accuracy of the regression's estimates.
It is a range around the regression estimate in which we can be reasonably sure that the
unknown actual value will fall. Generally, the smaller the standard error relative to the
dependent variable (SC), the more confident we can be of our results in using the regression as
a cost predictor.
Difficulty: Medium
8-126
98. US Best Corporation produces and distributes products nationwide, and competes on cost
leadership. In order to maintain its current industry cost and price leadership role, US Best uses
cost-based pricing techniques. One of the factors considered in determining future prices is the
Consumer Price Index (CPI). Considerable discussion over the past year on the national level
has strongly suggested the monthly CPI inflation adjustment figure is skewed upward by as
much as one percentage point.
Required: What implication does this purported inflation exaggeration in the Consumer Price
Index have on US Best Corporation's cost-based pricing changes in the near future?
Feedback: US Best Corporation should remove the excess percentage point CPI inflation rate if
(a) it believes the CPI is overstated by that amount; (b) it believes its competitors will adjust the
same amount for the same reason; and (c) do so if it truly wants to maintain the cost-based price
leadership it currently maintains.
Difficulty: Easy
8-127
99. Kumar Co. is attempting to predict its maintenance costs more accurately. Maintenance
costs are a mixed cost. Maintenance costs and machine hours for the first four months of the
year are as follows:
Feedback: Using March and April
Unit variable cost (or b) = = $4.10 per machine hour

1,430 - 1,130
Monthly fixed costs (or a) = $8,810 - ($4.10 x 1,430) or $7,580 - ($4.10 x 1,130) = $2,947
Difficulty: Easy
8-128
100. Kennerson Co. produced a pilot run of seventy units of a recently developed part used in
the finished products. Kennerson Co. expects to produce and sell 2,380 units annually. The
pilot run required 20.16 direct labor hours for the seventy units, averaging .408 direct labor
hours per piston. Kennerson experiences an eighty percent learning curve on the direct labor
hours needed to produce new parts.
Required: Assuming the parts are manufactured by Kennerson Co., calculate the average direct
labor hours per unit for the first 1,120 parts (including the pilot run) produced.
Feedback:
The average direct labor hours per unit for the first 1,120 parts is 0.16712 hours per unit.
Difficulty: Medium
8-129
101. School Kids' Compact Disc Store expanded the size of its store in Westfield, NJ two
months ago. The owner, Montgomery Brown, has asked you to develop an analysis of the cost
structure in his store, as a basis for assessing the profitability of his business. He provides you
with account data for the most recent month, which he explains is representative of what these
costs are in most months of the year; there is not much seasonality in his business. Last month,
May, 890 compact discs were sold. This month Montgomery expects to sell 1,100 CDs.
NOTE: Assume that Mr. Brown purchases promptly on a day-to-day basis to replace inventory,
so that the level of inventory remains constant.
Required:
(1) Develop the cost equation for Mr. Brown's store, using the account classification method,
assuming that the cost object is the individual compact disc.
(2) Mr. Brown plans to increase sales by 25% next month, July, by reducing the price of his
compact discs. Assuming a 25% increase in sales, what is the lowest price Mr. Brown can sell
his discs for if he wants to meet all costs plus make $1 profit per disc?
(3) What would the profit per disc be if sales actually increased by only 15% and the discs were
sold at the price calculated in (2)?
8-130
Feedback:
Variable Costs (solve for May or June; here solved for May)
Cost Function Equation: = $3,180 + $9.52 x (CDs sold) Can Also Use High-Low Method:
(15,652 - 13,653)/(1,100-890) = $9.52
Add $1 profit per disc: $13.29 + $1.00 = $14.29
8-131
Difficulty: Medium
8-132
102. Learning Curves Moss Point Manufacturing recently completed and sold an order of 50
units that had the following costs:
* Applied on the basis of direct labor hours

The company has now been requested to prepare a bid for 150 units of the same product.
Required: If an 80 percent learning curve is applicable, estimate Moss Point's total cost on this
order.
Feedback:
The time required for the additional 150 units is 2,560 - 1,000 = 1,560 hours
Difficulty: Medium
8-133
103. Andrews & Henderson Inc. is a manufacturer of mining equipment in Colorado. Eric
Andrews, the founder of the corporation, has just won a new contract from Shakley Inc. to build
seven new tunneling machines for a price of $500,000 each. The machines are to be delivered in
the next seven months. The costs associated with the production of the first machine are listed
below. Eric estimates that an 85% cumulative average learning rate exists for these types of
projects. Following is the cost information for the first tunneling machine:
Required:
(1) Prepare an estimate of the total hours for producing the second through eighth machines.
(2) Determine the expected profit from this project.
Feedback:
Time required for the additional 7 units is 33,260 hours (41,760 - 8,500).
Difficulty: Medium
8-134
104. Elisko Inc. is a major book distributor. Elisko's Shipping Department consists of a
manager plus ten other permanent positions- four supervisors and six loaders. The four
supervisors and six loaders provide the minimum staff and frequently must be supplemented by
additional workers, especially during the weeks when the volume of shipments is heavy. Thus,
the number of people shipping the orders frequently averages over 30 per week, i.e., ten
permanent persons plus 20 temporary workers. The temporary workers are hired through a local
agency. Elisko must use temporary workers to maintain a minimum daily shipment rate of 95
percent of orders presented for shipping. The loss of efficiency from using temporary workers
is minimal, and the $10.00 per hour cost of temporary workers is less than the $15.00 per hour
for the loaders and $22.50 per hour for the supervisors on Elisko's permanent staff. The agency
requires Elisko to utilize each temporary worker for at least four hours each day. Jim Locter,
Shipping Manager, schedules temporary help based on forecasted orders for the coming week.
Supervisors serve as loaders until temporary help is needed. A supervisor stops loading when
the ratio of loaders to supervisors reaches 7: 1. Locter knows that he will need temporary help
when the forecasted average daily orders exceed 300. Locter has frequently requested from two
to four extra temporary workers per day to guard against unexpected rush orders. If there was
not enough work, he would dismiss the extra people at noon after four hours of work. The
agency has not been pleased with Locter's practice of overhiring and has notified Elisko that it
is changing its policy. From now on, if a person is dismissed before an eight-hour assignment is
completed, Elisko will still be charged for an eight-hour day plus mileage back to the agency for
reassignment. This policy would go into effect the following week. Paula Brand, General
Manager, called Jim Locter to her office when she received the notice from the agency. She told
Locter, "Your staffing has to be better. This penalty could cost us up to $300-$500 per week in
labor cost for which we receive no benefit. Why can't you schedule better?" Locter replied, "I
agree that the staffing should be better, but I can't do it accurately when there are rush orders.
By being able to layoff people at noon, I have been able to adjust for the uncertain order
schedule without cost to the company. Of course, the agency's new policy changes this."
Locter and Brand contacted Elisko's Controller, Mitch Berg regarding Locter's problem on how
to estimate the number of people needed each week. Berg reasoned that Locter needed a quick
solution until he could study the work flow. Berg suggested a regression analysis using the
number of orders shipped as the independent variable and the number of workers (permanent
plus temporary) as the dependent variable. Berg indicated that data for the past year was
available 'and that the analysis could be done quickly using the accounting department's
software. Berg completed the two regression analyses that are presented below. The first
regression was based on the data for the entire year. The second regression excluded the weeks
when only the 10 permanent staff persons were used; these weeks were unusual and appeared to
be out of the relevant range. Locter was not familiar with regression analysis and, therefore,
was unsure how to implement this technique. He wondered which regression data he should
employ, i.e., which one was better. When he recognized that the regression was based on actual
orders shipped by week, Berg told him he could use the forecasted shipments for the week to
determine the number of workers needed.
8-135
Required:
(1) Using Regression 1 based on data from a full year, calculate the number of temporary
workers Jim Locter would plan to hire for a forecast indicating 1,200 shipments per day.
(2) Which one of the two regressions appears to be better? Explain your answer.
(3) Explain the circumstances under which Jim Locter can use the regression in his planning for
temporary workers.
(4) Explain whether the regression analysis that Elisko Inc. employed in this situation could be
improved. If it cannot be improved, explain why.
(5) How can the regression analysis help Elisko be more competitive?
8-136
Feedback: (1) W = a + bS
W = 5.062 + .023 (1,200)
= 5.062 + 27.6
= 32.662 or 33 total workers
Total workers needed (33) less permanent workers (10) = total number of temporary workers
needed (23)
(2) Regression 2 appears to be better than Regression 1 because:
• data outside the relevant range has been excluded thereby removing any bias (by excluding
the weeks when only the 10 permanent employees were used, since this data is not
representative of the common case wherein both permanent and part time help are used).
• the standard of error of the estimate (SE) for Regression 2 is smaller (0.432 vs. 2.012) and the
95% confidence interval for W is much smaller for Regression 2 (0.848 versus 3.943).
• the coefficient of determination (R-squared) is higher for Regression 2.
• the t-value for regression 2 is much larger.
(3) Jim Locter can use the regression in his planning for temporary when
• the forecasted daily shipments are greater than 300 and do not deviate too much from the
actual shipments.
• the amount of work to be done is dependent only on the number of shipments to be made and
does not change from shipment to shipment.
• worker productivity is expected to remain approximately the same as that experienced during
the period used to develop the regression.
• a strong cause and effect relationship (R squared) exists between a dependent and
independent variable.
• the time frame for a forecast is short-term.
(4) The regression can be improved by:
• redeveloping the regression using the number of hours worked as the dependent variable.
• performing another analysis if rush orders or deviations of actual orders from forecasts occur
with any degree of regularity.
• investigating the historical data used as a basis for the regression to determine if there are any
further unusual circumstances that should be removed.
• re-run the regression after a period of time, such as every four to six months.
(5) By providing more accurate estimation of the number of staff needed, Elisko provides better
service and improves worker productivity, thus helping the company become more
competitive.
Difficulty: Hard
8-137
105. Quick Telephone Response (QTR) was started several years ago to provide an outsource
telephone service for the growing number of small, specialty catalog mail-order companies that
commenced operations in recent years. Since most of the calls are received between 10 a.m. and
2 p.m., QTR began offering a telephone answering service to attempt to fill the remainder of the
day for its operators. However, as outsource competition has recently increased, QTR analyzed
its operations and concluded that it should focus on its core business of providing service to its
mail- order clients only. To bring operating costs into line, QTR concluded that it should shed
some of its full-time operators and replace them with part-time operators in order to cover the
peak mid-day calling period. Weldon Miller, director of the Telephone Response Operations
Department, engaged a consultant to assist in analyzing the situation and determining the
number of full-time and part-time employees that will be required to meet QTR's variable
operating schedule. Based on a study of one month's activity they concluded that the number of
daily orders received for their specialty clients averaged 3,450 with the mid-day period
averaging 2,250 orders. They calculated that there would be a need to retain twenty five (25)
full-time employees. They further developed two regression analyses. Regression 1 relates to
the average of 3,450 orders per day and Regression 2 relates to the average of 2,250 peak
mid-day orders. The data resulting from these analyses are presented below.
Regression Equation: where: E = a + bN E = Employees N = Number of orders
Required:
(1) Refer to the regression data in the previous column for Quick Telephone Response (QTR).
(a) Calculate the number of part-time employees that will be needed each day using the
regression results relating to the average number of daily orders handled. Round your response
to the nearest whole number.
(b) Apply the regression results that relate to the average number of orders handled during the
mid- day peak period. Calculate the number of part-time employees that will be needed daily.
Round your response to the nearest whole number.
(c) Of the two regression analyses used select the regression analysis which appears to be the
better one and explain the reason for your conclusion.
(2) Describe at least two ways that Weldon Miller could improve the regression predictions.
(CMA adapted)
8-138
Feedback: (1) (a) The number of part-time employees for Quick Telephone Response (QTR)
that will be needed each day using the regression results relating to the average number of daily
orders handled is 19, calculated as follows. E = a + bN = 26.0265 + .0051 (3,450) = 43.6215
(Rounded to 44 total employees) 44 total employees minus 25 full time employees = 19 part
time employees
(b) The number of part-time employees that will be needed each day using the regression results
relating to the average number of orders handled during the mid-day peak period is 17,
calculated as follows. E = a + bN = 31.6785 + .0045 (2,250) = 41.8035 (Rounded to 42 total
employees) 42 total employees minus 25 full-time employees = 17 part-time employees.
(c) Regression 2 is the better regression analysis of the two presented for the following reasons:
Regression 2 has more economic plausibility than Regression 1. Since the peak demand occurs
during the mid-day period it is better to forecast the part- time workers based upon the mid-day
orders. The standard error of the estimate is lower for Regression 2 (4.228 versus 4.623),
indicating that the predicted result is expected to be closer to the actual result. This measures the
dispersion of the observed points around the estimated regression line. The coefficient of
determination (R squared) is higher for Regression 2 (.682 versus.563), indicating that the
independent variable predicts a higher proportion of the variance in the dependent variable.
This means Regression 2 has a better "goodness of fit" than Regression 1.
(2) At least two ways that Weldon Miller could improve the regression predictions include the
following.
After the part-time operators begin processing orders, perform another regression analysis on
the incremental orders handled by the part-time operators versus the full-time operators. This
would result in a more direct cause- and-effect relationship for the part-time and full-time
operators. The analysis could be performed using multiple regression analysis. This could split
the orders and data into those handled by the full-time employees and by the part-time
employees during different periods of the day. Other analyses could add factors such as the
training period for new operators, seasonality in the mail-order business or different levels of
effort required to process different types of orders.
Difficulty: Medium
8-139
106. Train Express Co., which manufactures train engines, is attempting to predict its
maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and
machine hours for the first four months of the year are as follows:
Feedback: Using April and January
Unit variable cost (or b) = = $24.10 per machine hour

Monthly fixed costs (or a) = $62,370 - ($24.10 x 1,840) or ($50,320 - $24.10 x 1,340) =
$18,026
Difficulty: Easy
8-140
107. Manufacturers Inc. produced a pilot run of fifty units of a recently developed motor used
in the finished products. The company expected to produce and sell 5,526 units annually. The
pilot run required 21.2 direct labor hours for the fifty motors, averaging.424 direct labor hours
per motor. Manufacturers Inc. experienced an eighty-two percent learning curve on the direct
labor hours needed to produce new motors.
Required: Assuming the motors are manufactured by Manufacturers Inc., calculate the average
direct labor hours per unit for the first 800 motors (including the pilot run) produced.
Feedback:
The average direct labor hours per unit for the first 800 units is.191699 hours.
Difficulty: Medium
8-141
108. Whittenberg Distributors, a major retailing and mail-order operation, has been in business
for the past 10 years. During that time, its mail-order operations have grown from a sideline to
represent more than 80 percent of the company's annual sales. Of course, the company has
suffered growing pains. At times, overloaded or faulty computer programs resulted in lost sales.
And scheduling temporary workers to augment the permanent staff during peak periods has
always been a problem. Peter Bloom, manager of mail-order operations, has developed
procedures for handling most problems. However, he is still trying to improve the scheduling of
temporary workers to take customer telephone orders. Under the current system, Peter keeps a
permanent staff of 60 employees who handle the base telephone workload and supplements this
staff with temporary workers as needed. The temporary workers are hired on a daily basis; he
determines the number needed for the next day the afternoon before based on his estimate of the
upcoming telephone volume. Peter has decided to try regression analysis to improve the hiring
of temporary workers. By summarizing the daily labor-hours into weekly totals for the past year,
he determined the number of workers used each week. In addition, he listed the number of
orders processed each week. After entering the data into a spreadsheet, Peter ran two
regressions. Regression 1 related the total number of workers (permanent staff plus temporary
workers) to the number of orders received. Regression 2 related only temporary workers to the
number of orders received. The output of these analyses follows: Regression model: W = a + b
 T where: W = workers; T = telephone orders
Required:
(1)Peter Bloom estimates that Whittenberg Distributors will receive 12,740 orders during the
second week of December.
(a)Predict the number of temporary workers needed for this week using regression 1. Round
your answer to the nearest whole number.
(b)Using regression 2, predict the number of temporary workers needed during this week.
Round your answer to the nearest whole number.
(2)Which of the two regression analyses appears to be better? Explain your answer.
(3)Describe at least three ways that Peter Bloom could improve his analysis to make better
predictions than either of these regression results provides. (CMA Adapted)
8-142
Feedback: (1) (a) Using the regression results relating total workers to the number of orders
received (Regression I), the number of temporary workers needed is 17, calculated as follows:
W = a + bT
= 21.938 + .0043 (12,740)
= 76.720 (Round to 77)
Total workers needed 77

Less permanent workers 60
Temporary workers 17
(b)Using the regression analysis that relates the number of temporary workers to the number of
orders received (Regression 2), the number of temporary workers needed is 19, calculated as
follows:
W = a + bT
= -46.569 + .0051 (12,740)
= 18.405
Temporary workers = 19 (rounded)
(2) Regression Analysis 2 appears to be better for the following reasons.
• The standard error of the estimate is lower for Regression 2 (1.495 vs. 3.721) which usually
means that the prediction is expected to be more accurate. However, note that the dependent
variable in Regression 2 (temporary workers) is on the average somewhat smaller (about 1/4)
that of regression 1 (total workers), so that the standard errors are not directly comparable.
Because the dependent variable for Regression 2 is smaller, we would expect the standard error
also to be smaller. Bloom needs to compare the SE to the mean of the dependent variable (not
available in this case) to further understand whether the regressions provide useful predictions
• The coefficient of determination is higher for Regression 2 (.755 vs..624) which indicates a
more reliable regression model; the R Squared values are OK but not particularly strong.
• The t-value is slightly higher for regression 2 (2.04 vs. 1.95 for regression 1); neither t-value is
particularly good, an indication of a weak relationship between the independent variable and
the dependent variable.
• Since both the regressions are quite similar, Bloom should consider why one should lead to
better results than the other. That is, could not Bloom argue that regression 1 is preferred on the
logical basis that there should be a stronger relationship between total orders and total number
of workers? Even if the statistical measures are more favorable for regression 2, regression 1
might be preferable because it represents a more plausible relationship. Since any regression is
based on a sampling of data observations, it might be that if several regressions were done over
many time periods, the regression 1 model would show better statistical measures.
(3) At least three ways that Peter Bloom could improve his analysis in order to get better
predictions are described below.
• Perform regression calculations on a daily rather than weekly basis, since Bloom is analyzing
the need for temporary workers on a daily rather than a weekly basis.
• Note the comment (in part 2 above) about the need for further data analysis to examine the
value of regression 1 versus regression 2.
• Run the regression on data for more than one year if this data is available. If the historical data
8-143
is a good indicator of future trends, this will result in better predictions of expected orders. If
several months of data are used, Bloom should make sure that there are no shifts or cyclical
changes in the data over this longer period of time.
• Graph the data and look for outliers and other signs of non-linearity; note however that the
Durbin Watson statistics for both regressions are in the OK range.
• Study the data for seasonality and modify the model if appropriate.
Difficulty: Medium
109. Regression analysis is increasingly being used in business applications, often called
"business analytics" (or "predictive analytics"), in which a company studies its customers to
gather information that can be used to make each customer more profitable. Companies that do
this include Harrah's and eHarmony, among many others.
Required:
(1) Briefly explain how a company could use regression to improve customer profitability.
(2) Do you see any ethical issues involved in the use of business analytics? Explain.
Feedback: (1) Business analytics is a type of business intelligence in which statistical models
such as regression are used to develop information for decision making. Harrah's uses it to
predict when a gambling customer will reach their threshold of loss and leave the casino; this
information is used to encourage the customer to stop gambling just prior to that point.
eHarmony uses regression to determine couples who will be successful matches. The objective
of the use of regression in these cases is to develop a model which will predict customer
behavior so that the company can most profitably provide services or products to that customer.
(2) Many would view business analytics as simply good business practice, while others would
be concerned about the potential invasion of privacy, as these companies in effect build
behavioral models of their customers and then use the models to influence customer behavior.
AACSB: Ethics
Difficulty: Medium
8-144
110. Clothes for U is a large merchandiser of apparel for budget-minded families. Management
recently became concerned about the amount of inventory carrying costs and transportation
costs between warehouses and retail outlets. As a starting point in further analyses, Gregory
Gonzales, the controller, wants to test different forecasting methods and then use the best one to
forecast quarterly expenses for 2010. The relevant data for the previous three years follows:
The results of a simple regression analysis using all 12 data points yielded an intercept of
$11,854.55 and a coefficient for the independent variable of $126.22 (R-squared = .19, t = 1.5,
SE = 974).
Required:
(1) Calculate the quarterly forecasts for 2010 using the high-low method and regression
analysis. Recommend which method Gregory should use and explain why.
(2) How does your analysis in requirement 1 change if Clothes for U is involved in global
sourcing of products for its stores?
8-145
8-146
Feedback: (1) High-Low Method An examination of the exhibit below indicates that
representative high and low points are the last and first data points, respectively, so these points
are used to develop the high-low estimate. The second data point is the lowest point but not
considered representative of the data given the graph.
Variable cost = ($14,600 - $12,500)/(12 - 1) = $190.91. Fixed cost = $12,500 - $190.91 x 1 =

$12,309 = $14,600 - $190.91 x 12 Quarterly Predictions are: $12,309 + $190.91 x 13 =
$14,791; $12,309 + $190.91 x 14 = $14,982; $12,309 + $190.91 x 15 = $15,173; $12,309 +
$190.91 x 16 = $15,364
Regression The regression equation from the spreadsheet is:

Warehouse and Transportation Expense = $11,854 + (quarter number x $126.22)
Predicted Expense for the next four quarters using regression analysis: 1 $11,855 + (13 x
$126.22) = $13,496; 2 $11,855 + (14 x $126.22) = $13,622; 3 $11,855 + (15 x $126.22) =
$13,748; 4 $11,855 + (16 x $126.22) = $13,875 Regression analysis is the best method to
recommend, because it gives the best-fitting line.
(2) If Clothes for U is involved in global sourcing for its stores, then transportation costs and
warehousing costs must be analyzed by country, as these costs are likely to differ significantly
among countries. Also, in addition to transportation and warehousing, Clothes for U should
consider including in the analysis the additional costs of global business, including customs
duties, delays, and other costs.
Difficulty: Medium
8-147
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independence. After the British took possession of New York City,
Ambrose Serle, who had undertaken to publish the New York
Gazette in the interest of the invaders, wrote as follows to Lord
Dartmouth in regard to the patriot-party press.
Among other engines which have raised the present commotion, next to the
indecent harangues of the preachers, none has had a more extensive or stronger
influence than the newspapers of the respective colonies. One is astonished to see
with what avidity they are sought after, and how implicitly they are believed by the
great bulk of the people.[57]
It was nearly a century later, in the person of Horace Greeley,

editor of the New York Tribune during the anti-slavery struggle, that
the journal of opinion reached its highest expression in America.
America has had better newspaper men than Horace Greeley,
although none, perhaps, whose opinions exercised so wide an
influence. “The New York Tribune,” says Charles Francis Adams,
“during those years was the greatest educational factor, economically
and morally, this country has ever known.”
IV. THE INDEPENDENT PRESS
The power of the press, as represented by the older type of
newspaper, rested in the final analysis upon the ability of its editors
to create a party and lead it. The journal of opinion is, by its very
nature, predestined to become the organ of a party, or at any rate the
mouthpiece of a school.
So long as political activities were organized on the basis of
village life, the party system worked. In the village community,
where life was and still is relatively fixed and settled, custom and
tradition provided for most of the exigencies of daily life. In such a
community, where every deviation from the ordinary routine of life
was a matter of observation and comment and all the facts were
known, the political process was, at any rate, a comparatively simple
matter. Under these circumstances the work of the newspaper, as a
gatherer and interpreter of the news, was but an extension of the
function which was otherwise performed spontaneously by the
community itself through the medium of personal contact and
gossip.
But as our cities expanded and life grew more complicated, it
turned out that political parties, in order to survive, must have a
permanent organization. Eventually party morale became a greater
value than the issues for the determination of which the parties are
supposed to exist. The effect upon the party press was to reduce it to
the position of a sort of house organ of the party organization. It no
longer knew from day to day just what its opinions were. The editor
was no longer a free agent. It was of this subjugated Tribune that
Walt Whitman was thinking when he coined the phrase, “the kept
editor.”
When, finally, the exigencies of party politics, under conditions
of life in great cities, developed the political machine, some of the
more independent newspapers revolted. This was the origin of the
independent press. It was one of the independent papers, the New
York Times of that day, that first assailed and eventually overthrew,
with the aid of a cartoonist, Thomas Nast, the Tweed Ring, the first
and most outrageous of the political machines that party politics in
this country has so far produced. Presently there was a general
breaking away, particularly by the metropolitan, as distinguished
from the country, papers, from the domination of the parties. Party
loyalty ceased to be a virtue.
Meanwhile a new political power had arisen and found
expression in the press. This power was embodied, not in the
editorial and the editorial writer, however, but in the news and the
reporter. In spite of the fact that the prestige of the press, up to this
time, had rested on its rôle of champion of popular causes, the older
newspapers were not read by the masses of the people.
The ordinary man is more interested in news than he is in
political doctrines or abstract ideas. H. L. Mencken has called
attention to the fact that the average man does not understand more
than two-thirds of what “comes from the lips of the average political
orator or clergyman.”
The ordinary man, as the Saturday Evening Post has
discovered, thinks in concrete images, anecdotes, pictures, and
parables. He finds it difficult and tiresome to read a long article
unless it is dramatized and takes the form of what newspapers call a
“story.” “News story” and “fiction story” are two forms of modern
literature that are now so like one another that it is sometimes
difficult to distinguish them.
The Saturday Evening Post, for example, writes the news in the
form of fiction, while the daily press frequently writes fiction in the
form of news. When it is not possible to present ideas in the
concrete, dramatic form of a story, the ordinary reader likes them
stated in a short paragraph.
It is said that James E. Scripps, founder of the Detroit News,
which specializes in afternoon papers in secondary cities, built up his
whole string of papers upon the basis of the very simple
psychological principle that the ordinary man will read newspaper
items in the inverse ratio to their length. His method of measuring
the efficiency of his newspapers, therefore, was to count the number
of items they contained. The paper that had the largest number of
items was the best paper. This is just the reverse of Mr. Hearst’s
methods; his papers have fewer items than other papers.
The old-time journalist was inclined to have a contempt for
news. News was for him simply material upon which to base an
editorial. If God let things happen that were not in accordance with
his conception of the fitness of things, he simply suppressed them.
He refused to take the responsibility of letting his readers learn
about things that he knew ought not to have happened.
Manton Marble, who was editor of the New York World before
Joseph Pulitzer took it and made it yellow, used to say there were not
18,000 people in New York City to whom a well-conducted
newspaper could offer to address itself. If the circulation of the paper
went above that figure he thought there must be something wrong
with the paper. Before Mr. Pulitzer took it over, the circulation had
actually sunk to 10,000. The old New York World preserved the type
of the old conservative high-brow paper down to the eighties. By that
time in the larger cities the political independent newspapers had
become the accepted type of journal.
Long before the rise of what was later to be called the
independent press, there had appeared in New York two journals
that were the forerunners of the present-day newspapers. In 1883
Benjamin Day, with a few associates, started a paper for “mechanics
and the masses generally.” The price of this paper was one cent, but
the publishers expected to make up by larger circulation and by
advertising the loss sustained by the lower price. At that time most of
the other New York papers were selling for six cents.
It was, however, the enterprise of James Gordon Bennett, the
founder of the New York Herald, who set the pace in the new form of
journalism. In fact, as Will Irwin says in the only adequate account
that has ever been written of the American newspaper, “James
Gordon Bennett invented news as we know it.” Bennett, like some
others who have contributed most to modern journalism, was a
disillusioned man, and for that very reason, perhaps, a ruthless and
cynical one. “I renounce all so-called principles,” he said in his
announcement of the new enterprise. By principles he meant,
perhaps, editorial policies. His salutatory was at the same time a
valedictory. In announcing the purposes of the new journalism he
bade adieu to the aims and aspirations of the old. Henceforth the
editors were to be news gatherers and the newspaper staked its
future on its ability to gather, print, and circulate news.
What is news? There have been many answers. I think it was
Charles A. Dana who said, “News is anything that will make people
talk.” This definition suggests at any rate the aims of the new
journalism. Its purpose was to print anything that would make
people talk and think, for most people do not think until they begin
to talk. Thought is after all a sort of internal conversation.
A later version of the same definition is this: “News is anything
that makes the reader say, ‘Gee Whiz!’” This is the definition of
Arthur McEwen, one of the men who helped make the Hearst papers.
It is at the same time the definition of the latest and most successful
type of journal, the yellow press. Not all successful journals are, to be
sure, yellow. The New York Times, for example, is not. But the New
York Times is not yet a type.
V. THE YELLOW PRESS
There seem to be, as Walter Lippmann has observed, two types
of newspaper readers. “Those who find their own lives interesting”
and “those who find their own lives dull, and wish to live a more
thrilling existence.” There are, correspondingly, two types of
newspapers: papers edited on the principle that readers are mainly
interested in reading about themselves, and papers edited upon the
principle that their readers, seeking some escape from the dull
routine of their own lives, are interested in anything which offers
them what the psychoanalysts call “a flight from reality.”
The provincial newspaper with its record of weddings, funerals,
lodge meetings, oyster suppers, and all the small patter of the small
town represents the first type. The metropolitan press, with its
persistent search in the drab episodes of city life for the romantic and
the picturesque, its dramatic accounts of vice and crime, and its
unflagging interest in the movements of personages of a more or less
mythical high society represents the latter type.
Up to the last quarter of the nineteenth century, that is to say, up
to about 1880, most newspapers, even in our large cities, were
conducted on the theory that the best news a paper can print is a
death notice or marriage announcement.
Up to that time the newspapers had not yet begun to break into
the tenements, and most people who supported a newspaper lived in
homes rather than in apartments. The telephone had not yet come
into popular use; the automobile was unheard of; the city was still a
mosaic of little neighborhoods, like our foreign-language
communities of the present day, in which the city dweller still
maintained something of the provincialism of the small town.
Great changes, however, were impending. The independent
press was already driving some of the old-time newspapers to the
wall. There were more newspapers than either the public or the
advertisers were willing to support. It was at this time and under
these circumstances that newspaper men discovered that circulation
could be greatly increased by making literature out of the news.
Charles A. Dana had already done this in the Sun, but there still was
a large section of the population for whom the clever writing of Mr.
Dana’s young men was caviar.
The yellow press grew up in an attempt to capture for the
newspaper a public whose only literature was the family story paper
or the cheap novel. The problem was to write the news in such a way
that it would appeal to the fundamental passions. The formula was:
love and romance for the women; sport and politics for the men.
The effect of the application of this formula was enormously to
increase the circulation of the newspapers, not only in the great
cities, but all over the country. These changes were brought about
mainly under the leadership of two men, Joseph Pulitzer and
William Randolph Hearst.
Pulitzer had discovered, while he was editor of the St. Louis Post
Dispatch, that the way to fight popular causes was not to advocate
them on the editorial page but to advertise them—write them up—in
the news columns. It was Pulitzer who invented muckraking. It was
this kind of journalism which enabled Pulitzer, within a period of six
years, to convert the old New York World, which was dying of
inanition when he took it, into the most talked about, if not the most
widely circulated, paper in New York City.
Meanwhile, out in San Francisco Mr. Hearst had succeeded in
galvanizing the old moribund Examiner into new life, making it the
most widely read newspaper on the Pacific Coast.
It was under Mr. Hearst that the “sob sister” came into vogue.
This is her story, as Will Irwin told it in Collier’s, February 18, 1911:
Chamberlain (managing editor of the Examiner) conceived the idea that the
city hospital was badly managed. He picked a little slip of a girl from among his
cub reporters and assigned her to the investigation. She invented her own method;
she “fainted” on the street, and was carried to the hospital for treatment. She
turned out a story “with a sob for the unfortunate in every line.” That was the
professional beginning of “Annie Laurie” or Winifred Black, and of a departure in
newspaper writing. For she came to have many imitators, but none other could
ever so well stir up the primitive emotions of sympathy and pity; she was a “sob
squad” all by herself. Indeed, in the discovery of this sympathetic “woman writing,”
Hearst broke through the crust into the thing he was after.
With the experience that he had gained on the Examiner in San
Francisco and with a large fortune that he had inherited from his
father, Hearst invaded New York in 1896. It was not until he reached
New York and started out to make the New York Journal the most
widely read paper in the United States that yellow journalism
reached the limit.
Pulitzer’s principal contribution to yellow journalism was
muckraking, Hearst’s was mainly “jazz.” The newspaper had been
conducted up to this time upon the theory that its business was to
instruct. Hearst rejected that conception. His appeal was frankly not
to the intellect but to the heart. The newspaper was for him first and
last a form of entertainment.
It was about the time the yellow press was engaged in extending
the newspaper habit to the masses of people, including women and
immigrants—who up to this time did not read newspapers—that the
department store was beginning to attract attention.
The department store is, in a sense, a creation of the Sunday
newspaper. At any rate, without the advertising that the Sunday
newspaper was able to give it, the department store would hardly
have gained the vogue it has today. It is important in this connection
that women read the Sunday paper before they did the dailies. The
women are buyers.
It was in the Sunday newspaper that the methods of yellow
journalism were first completely worked out. The men who are
chiefly responsible for them are Morrill Goddard and Arthur
Brisbane. It was Goddard’s ambition to make a paper that a man
would buy even if he could not read it. He went in for pictures, first
in black and white and then in colors. It was in the Sunday World
that the first seven-column cut was printed. Then followed the comic
section and all the other devices with which we are familiar for
compelling a dull-minded and reluctant public to read.
After these methods had been worked out in the Sunday paper,
they were introduced into the daily. The final triumph of the yellow
journal was Brisbane’s “Heart-to-Heart Editorials”—a column of
predigested platitudes and moralizing, with half-page diagrams and
illustrations to re-enforce the text. Nowhere has Herbert Spencer’s
maxim that the art of writing is economy of attention been so
completely realized.
Walter Lippmann, in his recent study of public opinion, calls
attention to the fact that no sociologist has ever written a book on
news gathering. It strikes him as very strange that an institution like
the press, from which we expect so much and get so little of what we
expect, should not have been the subject of a more disinterested
study.
It is true that we have not studied the newspaper as the
biologists have studied, for example, the potato bug. But the same
may be said of every political institution, and the newspaper is a
political institution quite as much as Tammany Hall or the board of
aldermen are political institutions. We have grumbled about our
political institutions, sometimes we have sought by certain magical
legislative devices to exercise and expel the evil spirits that possessed
them. On the whole we have been inclined to regard them as sacred
and to treat any fundamental criticism of them as a sort of
blasphemy. If things went wrong, it was not the institutions, but the
persons we elected to conduct them, and an incorrigible human
nature, who were at fault.
What then is the remedy for the existing condition of the
newspapers? There is no remedy. Humanly speaking, the present
newspapers are about as good as they can be. If the newspapers are
to be improved, it will come through the education of the people and
the organization of political information and intelligence. As Mr.
Lippmann well says, “the number of social phenomena which are
now recorded is small, the instruments of analysis are very crude,
and the concepts often vague and uncriticized.” We must improve
our records and that is a serious task. But first of all we must learn to
look at political and social life objectively and cease to think of it
wholly in moral terms! In that case we shall have less news, but
better newspapers.
The real reason that the ordinary newspaper accounts of the
incidents of ordinary life are so sensational is because we know so
little of human life that we are not able to interpret the events of life
when we read them. It is safe to say that when anything shocks us,
we do not understand it.
Robert E. Park
CHAPTER V
COMMUNITY ORGANIZATION AND
JUVENILE DELINQUENCY
I. THE “NATURAL DEPRAVITY” OF

MANKIND
In view of the fact that man is so manifestly—as Aristotle
described him—a political animal, predestined to live in association
with, and dependence upon, his fellows, it is strange and interesting
to discover, as we are compelled to do, now and again, how utterly
unfitted by nature man is for life in society.
It is true, no doubt, that man is the most gregarious of animals,
but it is nevertheless true that the thing of which he still knows the
least is the business of carrying on an associated existence. Here, as
elsewhere, it is those who have given the subject the closest study—
the educator, the criminologist, and the social worker—who are most
aware of the incalculable elements in every social situation and feel
most keenly their inability to control human behavior.
In his recent study, The Unadjusted Girl, Dr. W. I. Thomas,
referring to this matter, calls attention to the fact that “The whole
criminal procedure is based on punishment, and yet we do not even
know that punishment deters from crime. Or, rather, we know that it
sometimes deters, and sometimes stimulates to further crime, but we
do not know the conditions under which it acts in one way or
another.”[58]
So ill-adapted is the natural, undomesticated man to the social
order into which he is born, so out of harmony are all the native
impulses of the ordinary healthy human with the demands which
society imposes, that it is hardly an exaggeration to say that if his
childhood is spent mainly in learning what he must not do, his youth
will be devoted mainly to rebellion. As to the remainder of his life—
his recreations will very likely turn out to be some sort of vacation
and escape from this same social order to which he has finally
learned to accommodate, but not wholly reconcile, himself.
So far is this description true that our ancestors, living under a
sterner discipline and in a moral order less flexible and
accommodating than our own, were so impressed with the innate
cantankerousness of ordinary mankind that they were driven to the
assumption that there was something fundamentally diabolical in
human nature, a view which found expression in the well-known
doctrine of the “natural depravity of man.”
One reason why human beings, in contrast with the lower
animals, seem to be so ill-adapted to the world in which they are
born is that the environment in which human beings live is so largely
made up of the experience and memories and the acquired habits of
the people who have preceded them.
This experience and these memories—crystallized and embodied
in tradition, in custom, and in folkways—constitute the social, as
distinguished from the biological, environment; for man is not
merely an individual with certain native and inherited biological
traits, but he is at the same time a person with manners, sentiments,
attitudes, and ambitions.
It is the social environment to which the person, as
distinguished from the individual, responds; and it is these
responses of the person to his environment that eventually define his
personality and give to the individual a character which can be
described in moral terms.
II. SOCIETY AND THE SOCIAL MILIEU
This social environment in which mankind has acquired nearly
if not all the traits that we regard as characteristically human is what
we call society, society in the large; what Comte called “humanity.”
When, however, we attempt to consider a little more in detail
this society which ideally includes all mankind, we discover that it is
composed of a number of smaller groups, little societies, each of
which represents some single aspect or division of this all-enveloping
social milieu in which we live and of which we are at the same time a
part.
The first and most intimate portion of man’s social environment,
strange as the statement may at first seem, is his own body. After
that, his clothing, tools, and property, which are in some sense a part
of his personality, may, under certain circumstances, be regarded as
a part of his environment. They become part of his social
environment as soon as he becomes conscious of them; as soon as he
becomes self-conscious.
Most of us have known, at some time in our lives, that
“sickening sense of inferiority” that comes over one when in
competition with his fellows, he realizes for the first time, perhaps,
the inadequacy of his personal resources—physical, mental, and
moral—to achieve his personal ambitions. But we who are
presumably normal have very little understanding of the struggles of
the physically or mentally handicapped to accommodate themselves
to a world to which they are constitutionally not adapted.
So important to the development of personality is this interest
which, with the advent of self-consciousness, the individual discovers
in himself, that it has been made the basis of one of the numerous
schools of psychiatry in Europe. Dr. Alfred Adler’s theory of “psychic
compensation” is based on the observation that an individual who is
conscious of his inferiority inevitably seeks to compensate himself
for this lowered self-esteem by greater concentration and effort.
Eventually he may, in this way, succeed in overcoming his
constitutional handicap; or he may find compensation for failure in
one field by success in another and different one. Adler points out
that there are numerous instances in which individuals have made
striking successes in fields in which they were least fitted,
constitutionally, to succeed. The classic illustration is that of
Demosthenes, who, according to the anecdote that has come down to
us, was a stutterer, but, by putting pebbles in his mouth and talking
to the waves on the seashore, overcame his handicap and became the
greatest of Athenian orators.
When this sense of inferiority is acute because of some physical
deformity, or in consequence of any other constitutional inferiority,
so that the person is peculiarly sensitive about himself, the result is
frequently what Adler describes as “psychic overcompensation,”
which manifests itself in certain definite neurotic and socially
pathological tendencies, usually described as “egocentrism.”
In such cases, according to Adler, “the neurotic shows a series of
sharply emphasized traits of character which exceed the normal
standard. The marked sensitiveness, the irritable debility, the
suggestibility, the egotism, the penchant for the fantastic, the
estrangement from reality, but also more special traits such as
tyranny, malevolence, a self-sacrificing virtue, coquetry, anxiety, and
absentmindedness are met with in the majority of case histories.”
As soon as we become conscious of ourselves, self-control—
which is not fundamentally different from the control we exercise
over external volume—tends to become one of our most difficult and
absorbing problems. Man has many advantages over the lower
animals. On the other hand, the lower animals are not subject to
what Frazer describes as “the perils of the soul”; they do not have the
problem of managing themselves. This was evidently what Walt
Whitman meant when he wrote:
I think I could turn and live with animals, they are so placid and self-
contained, ...
They do not sweat and whine about their condition,
They do not lie awake in the dark and weep for their sins,
They do not make me sick discussing their duty to God,
No one is dissatisfied—not one is demented with the mania of owning things,
Not one kneels to another, nor to his kind that lived thousands of years ago,
Not one is respectable or industrious over the whole earth.
III. THE FAMILY AS A CORPORATE PERSON
After the individual’s own person, the most intimate
environment to which the person responds is the family. The family
is, or was, under earlier and simpler conditions of life, a sort of larger
corporate person. Among the Polish peasants, for example, where
the family completely dominates the individual, “husband and wife,”
we are told, “are not individuals more or less closely connected
according to their personal sentiments, but group members,
controlled by both the united families.”[59] It is on this basis that we
can understand completely the letters written by immigrant boys to
their parents asking them to send them wives:
Dearest Parents:
Please do not be angry with me for what I shall write. I write you that it is hard
to live alone, so please find some girl for me, but an orderly [honest] one, for in
America there is not even one single orderly [Polish] girl.... [December 21, 1902.] I
thank you kindly for your letter, for it was happy. As to the girl, although I don’t
know her, my companion, who knows her, says that she is stately and pretty, and I
believe him, as well as you, my parents.... Please inform me which one (of the
sisters) is to come, the older or the younger one, whether Aledsandra or
Stanislawa.[60]
Of such a family it may almost be said that the unrebellious and

completely accommodated individuals who compose it have ceased
to exist as persons. They have no independent social status and no
personal responsibilities except as members of the family group.
The family, as it exists under modern conditions, has fallen from
the high estimation in which it was held by an earlier generation. I
once heard a distinguished psychologist say that he had been forced
to the conclusion, after much patient study, that the family was
probably the worst possible place in which to bring up a child. In
general, I should say the psychiatrists seem to have a very poor
opinion of the modern family as an environment for children. This
opinion, if it is not justified, is at least supported by studies of
juvenile delinquency made some years ago, in which it appeared that
50 per cent of the delinquencies studied were from broken homes.
The “one-child family” is now generally recognized as one of the
characteristic social situations in which egocentric behavior is likely
to manifest itself. It is certain that parents, just because of their
solicitude for the welfare of their offspring, are not always safe
companions for them. However that may be today, it is certain that
in the past it was within the limits of the family group that most of
the traits which we may describe as human were originally
developed.
Outside the circle of the family and the neighborhood, within
which intimate and the so-called “primary relations” are maintained,
there is the larger circle of influences we call the community; the
local community, and then the larger, organized community,
represented by the city and the nation. And out beyond the limits of
these there are beginning to emerge the vast and vague outlines of
that larger world-community which Graham Wallas has described
under the title, The Great Society.
The community, then, is the name that we give to this larger and
most inclusive social milieu, outside of ourselves, our family, and our
immediate neighborhood, in which the individual maintains not
merely his existence as an individual, but his life as a person.
The community, including the family, with its wider interests, its
larger purposes, and its more deliberate aims, surrounds us, incloses
us, and compels us to conform; not by mere pressure from without,
not by the fear of censure merely, but by the sense of our interest in,
and responsibility to, certain interests not our own.
The sources of our actions are, no doubt, in the organic impulses
of the individual man; but actual conduct is determined more or less
by public opinion, by custom, and by a code which exists outside of
us in the family, in the neighborhood, and in the community. This
community, however, with its less immediate purposes and its more
deliberate aims, is always more or less outside of, and alien to, us;
much more so than the family, for example, or any other congenial
group. This is to such an extent true that certain sociological writers
have conceived society as having an existence quite independent of
the individuals who compose it at any given time. Under these
circumstances the natural condition of the individual in society is
one of conflict; conflict with other individuals, to be sure, but
particularly conflict with the conventions and regulations of the
social group of which he is a member. Personal freedom—self-
expression, as we have learned to call it in recent years—is, therefore,
if not a fruitless, still a never ending, quest.
Only gradually, as he succeeds in accommodating himself to the
life of the larger group, incorporating into the specific purposes and
ambitions of his own life the larger and calmer purposes of the
society in which he lives, does the individual man find himself quite
at home in the community of which he is a part.
If this is true of mankind as a whole, it is still more true of the
younger person. The natural impulses of the child are inevitably so
far from conforming to the social situation in which he finds himself
that his relations to the community seem to be almost completely
defined in a series of “don’ts.” Under these circumstances juvenile
delinquency is, within certain age-limits at least, not merely
something to be expected; it may almost be said to be normal.
It is in the community, rather than in the family, that our moral
codes first get explicit and formal definition and assume the external
and coercive character of municipal law.
IV. SOCIAL CHANGE AND SOCIAL
DISORGANIZATION
In the family and in the neighborhood such organization as
exists is based upon custom and tradition, and is fixed in what
Sumner calls the folkways and the mores. At this stage, society is a
purely natural product; a product of the spontaneous and
unreflective responses of individuals living together in intimate,
personal, and face-to-face relations. Under such circumstances
conscious efforts to discipline the individual and enforce the social
code are directed merely by intuition and common sense.
In the larger social unit, the community, where social relations
are more formal and less intimate, the situation is different. It is in
the community, rather than in the family or the neighborhood, that
formal organizations like the church, the school, and the courts come
into existence and get their separate functions defined. With the
advent of these institutions, and through their mediation, the
community is able to supplement, and to some extent supplant, the
family and the neighborhood as a means for the discipline and
control of the individual. However, neither the orphan asylum nor
any other agency has thus far succeeded in providing a wholly
satisfactory substitute for the home. The evidence of this is that they
have no alumni association. They create no memories and traditions
that those who graduate from them are disposed to cherish and keep
alive.
It is in this community with its various organizations and its
rational, rather than traditional, schemes of control, and not
elsewhere, that we have delinquency. Delinquency is, in fact, in some
sense the measure of the failure of our community organizations to
function.
Historically, the background of American life has been the
village community. Until a few years ago the typical American was,
and perhaps still is, an inhabitant of a middle western village; such a
village, perhaps, as Sinclair Lewis describes in Main Street. And still,
today, the most characteristic trait of Homo Americanus is an
inveterate individualism which may, to be sure, have been
temperamental, but in that case temperament has certainly been
considerably reinforced by the conditions of life on the frontier.
But with the growth of great cities, with the vast division of labor
which has come in with machine industry, and with movement and
change that have come about with the multiplication of the means of
transportation and communication, the old forms of social control
represented by the family, the neighborhood, and the local
community have been undermined and their influence greatly
diminished.
This process by which the authority and influence of an earlier
culture and system of social control is undermined and eventually
destroyed is described by Thomas—looking at it from the side of the
individual—as a process of “individualization.” But looking at it from
the point of view of society and the community it is social
disorganization.
We are living in such a period of individualization and social
disorganization. Everything is in a state of agitation—everything
seems to be undergoing a change. Society is, apparently, not much
more than a congeries and constellation of social atoms. Habits can
be formed only in a relatively stable environment, even if that
stability consists merely—as, in fact, it invariably does, since there is
nothing in the universe that is absolutely static—in a relatively
constant form of change. Any form of change that brings any
measurable alteration in the routine of social life tends to break up
habits; and in breaking up the habits upon which the existing social
organization rests, destroys that organization itself. Every new device
that affects social life and the social routine is to that extent a
disorganizing influence. Every new discovery, every new invention,
every new idea, is disturbing. Even news has become at times so
dangerous that governments have felt it wise to suppress its
publication.
It is probable that the most deadly and the most demoralizing
single instrumentality of present-day civilization is the automobile.
The automobile bandit, operating in our great cities, is much more
successful and more dangerous than the romantic stage robber of
fifty years ago. The connection of the automobile with vice is
notorious. “The automobile is connected with more seductions than
happen otherwise in cities altogether.”[61]
The newspaper and the motion picture show, while not so
deadly, are almost as demoralizing. If I were to attempt to enumerate
all the social forces that have contributed to the disorganization of
modern society I should probably be compelled to make a catalogue
of everything that has introduced any new and striking change into
the otherwise dull routine of our daily life. Apparently anything that
makes life interesting is dangerous to the existing order.
The mere movement of the population from one part of the
country to another—the present migration of the Negroes northward,
for example—is a disturbing influence. Such a movement may
assume, from the point of view of the migrants themselves, the
character of an emancipation, opening to them new economic and
cultural opportunities, but it is none the less disorganizing to the
communities they have left behind and to the communities into
which they are now moving. It is at the same time demoralizing to
the migrating people themselves, and particularly, I might add, to
the younger generation.
The enormous amount of delinquency, juvenile and adult, that
exists today in the Negro communities in northern cities is due in
part, though not entirely, to the fact that migrants are not able to
accommodate themselves at once to a new and relatively strange
environment. The same thing may be said of the immigrants from
Europe, or of the younger generation of women who are just now
entering in such large numbers into the newer occupations and the
freer life which the great cities offer them.
“Progress,” as I once heard William James remark, “is a terrible
thing.” It is a terrible thing in so far as it breaks up the routine upon
which an existing social order rests, and thus destroys the cultural
and the economic values, i.e., the habits of thrift, of skill, of industry,
as well as the personal hopes, ambitions, and life-programs which
are the content of that social order.
Our great cities, as those who have studied them have learned,
are full of junk, much of it human, i.e., men and women who, for
some reason or other, have fallen out of line in the march of
industrial progress and have been scrapped by the industrial
organization of which they were once a part.
A recent study by Nels Anderson of what he calls “Hobohemia,”
an area in Chicago just outside the “Loop,” that is to say, the
downtown business area, which is almost wholly inhabited by
homeless men, is a study of such a human junk heap. In fact, the
slum areas that invariably grow up just on the edge of the business
areas of great cities, areas of deteriorated houses, of poverty, vice,
and crime, are areas of social junk.
I might add, because of its immediate connection with the
problems and interests of this association, that recent studies made
in Chicago of boys’ gangs seem to show that there are no playgrounds
in the city in which a boy can find so much adventure, no place where
he can find so much that may be called “real sport,” as in these areas
of general deterioration which we call the slums.
In order to meet and deal with the problems that have been
created by the rapid changes of modern life, new organizations and
agencies have sprung into existence. The older social agencies, the
church, the school, and the courts, have not always been able to meet
the problems which new conditions of life have created. The school,
the church, and the courts have come down to us with their aims and
methods defined under the influence of an older tradition. New
agencies have been necessary to meet the new conditions. Among
these new agencies are the juvenile courts, juvenile protective
associations, parent-teachers’ associations, Boy Scouts, Young Men’s
Christian Associations settlements, boys’ clubs of various sorts, and I
presume, playgrounds and playground associations. These agencies
have taken over to some extent the work which neither the home, the
neighborhood, nor the other older communal institutions were able
to carry on adequately.
These new institutions, perhaps because they are not to the
same extent hampered by our earlier traditions, are frankly
experimental and are trying to work out a rational technique for
dealing with social problems, based not on sentiment and tradition,
but on science.
Largely on the basis of the experiments which these new
agencies are making, a new social science is coming into existence.
Under the impetus which the social agencies have given to social
investigation and social research, sociology is ceasing to be a mere

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Horngrens Cost Accounting A Managerial Emphasis 16th

Multiple Choice Questions

7. Selection and employment of the correct estimation method is:

9. When there are two or more cost drivers, regression is termed:

10. The independent variable in regression analysis is:

14. An R-squared value that approaches one (1.0) would indicate:

16. The learning curve in cost estimation is a good example of:

18. In least squares regression analysis, the cost to be estimated is the:

Using the high-low method, unit variable cost is calculated to be:

Based upon this information, monthly fixed factory overhead was:

48. Simple regression analysis involves the use of:

49. Multiple regression analysis:

60. As a preliminary step in the selection of variables to use in a statistical-forecasting model,

63. Which of the following is required for multiple regression?

64. The p-value measures:

How should the cost function be properly stated?

What is the estimated total cost at an operating level of 900 hours?

What is the estimated total cost at an operating level of 150 hours?

How should the cost function be properly stated?

What is the estimated total cost at an operating level of 1,180 hours?

How should the cost function be properly stated?

What is the estimated total cost at an operating level of 8,000 hours?

75. The R-squared in a satisfactory regression should be:

77. Which of the following cannot be influenced by learning curve analysis?

79. Cost estimation includes all of the following steps except:

The t statistic for the independent variable:

The F statistic is calculated by:

The statistic that indicates precision of the regression is:

The statistic that indicates statistical reliability of the regression is:

88. A measure of the statistical reliability of each independent variable is:

Where: SC = Student cost

* Applied on the basis of direct labor hours

Chapter 08 Cost Estimation Answer Key

Multiple Choice Questions

7. Selection and employment of the correct estimation method is:

9. When there are two or more cost drivers, regression is termed:

10. The independent variable in regression analysis is:

14. An R-squared value that approaches one (1.0) would indicate:

16. The learning curve in cost estimation is a good example of:

18. In least squares regression analysis, the cost to be estimated is the:

Using the high-low method, unit variable cost is calculated to be:

Unit variable cost = ($6,460 - $5,506)/(2,090 - 1,560) = $1.80

$6,460 - ($1.80 x 2,090) = $2,698 or 5,506 - ($1.80 x 1,560) = $2,698

Unit variable cost = ($8,921 - $8,001)/(2,834 - 2,034) = $1.15

$8,921 - (1.15 x 2,834) = $5,661.90 or $8,001 - ($1.15 x 2,034) = $5,661.90

FC = $3,484 - (2.00 x 1,394) = $696 or $2,996 - (2.00 x 1,150) = $696

$660 + [$74,700/(300 x.85)] = $952.94

1. Unit variable cost = ($23,200 - $17,200)/(450-300) = $40

1. High-low points are August and April

FC = $5,360 - ($6.83 x 680) = $715.60; $3,380 -($6.83x390) = $716.30 Rounded = 716.

TC = $716 + ($6.83 x 600) = $4,814

Unit variable cost = ($42,000 - $34,000)/(46,000 - 30,000) = $0.50

Fixed cost = ($42,000 x 12 months) - (46,000 x 12 x $0.50) = $228,000 or Fixed cost =

Unit variable cost = ($86,000 - $74,000)/(96,000 - 66,000) = $0.40

Fixed cost = ($86,000 x 12 months) - (96,000 x 12 x $0.40) = $571,200 or Fixed cost =