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Management Accounting, Cdn.

6e (Horngren/Sundem/Stratton/Beaulieu)
Chapter 3 Measurement of Cost Behaviour
1) Measuring cost behaviour involves understanding and quantifying how activities of an organization
affect levels of costs.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
2) Cost behaviour can be graphed with a straight line when a cost changes proportionately with changes
in a cost driver.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
3) The rental of a car, which includes a fixed daily rate plus an extra fee for each mile driven, is an
example of a step cost.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
4) Capacity costs are large, indivisible chunks of cost that the organization is obligated to incur or usually
would not consider avoiding.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
5) Committed fixed costs can be altered by management if management decides that different levels of
spending are desirable.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
6) Cost measurement is the first step in estimating or predicting costs as a function of appropriate cost
drivers.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1
7) A cost driver, sometimes referred to as the independent variable, is part of the cost function
relationship.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 80
Objective: 1

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8) When graphing a cost function, the total variable cost is the intercept, which is the point on the vertical
axis where the cost function begins.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 85
Objective: 3
9) Plausibility and reliability are two relevant factors to consider in order to ensure accurate and useful
cost functions.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 85
Objective: 3
10) Activity analysis is the process of identifying appropriate cost drivers and their effects on the costs of
making a product or providing a service.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 86
Objective: 4
11) Each cost in a manufacturing operation must be either fixed or variable and must be identified with a
single cost driver.
Answer: FALSE
Diff: 2
Type: TF
Page Ref: 80
Objective: 1
12) Activity analysis is one method of approximating cost functions.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 86
Objective: 4
13) Account analysis is the process of selecting a volume-related cost driver and classifying each account
as a variable or fixed cost.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 89
Objective: 5
14) The high-low method is a reliable method of cost estimation.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 89
Objective: 5
15) The visual-fit method is highly subjective and is more reliable when the cost function of the data is
linear.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 89
Objective: 5

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16) Linear-cost behaviour


A) is linear over the entire range of production.
B) cannot be graphed as a straight line.
C) exists when a cost changes proportionately with changes in a cost driver.
D) can be used to graph a step cost.
Answer: C
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
17) An example of a volume-driven cost in a book publishing enterprise is
A) wages of editorial staff.
B) paper and ink.
C) rent on the factory.
D) accounts payable clerk's wages.
Answer: B
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
18) Costs that change abruptly at intervals of activity because the resources and their costs come in
indivisible chunks are called
A) mixed costs.
B) variable costs.
C) fixed costs.
D) step costs.
Answer: D
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
19) The following three data points appear to be
Units
100
110
120
A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) a step cost.
Answer: A
Diff: 1
Type: MC
Objective: 1

Costs
$200
220
24

Page Ref: 80

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20) The following three data points appear to be


Units
200
220
240
A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) a step cost.
Answer: C
Diff: 1
Type: MC
Objective: 1

Costs
$400
400
400

Page Ref: 80

21) The following three data points appear to be


Units
100
110
120
A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) a step cost.
Answer: B
Diff: 1
Type: MC
Objective: 1

Costs
$400
420
440

Page Ref: 80

22) ________ are the fixed costs of being able to achieve a desired level of production or to provide a
desired level of service, while maintaining product or service attributes, such as quality.
A) Capacity costs
B) Committed fixed costs
C) Discretionary fixed costs
D) None of the above
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
23) ________ are costs arising from the possession of facilities, equipment, and a basic organization.
A) Capacity costs
B) Committed fixed costs
C) Discretionary fixed costs
D) None of the above
Answer: B
Diff: 1
Type: MC
Page Ref: 80
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Objective: 1
24) ________ are costs that have no obvious relationship to levels of output activity but are determined as
part of the periodic planning process.
A) Capacity costs
B) Committed fixed costs
C) Discretionary fixed costs
D) None of the above
Answer: C
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
25) Strategic decisions about the scale and scope of an organization's activities generally result in fixed
levels of
A) capacity costs.
B) discretionary costs.
C) mixed costs.
D) engineered costs.
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
26) The fixed costs required to achieve a desired level of production or to provide a desired level of
service, while maintaining product or service attributes such as quality, are referred to as
A) committed costs.
B) mixed costs.
C) capacity costs.
D) engineered costs.
Answer: C
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
27) A property tax is an example of a
A) mixed cost.
B) committed fixed cost.
C) discretionary cost.
D) engineered cost.
Answer: B
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
28) Costs determined by management as part of the periodic planning process in order to meet the
organization's goals are
A) discretionary fixed costs.
B) engineered costs.
C) mixed costs.
D) step costs.
Answer: A
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Diff: 1
Type: MC
Page Ref: 80
Objective: 1
29) Advertising cost is an example of a
A) committed fixed cost.
B) discretionary fixed cost.
C) mixed cost.
D) engineered cost.
Answer: B
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
30) Research and development costs are an example of
A) engineered costs.
B) mixed costs.
C) committed fixed costs.
D) discretionary fixed costs.
Answer: D
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
31) Costs that may be essential to the long run achievement of the organization's goals, but that managers
can almost reduce to zero in the short run, are called
A) engineered costs.
B) mixed costs.
C) committed fixed costs.
D) discretionary fixed costs.
Answer: D
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
32) A cost function
A) need not have a cause-and-effect relationship.
B) should include only personal observations of costs and activities.
C) does not explain past cost behaviour.
D) should be a reliable predictor of future costs.
Answer: D
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
33) The first step in estimating or predicting costs is
A) planning.
B) control.
C) cost measurement.
D) mixing costs.
Answer: C
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
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34) An algebraic equation used by managers to describe the relationship between a cost and its cost
driver(s) is called a
A) cost behaviour.
B) cost function.
C) budget.
D) cost analysis.
Answer: B
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
35) ________ is the first step in estimating or predicting costs as a function of appropriate cost drivers.
A) Cost measurement
B) Cost determination
C) Cost behaviour
D) Cost driver
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
36) In the mixed-cost function, Y = F + VX, the F stands for
A) total fixed cost.
B) total cost.
C) variable cost per unit of cost driver.
D) number of units of the cost driver.
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
37) In the mixed-cost function, Y = F + VX, the X stands for
A) total fixed cost.
B) total cost.
C) variable cost per unit of cost driver.
D) number of units of the cost driver.
Answer: D
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
38) In the mixed-cost function, Y = F + VX, the V stands for
A) total fixed cost.
B) total cost.
C) variable cost per unit of cost driver.
D) number of units of the cost driver.
Answer: C
Diff: 1
Type: MC
Page Ref: 80
Objective: 1

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39) Which symbol in the mixed-cost function, Y = F + VX, indicates the intercept?
A) F
B) V
C) Y
D) X
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
40) Which symbol in the mixed-cost function, Y = F + VX, represents the slope?
A) V
B) F
C) X
D) Y
Answer: A
Diff: 1
Type: MC
Page Ref: 80
Objective: 1
41) The process of identifying appropriate cost drivers and their effects on the costs of making a product
or providing a service is called
A) cost prediction.
B) cost measurement.
C) activity analysis.
D) budgeting.
Answer: C
Diff: 1
Type: MC
Page Ref: 86
Objective: 4
42) The application of cost measures to expected future activity levels to forecast future costs is
A) activity analysis.
B) cost prediction.
C) budgeting.
D) cost measurement.
Answer: B
Diff: 1
Type: MC
Page Ref: 86
Objective: 4
43) The process of completing a final product or service
A) can have only one cost driver.
B) may involve a number of separate activities.
C) can have only one cause-and-effect relationship.
D) can have multiple cost drivers, but they must be of equal importance.
Answer: B
Diff: 1
Type: MC
Page Ref: 82
Objective: 2

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44) Which of the following is NOT a method of approximating cost functions?


A) Engineering analysis
B) Account analysis
C) Product analysis
D) High-low analysis
Answer: C
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
45) Which method of approximating cost functions does NOT involve the analysis of past costs?
A) High-low analysis
B) Visual-fit analysis
C) Engineering analysis
D) Simple least-squares regression
Answer: C
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
46) Engineering cost analysis
A) measures cost behaviour according to what cost should be.
B) measures cost behaviour according to what costs have been.
C) involves very little cost to perform.
D) is accurate and timely.
Answer: A
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
47) ________ measures cost behaviour according to what costs should be, NOT by what costs have been.
A) Engineering analysis
B) Account analysis
C) The high-low method
D) The least-squares regression method
Answer: A
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
48) ________ selects a volume-related cost driver and classifies each account as a variable or fixed cost.
A) Engineering analysis
B) Account analysis
C) The high-low method
D) The least-squares regression method
Answer: B
Diff: 1
Type: MC
Page Ref: 89
Objective: 5

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49) ________ is a simple method for measuring a linear cost function from past cost data, focusing on two
representative points.
A) Engineering analysis
B) Account analysis
C) The high-low method
D) The least-squares regression method
Answer: C
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
50) ________ is a method in which the cost analyst draws a straight line through a plot of all the available
data.
A) Engineering analysis
B) Account analysis
C) The visual-fit method
D) The least-squares regression method
Answer: C
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
51) ________ measures a cost function objectively (with statistics rather than human eyesight) using all the
data available.
A) Engineering analysis
B) Account analysis
C) The visual-fit method
D) The least-squares regression method
Answer: D
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
52) One of the simplest methods to measure a linear cost function from past data is the
A) account method.
B) high-low method.
C) least-squares regression method.
D) mixed cost method.
Answer: B
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
53) Account analysis
A) is subjective, requiring judgment by the analyst.
B) is more expensive than engineering analysis.
C) cannot be used for mixed costs.
D) does not require recording relevant cost accounts and cost drivers.
Answer: A
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
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54) Which of the following methods of measuring cost functions is the most subjective?
A) High-low.
B) Visual-fit.
C) Least-squares regression.
D) Engineering.
Answer: D
Diff: 1
Type: MC
Page Ref: 89
Objective: 5
Presented below is the production data for the last six months of the year for the mixed costs incurred by
Vignovich Company.
Month
July
August
September
October
November
December

Cost
$24,450
20,120
32,400
44,200
29,000
36,680

Units
8,200
6,400
10,600
15,000
9,600
13,200

Vignovich Company uses the high-low method to analyze mixed costs.


55) The variable cost per unit is
A) $3.06.
B) $2.80.
C) $0.36.
D) $0.33.
Answer: B
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
56) The total fixed cost is
A) $39,250.
B) $17,816.
C) $2,200.
D) $536.
Answer: C
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
57) The cost function would be stated as
A) Y = $ 2,200 + $2.80X.
B) Y = $17,816 + $0.36X.
C) Y = $ 536 + $3.06X.
D) Y = $39,250 + $0.33X.
Answer: A
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Diff: 2
Type: MC
Page Ref: 89
Objective: 5
58) The total cost at an operating level of 10,000 units would be
A) $31,136.
B) $30,200.
C) $21,416.
D) $42,550.
Answer: B
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
The Vern Corporation has assembled the following data pertaining to certain costs that cannot be easily
identified as either fixed or variable. Vern Corporation has heard about a method of measuring cost
functions called the high-low method and has decided to use it in this situation.
Cost
$20,000
12,200
17,000
15,640
18,200
22,080
21,200
18,600

Hours
7,000
4,000
5,200
4,900
6,000
7,800
7,480
6,760

59) The variable cost per unit is


A) $0.38.
B) $0.46.
C) $2.60.
D) $2.16.
Answer: C
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
60) The total fixed cost is
A) $13,386.
B) $10,680.
C) $5,056.
D) $1,800.
Answer: D
Diff: 2
Type: MC
Page Ref: 89
Objective: 5

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61) The cost function would be stated as


A) Y = $13,386 + $0.46X.
B) Y = $10,680 + $0.38X.
C) Y = $ 5,056 + $2.16X.
D) Y = $ 1,800 + $2.60X.
Answer: D
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
The Stewart Company used regression analysis to predict the annual cost of utilities. The results were as
follows:
Utilities Cost
Explained by Machine Hours
Constant
Standard error of Y estimate
R-squared
No. of observations
Degrees of freedom
X coefficient(s)
Standard error of coefficient(s)

$16,650
$ 3,726
0.9436
24
22
7.16
0.458329

62) The total fixed cost is


A) $16,650.
B) $15,711.
C) $ 6,652.
D) $ 3,726.
Answer: A
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
63) The variable cost per machine hour is
A) $1.86.
B) $0.96.
C) $7.16.
D) $0.46.
Answer: C
Diff: 2
Type: MC
Page Ref: 89
Objective: 5

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64) The linear cost function is


A) Y = $16,650 + $7.16X.
B) Y = $15,711 + $1.86X.
C) Y = $ 3,726 + $0.96X.
D) Y = $ 6,562 + $0.46X.
Answer: A
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
65) The coefficient of determination is
A) 0.458329.
B) 22.
C) 7.16.
D) 0.9436.
Answer: D
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
The Schmidt Company used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost
Explained by Units Produced
Constant
Standard error of Y estimate
R-squared
No. of observations
Degrees of freedom

$4,378
$ 912
0.9183

X coefficient(s)
Standard error of coefficient(s)

12
10
2.35
0.437525

66) The total fixed cost is


A) 912.
B) $4,378.
C) $918.
D) $4,020.
Answer: B
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
67) The variable cost per unit of product is:
A) $1.03.
B) $0.92.
C) $2.35.
D) $0.44.
Answer: C
Diff: 2
Type: MC
Page Ref: 89
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Objective: 5
68) The linear cost function is
A) Y = $4,378 + $2.35X.
B) Y = $ 912 + $1.03X.
C) Y = $4,020 + $0.92X.
D) Y = $ 918 + $0.44X.
Answer: A
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
69) The coefficient of determination is
A) 0.437525.
B) 12.
C) 2.35.
D) 0.9183.
Answer: D
Diff: 2
Type: MC
Page Ref: 89
Objective: 5
70) The independent variable (activity) selected should have a high degree of correlation with the
dependent variable (cost) as indicated by a coefficient of determination that is:
A) close to -1
B) close to +1
C) equal to 0
D) none of the above
Answer: B
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
Use the following information to answer the next question(s).
The following information was collected regarding maintenance costs at different activity levels measured
in machine hours:
Number of Machine Hours
8,000
10,000
11,000
9,000
14,000
12,000

Total Maintenance Costs


$600,000
640,000
800,000
700,000
900,000
870,000

71) Using the high-low method, an estimate of the variable component for maintenance costs is
A) $50.00.
B) $52.50.
C) $64.28.
D) $75.00.
Answer: A
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Diff: 3
Type: MC
Objective: 3

Page Ref: 85

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72) Using the high-low method, an estimate of the fixed portion of maintenance costs is
A) $165,000.
B) $200,000.
C) $224,000.
D) $300,000.
Answer: B
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
73) Using the cost formula developed under the high-low method, what would be the estimate of
maintenance costs if 13,000 machine hours are scheduled for next month
A) $650,000.
B) $950,000.
C) $850,000.
D) $882,000.
Answer: C
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
Use the following information to answer the next question(s).
The method of least squares produced the following computer printout using direct labour hours as the
activity.
Intercept
Slope
Correlation Coefficient

20,318.00
42.00
.90

74) The estimate of the variable component for maintenance costs is


A) $37.80.
B) $42.00.
C) $46.67.
D) $47.00.
Answer: B
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
75) The estimate of the fixed component for maintenance costs is
A) $18,286.
B) $20,276.
C) $20,318.
D) $20,360.
Answer: C
Diff: 3
Type: MC
Page Ref: 85
Objective: 3

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76) If 5,000 machine hours are scheduled, an estimate of maintenance costs is


A) $253,318.
B) $230,726.
C) $230,360.
D) $230,318.
Answer: D
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
77) The coefficient of determination costs is
A) 0.73.
B) 0.81.
C) 0.90.
D) 1.00.
Answer: B
Diff: 3
Type: MC
Page Ref: 89
Objective: 5
78) The coefficient of determination indicates
A) the percentage of change in the dependent variable explained by changes in the independent variable.
B) the percentage of change in the dependent variable caused by changes in the independent variable.
C) the percentage of change in the independent variable explained by changes in the dependent variable.
D) the percentage of change in the independent variable caused by changes in the dependent variable.
Answer: A
Diff: 3
Type: MC
Page Ref: 85
Objective: 3
79) Understanding and quantifying how activities of an organization affect levels of costs.
Answer: Measuring cost behaviour
Diff: 1
Type: SA Page Ref: 96
Objective: 1
80) Activity that can be graphed with a straight line when a cost changes proportionately with changes in
a cost driver.
Answer: Linear cost behaviour
Diff: 1
Type: SA Page Ref: 80
Objective: 1
81) Costs that change abruptly at intervals of activity because the resources and their costs come in
indivisible chunks.
Answer: Step costs
Diff: 1
Type: SA Page Ref: 80
Objective: 1
82) Costs that contain elements of both fixed and variable cost behaviour.
Answer: Mixed costs
Diff: 1
Type: SA Page Ref: 80
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Objective: 1
83) Costs arising from the possession of facilities, equipment, and a basic organization: large, indivisible
chunks of cost that the organization is obligated to incur or usually would not consider avoiding.
Answer: Committed fixed costs
Diff: 1
Type: SA Page Ref: 80
Objective: 1
84) Costs determined by management as part of the periodic planning process in order to meet the
organization's goals.
Answer: Discretionary fixed costs
Diff: 1
Type: SA Page Ref: 82
Objective: 2
85) The first step in estimating or predicting costs as a function of appropriate cost drivers.
Answer: Cost measurement
Diff: 1
Type: SA Page Ref: 89
Objective: 5
86) An algebraic equation used by managers to describe the relationship between a cost and its cost
driver(s).
Answer: Cost function
Diff: 1
Type: SA Page Ref: 89
Objective: 5
87) The process of identifying appropriate cost drivers and their effects on the costs of making a product
or providing a service.
Answer: Activity analysis
Diff: 1
Type: SA Page Ref: 86
Objective: 4
88) The application of cost measures to expected future activity levels to forecast future costs.
Answer: Cost prediction
Diff: 1
Type: SA Page Ref: 86
Objective: 4
89) Selecting a volume-related cost driver and classifying each account as a variable cost or as a fixed cost.
Answer: Account analysis
Diff: 1
Type: SA Page Ref: 89
Objective: 5
90) Measuring a cost function objectively by using statistics to fit a cost function to all the data.
Answer: Regression analysis
Diff: 1
Type: SA Page Ref: 89
Objective: 5

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91) Explain the difference between a step cost and a mixed cost.
Answer: A step cost changes abruptly at intervals of activity because the resources and their costs come
in indivisible chunks. Mixed costs contain elements of both fixed and variable cost behaviour. Like step
costs, the fixed element is determined by the planned range of activity level. Unlike step costs, however,
usually in a mixed cost there is only one relevant range of activity and one level of fixed cost.
Diff: 1
Type: ES
Page Ref: 80
Objective: 1
92) Explain management influences on cost behaviour.
Answer: Management can influence cost behaviour by measuring and evaluating current cost behaviour.
In addition, management influences cost behaviour through decisions about such factors as product or
service attributes, capacity, technology, and policies to create incentives to control costs. Among the
influences of product or service attributes are managers' choices of product mix, design, performance,
quality, features and distribution.
Diff: 1
Type: ES
Page Ref: 82
Objective: 2
93) Explain the difference between committed fixed costs and discretionary fixed costs and give an
example of each.
Answer: Committed fixed costs usually arise from the possession of facilities, equipment, and a basic
organization. These are large, indivisible chunks of cost that the organization is obligated to incur or
usually would not consider avoiding. Discretionary fixed costs are determined by management as part of
the periodic planning process in order to meet the organization's goals. Unlike committed fixed costs,
managers can alter discretionary fixed costs easily, up or down, even within a budget period. One
example of a committed fixed cost is property taxes. (insurance, mortgage payments, interest payments on
long-term debt) One example of a discretionary cost is advertising. (research and development,
employment training, management salaries)
Diff: 1
Type: ES
Page Ref: 80
Objective: 1

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94) The Arnott Company incurred the following maintenance costs during the past six months:
Month
January
February
March
April
May
June

Machine Hours

Maintenance Cost

120,000
100,000
140,000
160,000
130,000
90,000

$456,000
420,000
492,000
528,000
474,000
402,000

a. The two points that seem to best represent the relationship between cost and activity are the activity
levels of 100,000 and 140,000 machine hours. Using these two points, estimate the fixed and variable
components of maintenance costs.
b. Develop a cost function that the Arnott Company can use to estimate maintenance cost at different
volume levels.
c. Estimate maintenance cost for July if the company expects to use 110,000 machine hours.
Answer:
a. Variable Cost Per Machine Hours = Difference in Total Cost/Difference in Levels of Activity =
($492,000 - $420,000)/(140,000 - 100,000) = $72,000/40,000 = $1.80 per machine hours
Total Cost at 140,000 Machine Hours - Variable Cost at 140,000 Machine Hours = Fixed Cost
$492,000 - ($1.80 x 140,000) = $240,000
b. Cost Function for Maintenance Cost = $240,000 + $1.80X
where X = machine hours
c. Maintenance Cost at 110,000 Machine Hours = $240,000 + $1.80X = $240,000 + ($1.80 x 110,000) =
$438,000
Diff: 3
Type: ES
Page Ref: 89
Objective: 5

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95) Conquest Industries made the following observations of supply costs at different production volume
levels:
Month
January
February
March
April
May
June
July
August
September
October
November
December

Supply Cost
$

960
1,060
1,180
980
940
900
1,120
1,260
1,200
1,360
1,160
1,040

Production (Units)
420
580
760
480
380
400
620
840
800
900
720
540

a. Using the method of least squares, develop an estimate of total fixed costs and variable cost per unit.
(Round your estimate of variable cost per unit to two decimal points.)
b. Develop a cost function to estimate supply cost at different volume levels and then estimate supply cost
if production is expected to be 700 units.
c. If the coefficient of correlation was .95, what percentage of the change in supply cost could be explained
by changes in production volume?

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Answer:
a. Method of least squares:

Month
January
February
March
April
May
June
July
August
September
October
November
December
Totals
v

Units

Cost

XY

420
580
760
480
380
400
620
840
800
900
720
540
7440

960
1060
1180
980
840
900
1120
1260
1200
1360
1160
1040
13060

403200
614800
896800
470400
319200
360000
694400
1058400
960000
1224000
835200
561600
8398000

X2
176400
336400
577600
230400
144400
160000
384400
705600
640000
810000
518400
291600
4975200

= (XY - XY/n)/(X2 - (X)2/n)


= [8,398,000 - (7,440 x 13,060/12)]/[4,975,200 - (7,4402/12)]
= 300,800/362,400
=
.83

The slope of the regression line and an estimate of the variable supply cost per unit is $0.83.
F

= (Y/n - vX/n)
= [13,060/12 - (0.83 x 7,440/12)]
= 573.73

The estimate of total fixed costs is $573.73.


The regression line equation is:
Y

$573.73 + $0.83X

b. The cost function for supply cost would be:


Total Monthly Supply Cost = $573.73 + $0.83X
where X = the number of units
An estimate of supply cost at 700 units of production would be:
Total Monthly Supply Cost = $573.73 + ($0.83 x 700 Units)
= $573.73 + $581
= $1,154.73
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c. If the correlation coefficient is .95, the coefficient of determination is .9025 (.952).


Therefore, approximately 90% of the change in supply costs can be explained by changes in production
volume.
Diff: 3
Type: ES
Page Ref: 89
Objective: 5
96) Kilson Dental Centre currently charges $20 per dental exam. A new company that recently located
near the dental centre asked if the dental centre would be interested in providing dental services to their
employees at a special rate of $15 per dental exam.
The dentists have agreed to offer the dental exams at the reduced fee if the $15 would cover the variable
costs of the dental exam.
The dental centre's accountant provided the following information about dental exams during the first six
months of the year:
Number of Exams
January
February
March
April
May
June

120
150
110
140
100
80

Total Cost of Exams


$1,850
2,020
1,600
1,960
1,450
1,200

a. Using the least squares method, determine the variable cost per dental exam.
b. Will the $15 reduced fee cover the dental centre's variable cost of providing the dental exam?
c. Develop a cost function that can be used to estimate total exam costs at different activity levels.
d. If a total of 200 exams are expected to be performed in July, what would be the total expected cost of
performing the 200 exams?
e. If 50 additional exams are performed each month at the special rate, what would be the incremental
revenue resulting from the 50 exams?
f. What would be the incremental cost of providing the 50 exams?
g. What would be the incremental profit that would result from providing the 50 exams at the reduced
rate?

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Answer:
a.
Units

Cost

Month

XY

X2

January
February
March
April
May
June
Totals

120
150
110
140
100
80
700

1850
2020
1600
1960
1450
1200
10080

222000
303000
176000
274400
145000
96000
1216400

14400
22500
12100
19600
10000
6400
85000

= (XY - XY/n)/(X2 - (X)2/n)

= [1,216,400 - (700 x 10080/6)]/(85,000 - 7002/6)


= 40,400/3,333.33
= 12.12

The slope of the regression line and an estimate of the variable cost per dental exam is $12.12.
b. Yes, the $15 reduced fee would cover the centre's variable cost of $12.12 per exam.
c.

= (Y/n - vX/n)
= [10,080/6 - (12.12 700/6)]
= 266

The estimate of total fixed costs is $266.


The regression line equation is: Y = $266 + $12.12X
d. An estimate of costs for 200 dental exams would be:
Y

= $266 + ($12.12 x 200)


= $2,690

e. Incremental Revenue = Special Rate Additional Exams


= $15 x 50
= $750
f. Incremental Cost = Variable Cost Per Exam Additional Exams
= $12.12 x 50
= $606
g. Incremental Profit = Incremental Revenue - Incremental Cost
= $750 - $606
= $144
Diff: 3
Type: ES
Page Ref: 89
Objective: 5
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2012 Pearson Canada Inc.

97) In order to better predict setup costs, the plant manager has asked the computer centre to use the least
squares method to generate a printout for use in estimating setup costs.
The following computer printout was generated and given to the plant manager.
Intercept
Slope
Correlation Coefficient
Activity Variable:

150.00
10.00
.98
Number of Setups

The plant manager brought the printout to you and said, "How am I supposed to use this to estimate
setup costs? This printout is worthless!"
a. Explain how the printout information can be used to estimate setup costs.
b. Estimate setup costs if 30 setups are expected next month.
c. What percentage change in setup costs can be explained by changes in the number of setups?
Answer:
a. If the intercept is within the relevant range, it is an estimate of total fixed costs.
The slope is an estimate of variable costs.
The printout information can be used to develop the following cost function to estimate setup costs at
different activity levels.
Total Setup Costs = $150 + $10X
where X = the number of setups
b. Total Setup Costs = $150 + ($10 x 30)
= $450
c. 96% (.982) of the change in setup costs can be explained by changes in the number of setups. This
indicates that the cost function appears to be useful in estimating setup costs.
Diff: 3
Type: ES
Page Ref: 89
Objective: 5

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2012 Pearson Canada Inc.