Chapter005CostEstimation

True/FalseQuestions
1.Costbehavioristhemostimportantcharacteristicformanagerialdecisionmaking.
TRUE

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Difficulty:Simple
LearningObjective:1

2.Ingeneral,accountingrecordsaccumulatecostinformationaccordingtoitsbehavior(i.e.,
variableandfixed).
FALSE

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Difficulty:Simple
LearningObjective:1

5.Onedisadvantageoftheengineeringmethodisthatitdetailseachsteprequiredtoperform
anoperation.
FALSE

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Difficulty:Moderate
LearningObjective:2

7.Oneadvantageoftheengineeringmethodisthatitdoesnotrequiredatafrompriorperiods
toestimatecostbehavior.
TRUE

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8.Oneadvantageoftheaccountanalysismethodforestimatingcostbehavioristhatit
includesactualworkconditions.
TRUE

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10.Themostimportantstepinobtainingcostbehaviorestimatesisidentifyingtheappropriate
costdriver.
TRUE

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13.Thefirststepinusingastatisticalcostestimationmethodistoestablishalogical
relationshipbetweenthedependentvariableandtheindependentvariable(costdriver).
TRUE

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14.Therelevantrangerepresentsthoseactivitylevelsforwhichvalidcostrelationshipshave
beenobserved.
TRUE

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15.Therelevantrangeforactivitiesdoesnotapplytofixedcosts.
FALSE

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17.Ingeneral,moreobservationsarerequiredwhencostandactivitylevelsareunstable;i.e.,
thecompany'soperationshavechangedsignificantlywithintherelevantrange.
FALSE

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21.Theslopeofthetotalcostlineusingthehighlowmethodisthedifferencebetweenthe
highandlowactivitydividedbythedifferencebetweenthehighandlowcost.
FALSE

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22.Onedisadvantageofthehighlowmethodisthehighestandlowestpointsmaynotbe
representativeofnormaloperatingactivities.
TRUE

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24.Thetotalcostbeingestimatedistheindependentvariableintheregressionequation.
FALSE

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25.Oneadvantagethatregressiontechniqueshaveoverothercostestimationmethodsisit
generatesinformationthatcanbeusedtodeterminehowwelltheestimatedcostequationwill
predictfuturecosts.
TRUE

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26.ThecorrelationcoefficientshouldbeinterpretedastheproportionofthevariationinY
explainedbyX.
FALSE

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28.Becauseoutliersareextremedatapoints,theycanbeincludedintheregressionanalysis
andnotsignificantlyaffecttheresults.
FALSE

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31.Ingeneral,theuseofmultipleindependentvariablesincreasestheproportionofthe
variationinthedependentvariableexplainedbythecostequation.
TRUE

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32.Onewaytocontroltheeffectsofanonlinearrelationbetweentotalcostsandvolumeis
reducetherelevantrange.
TRUE

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Difficulty:Moderate
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33.Thelinearcostestimatetendstounderstatetheslopeofthecostlineoutsideofthe
relevantrange.
TRUE

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34.Spuriousrelationscanoccurinmultipleregressions,butnotinsimpleregressions.
TRUE

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36.Abasicassumptionofmostcostestimationmethodsiscostbehaviorpatternsarelinear
withintherelevantrange.
TRUE

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37.Ingeneral,"garbagein,garbageout;"i.e.,thequalityofthecostequationdependson
collectingappropriatedata.
TRUE

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Difficulty:Simple
LearningObjective:7

38.Differentcostestimationsmethodswillproducedifferentcostequations,evenwhenusing
thesamesetofdata.
TRUE

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39.Thequalityofthecostequationcanbeincreasedbyadjustingthecostinformationfor
inflationaryeffects.
TRUE

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Difficulty:Moderate
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MultipleChoiceQuestions
40.Whichofthefollowingstatementsis(are)trueregardingcostbehaviors?

(A)Ingeneral,accountingrecordsaccumulatecostinformationaccordingtoitsbehavior.
(B)Costbehaviorsarethemostimportantconsiderationinmanagerialdecisionmaking.
a.onlyAistrue.
B. onlyBistrue.
c.BothAandBaretrue.
d.NeitherAnorBistrue.

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Difficulty:Simple
LearningObjective:1

41.Whichcostestimationmethoddoesnotusethecompanyrecordsasitsprimarysourceof
informationabouttherelationshipbetweentotalcostsandactivitylevels?
a.scattergraph
b.highlow
c.accountanalysis
d.regressionanalysis
E. engineeringestimates

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Difficulty:Simple
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44.Whichofthefollowingcostswouldmostlikelybeclassifiedasvariableassumingthe
accountanalysismethodisusedtodeterminecostbehaviors?
A. indirectmaterials.
b.supervisorysalaries
c.equipmentmaintenance
d.annualChristmasparty
e.buildingoccupancycosts.

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45.InthecostequationTC=F+VX,Xisbestdescribedasthe:
a.coststhatdonotvarywithchangesintheactivitylevel.
b.coststhatdovarywithchangesintheactivitylevel.
c.totalcostestimateataparticularactivitylevel.
D. activitylevelusedtoestimatethetotalcost.

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Difficulty:Simple
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46.InthecostequationTC=F+VX,Visbestdescribedasthe:
a.coststhatdonotvarywithchangesintheactivitylevel.
b.interceptofthecostequation.
C. Slopeofthecostequation.
d.Activitylevelusedtoestimatethedependentvariable.

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Difficulty:Simple
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48.Theterm"relevantrange"asusedincostaccountingmeanstherangeoverwhich:
a.relevantcostsareincurred.
b.costsmayfluctuate.
C. costrelationshipsarevalid.
d.costdataisavailable.

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49.Determiningthefixedandthevariablecomponentsofamixedcostcanbeaccomplished
byseveralmethods.Thecostofeachmethodvariesindirectrelationtoitsdegreeof
accuracy.Whichofthefollowingmethodsfindsthevariableportionofamixedcostbefore
calculatingthefixedportion?
a.Scattergraph.
B. Highlowmethod.
c.Accountanalysis.
d.Linearregression.
e.Engineeringapproach.

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50.Adisadvantageofthehighlowmethodofcostanalysisisthatit
a.typicallyresultsintotallyinaccuratecostformulae.
b.istootimeconsumingtoapply.
C. usestwoextremedatapoints,whichmaynotberepresentativeofnormalconditions.
d.reliestotallyonthejudgmentofthepersonperformingthecostanalysis.

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51.Regressionanalysisdoesnotassumea
a.linearrelationshipbetweenthedependentandindependentvariables(s).
b.normaldistributionoftheactualvalues(y)aroundthepredictingequation(y').
C. constantvariancefortheindependenterrorterms(e)fromthepredictingequation.
d.logicalandcausalrelationshipbetweenthedependentandindependentvariable(s).

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52.Inthestandardregressionequationofy=a+bx,theletterbisbestdescribedasthe
a.independentvariable.
b.dependentvariable.
C. slopeoftheequation.
d.interceptoftheequation.

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Difficulty:Simple
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53.Inthestandardregressionequationofy=a+bx,theletteraisbestdescribedasthe
a.independentvariable.
b.dependentvariable.
c.slopeoftheequation.
D. interceptoftheequation.

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54.Inthestandardregressionequationofy=a+bx,theletteryisbestdescribedasthe
a.independentvariable.
B. dependentvariable.
c.slopeoftheequation.
d.interceptoftheequation.

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58.Givenactualamountsofasemivariablecostforvariouslevelsofoutput,themethodthat
willgivethemostreliablemeasureofthefixedandvariablecomponentsisthe
a.highlowmethod.
B. linearregressionmethod.
c.scattergraphmethod.
d.accountanalysismethod.

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Difficulty:Simple
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59.Whichofthefollowingstatementsregardingregressionanalysisis(are)true?

(A)Onewaytocontroltheeffectsofanonlinearrelationshipbetweentotalcostsandactivity
isreducetherelevantrange.
(B)Thelinearcostestimatetendstounderstatetheslopeofthecostlineoutsideofthe
relevantrange.
a.onlyAistrue.
b.onlyBistrue.
C. BothAandBaretrue.
d.NeitherAnorBistrue.

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60.MountCompanyincurredatotalcostof$8,600toproduce400unitsofpulp.Eachunitof
pulprequiredfive(5)directlaborhourstocomplete.Whatisthetotalfixedcostifthe
variablecostwas$1.50perdirectlaborhour?
a.$1,700
b.$3,000
C. $5,600
d.$8,000
e.someotheranswer_______________.
$8,600=FC+$1.50(400)(5);FC=$5,600

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61.Giventhefollowinginformation,computethetotalnumberofunitsfortheperiod.

a.360
b.432
C. 640
d.840
e.someotheranswer_______________.
$132,600=$75(units)+12,000($2.70)+.50(12,000)($2.70)+$36,000
Units=640

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Difficulty:Moderate
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62.TheShapelyCompanyusesthehighlowmethodtodetermineitscostequation.The
followinginformationwasgatheredfor2008:

Whatarethedirectlaborcostspermachinehour?
a.$20.00
b.$16.00
c.$14.29
D. $10.00
e.someotheranswer_______________.
VCperM/CHr.=($200,000 120,000)/(14,000 6,000)=$10.00

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63.TheShapelyCompanyusesthehighlowmethodtodetermineitscostequation.The
followinginformationwasgatheredfor2008:

IfShapelyexpectstouse10,000machinehoursnextmonth,whataretheestimateddirect
laborcosts?
A. $160,000
b.$180,000
c.$175,000
d.$150,000
e.someotheranswer_______________.
VCperunit=($200,000 120,000)/(14,000 6,000)=$10.00
FC=$120,000 $10(6,000)=$60,000
TC=$60,000+$10(10,000)=$160,000

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64.Hagler'sToupeeshasthefollowingmachinehoursandproductioncostsforthelastsix
monthsoflastyear:

IfHaglerexpectstoincur14,000machinehoursinJanuary,whatwillbetheestimatedtotal
productioncostusingthehighlowmethod?
a.$8,750.00
B. $11,142.50
c.$22,400.00
d.$31,220.00
e.Someotheranswer____________.
VCperunit=($12,080 9,580)/(15,500 11,500)=$.625
FC=$12,080 $.625(15,500)=$2,392.50
TC=$2,392.50+$.625(14,000)=$11,142.50

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65.ThecontrollerofJoyCohasrequestedaquickestimateofthemanufacturingsupplies
neededfortheMortonPlantforthemonthofJulywhenproductionisexpectedtobe470,000
unitstomeettheendinginventoryrequirementsandsalesof475,000units.JoyCo'sbudget
analysthasthefollowingactualdataforthelastthreemonths.

Usingthehighlowmethodtodevelopacostestimatingequation,theestimateofneeded
manufacturingsuppliesforJulywouldbe(CMAadapted)
a.$681,500.
b.$688,750.
c.$749,180.
D. $752,060.
e.$759,310.
VCperunit=($853,560 723,060)/(540,000 450,000)=$1.45perunit
FC=$853,560 $1.45(540,000)=$70,560
TC=$70,560+$1.45(470,000)=$752,060

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66.TheChambersManufacturingCompanyrecordedoverheadcostsof$14,182atanactivity
levelof4,200machinehoursand$8,748at2,300machinehours.Therecordsalsoindicated
thatoverheadof$9,730wasincurredat2,600machinehours.Whatisthevariablecostper
machinehourusingthehighlowmethodtoestimatethecostequation?
a.$2,78
B. $2.86
c.$3.10
d.$3.38
e.someotheranswer_________________.
($14,182 8,748)/(4,200 2,300)=$2.86

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67.TheWiscowManufacturingCompanyrecordedoverheadcostsof$14,182atanactivity
levelof4,200machinehoursand$8,748at2,300machinehours.Therecordsalsoindicated
thatoverheadof$9,730wasincurredat2,600machinehours.Whatisthetotalestimatedcost
for2,600machinehoursusingthehighlowmethodtoestimatethecostequation?
a.$9,730
B. $9,606
c.$9,106
d.$8,788
e.someotheranswer_______________.
VC=($14,182 8,748)/(4,200 2,300)=$2.86
FC=$14,182 2.86(4,200)=$2,170
TC=$2,170+$2.86(2,600)=$9,606

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68.ThecostaccountantsattheDoeringCompanyregressedtotaloverheadcostsanddirect
laborhoursforthepast30monthsandreportedthefollowingresults:

Whatistheestimatedoverheadcostif225directlaborhoursareexpectedtobeusedinthe
upcomingperiod?(roundedtothenearestwholedollar)
a.$10,534
B. $9,882
c.$9,230
d.$8,617
e.someotheranswer_______________.
$596.36+$41.27(225)=$9,882.11

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69.ThecostaccountantsattheDoeringCompanyregressedtotaloverheadcostsanddirect
laborhoursforthepast30monthsandreportedthefollowingresults:

Whatpercentageofthevariationintotaloverheadcostsisexplainedbythechangeindirect
laborhours?
a.96.6%
b.93.4%
C. 87.2%
d.81.4%
e.someotheranswer_______________.
(.934)(.934)=.872

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82.Whichofthefollowingisthedifferencebetweenvariablecostsandfixedcosts:(CMA
adapted,6/94)
a.variablecostsperunitfluctuateandfixedcostsperunitremainconstant
B. variablecostsperunitarefixedovertherelevantrangeandfixedcostsperunitarevariable
c.totalvariablecostsarevariableovertherelevantrangeandfixedinthelongterm,while
fixedcostsneverchange
d.variablecostsperunitchangeinvaryingincrements,whilefixedcostsperunitchangein
equalunits
e.totalvariablecostscanbevariedbymanagement,whilefixedcostsareuncontrollable

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83.Whichoneofthefollowingisleastlikelytobeanobjectiveofacostaccountingsystem?
(CMAadapted,6/94)
a.Productcosting
b.Departmentefficiency
c.Inventoryvaluation
D. Salescommissiondetermination
e.Incomedetermination

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84.Whichofthefollowingmaybeusedtoestimatehowinventorywarehousecostsare
affectedbyboththenumberofshipmentsandtheweightofthematerialhandled?(CPA
adapted,11/90)
a.economicorderquantityanalysis
b.probabilityanalysis
c.correlationanalysis
D. multipleregressionanalysis

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85.Acostdriverisdefinedas:(CMAadapted,6/93)
a.thelargestcostinamanufacturingprocess
b.afixedcostthatcannotbeavoided
c.thesignificantfactorindevelopinganewproduct
d.anindirectcostthatcannotbetracedtoaparticularcostobjectivebutisessentialtothe
business
E. acausalfactorthatincreasesthetotalcostofacostobjective

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86.Relevantcostsare
a.allfixedcosts
b.allvariablecosts
c.coststhatwouldbeincurredwithintherelevantrangeofproduction
d.pastcoststhatareexpectedtobedifferentinthefuture
E. anticipatedfuturecoststhatwilldifferundervariousalternatives

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88.Theterms"directcost"and"indirectcost"arecommonlyusedinaccounting.Aparticular
costmightbeconsideredadirectcostofamanufacturingdepartmentbutmightbeanindirect
costoftheproductproducedinthemanufacturingdepartment.Classifyingacostaseither
directorindirectdependsupon:(CMAadapted,6/92)
a.thebehaviorofthecostinresponsetovolumechanges
b.whetherthecostisexpensedintheperiodinwhichitisincurred
C. thecostobjecttowhichthecostisbeingrelated
d.whetheranexpenditureisunavoidablebecauseitcannotbechangedregardlessofany
actiontaken
e.thetimingofthecashoutlayforthecost

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EssayQuestions

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Chapter005CostEstimation
89.TheTealCompany'stotaloverheadcostsatvariouslevelsofactivityarepresentedbelow:

Assumethattheoverheadcostsaboveconsistofutilities,supervisorysalaries,and
maintenance.Thebreakdownofthesecostsatthe9,000directlaborhourlevelofactivityis
asfollows:

Required:
(A)Usingthehighlowmethod,determinethecostformulaformaintenance.
(B)Expressthecompany'stotaloverheadcostsinlinearequationform.
(A)Utilitiesperhour=$137,700/9,000=$15.30perdirectlaborhour
Utilitycostatthehighpoint=$15.30(10,500)=$160,650
Utilitycostatthelowpoint=$15.30(6,000)=$91,800
Maintenancecostatthehighpoint=$340,500 80,000 160,650=$99,850
Maintenancecostatthelowpoint=$234,000 80,000 91,800=$62,200
Maintenancecostperhour=($99,850 62,200)/(10,500 6,000)=$8.36667
FixedMaintenancecostspermonth=$99,850 ($8.36667) (10,500)=$12,000
Totalmaintenancecosts=$12,000+$8.36667perDirectLaborHour
(B)

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90.ThefollowingmanufacturingcostswereincurredbytheRSTCompanyin2008:

Thesecostswereincurredtoproduce25,000unitsofproduct.Variablemanufacturing
overheadwas80%ofthedirectmaterialscost.
In2009,thedirectmaterialandvariableoverheadcostsperunitwillincreaseby15%,butthe
directlaborcostsperunitarenotexpectedtochange.Fixedmanufacturingcostsareexpected
toincreaseby7.5%.
Required:
Prepareacostestimateforanactivitylevelof20,000unitsofproductin2009.
Determinethetotalproductcostsperunitfor2008and2009.
Variableoverheadcosts(2008)=.80($112,500)=$90,000
Fixedoverheadcosts(2008)=$235,000 $90,000=$145,000

(1)[($112,500)/25,000)(1.15)](20,000)=$103,500
(2)($175,000/25,000)(20,000)=$140,000
(3)[($90,000)/25,000)(1.15)](20,000)=$82,800
(4)($145,000)(1.075)=$155,875
2008unitcost:$522,500/25,000=$20.90
2009unitcost:$482,175/20,000=$24.11

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92.Acompanyranaregressionanalysisusingdirectlaborhoursastheindependentvariable
andmanufacturingoverheadcostsasthedependentvariable.Theresultsaresummarized
below:

Thecompanyisplanningonoperatingatalevelthatwouldrequire12,000directlaborhours
permonthintheupcomingyear.
Required:
(a)Usetheinformationfromtheregressionanalysistowritethecostestimationequationfor
themanufacturingoverheadcosts.
(b)Computetheestimatedmanufacturingoverheadcostspermonthfortheupcomingyear.
(a)Totalmanufacturingoverheadcosts=$14,600+($12.55 DirectLaborHours)
(b)Totalmanufacturingoverheadcosts=$14,600+($12.55)(12,000)=$165,200

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