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Accounting

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- chapter 1
- chapter 7
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- chapter 8
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- chapter 4
- Econometrics Project
- 10 Ch 10 Linear Regression and Correlation
- Multiple Regression
- Linear Regression - MATLAB & Simulink
- Journal of Marketing Theory and Practice
- Statistical and Regression Analysis of Material Removal Rate for Wire Cut Electro Discharge Machining of Ss 304L Using Design of Experiments
- Correlation in SPSS
- Journal Draft: Modelling and Analysis in the Correlation of Ni-Cr, Mn-S and Mn-Si Ratios to the Tensile and Yield Strengths of Grade 415W Rebars of Billet 2382

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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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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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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

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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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

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

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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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

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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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

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

$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

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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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

22

2012 Pearson Canada Inc.

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?

23

2012 Pearson Canada Inc.

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

= [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 regression line equation is:

Y

$573.73 + $0.83X

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

24

2012 Pearson Canada Inc.

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

$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?

25

2012 Pearson Canada Inc.

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

= 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 regression line equation is: Y = $266 + $12.12X

d. An estimate of costs for 200 dental exams would be:

Y

= $2,690

= $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

26

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

27

2012 Pearson Canada Inc.

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