CHAPTER 10: DETERMINING HOW COSTS BEHAVE
TRUE/FALSE
1. One assumption frequently made in cost behavior estimation is that changes in total
costs can be explained by changes in the level of a single activity.
Answer: True Difficulty: 1 Objective: 1
2. All cost functions are linear.
Answer: False Difficulty: 1 Objective: 1
All cost functions are not linear, but for cost-behavior estimation we assume some are
within a relevant range.
.
3. y = a + bX represents the general form of the linear cost function.
Answer: True Difficulty: 1 Objective: 2
4. A linear cost function can only represent fixed cost behavior.
Answer: False Difficulty: 1 Objective: 2
A linear cost function can represent fixed, mixed, or variable cost behavior.
5. In a graphical display of a cost function, the steepness of the slope represents the total
amount of fixed costs.
Answer: False Difficulty: 1 Objective: 2
In a graphical display of a cost function, the constant or the y-intercept represents the
amount of fixed costs.
6. The longer the time horizon, the more likely that a cost will have a fixed cost behavior.
Answer: False Difficulty: 2 Objective: 2
The longer the time horizon, the more likely that a cost will be variable.
7. Outside of the relevant range, variable and fixed cost-behavior patterns may change.
Answer: True Difficulty: 2 Objective: 2
8. Any linear cost function can be graphed by knowing only the slope coefficient.
Answer: False Difficulty: 1 Objective: 2
A linear function can be graphed if the slope coefficient and the intercept are known.
9. Knowing the proper relevant range is essential to properly classify costs.
Answer: True Difficulty: 1 Objective: 2
10. It can be inferred that when there is a high correlation between two variables, one is the
cause of the other.
Answer: False Difficulty: 2 Objective: 2
It cannot be inferred that a high correlation between two variables indicates that one is the
cause of the other. A high correlation simply indicates that the variables move together.
11. An example of a physical cause-and-effect relationship is when additional units of
production increase total direct material costs.
Answer: True Difficulty: 2 Objective: 2
12. The industrial engineering method of cost estimation is based on opinions from various
departments and is quick and of low cost to apply.
Answer: False Difficulty: 1 Objective: 3
The conference method of cost estimation is based on opinions from various departments
and is quick and of low cost to apply.
13. The account analysis method of cost estimation classifies account costs as fixed,
mixed, or variable using qualitative judgments.
Answer: True Difficulty: 1 Objective: 3
14. The industrial engineering method uses a formal mathematical method to identify
cause-and-effect relationships among past data observations.
Answer: False Difficulty: 1 Objective: 3
Quantitative analysis methods use a formal mathematical method to identify
cause-and-effect relationships among past data observations.
15. Individual cost items included in the dependent variable should have the same cost
driver or more than one cost function should be estimated.
Answer: True Difficulty: 2 Objective: 4
16. An example of time-series data is to compile maintenance costs of twelve different
manufacturing plants incurred during 20×3.
Answer: False Difficulty: 1 Objective: 4
An example of cross-sectional data is to compile maintenance costs of twelve different
manufacturing plants incurred during 20×3.
17. Evidence of relationships and extreme observations are highlighted when costs and
their cost drivers are plotted graphically.
Answer: True Difficulty: 2 Objective: 4
18. The most common forms of quantitative analysis are the conference method and the
account analysis method.
Answer: False Difficulty: 1 Objective: 4
The most common forms of quantitative analysis are the high-low method and regression
analysis.
19. Regression analysis relies on only two observations to estimate a linear cost function.
Answer: False Difficulty: 1 Objective: 4
The high-low method relies on only two observations to estimate a linear cost function.
20. The y-intercept of a linear cost function is an accurate cost assessment of using zero
machine-hours, even if zero machine-hours is outside of the relevant range.
Answer: False Difficulty: 2 Objective: 4
The y-intercept of a linear cost function is an accurate cost assessment of using zero
machine-hours, only if zero machine-hours are within the relevant range.
21. A positive slope of a regression line indicates that total costs are lower for higher
values of the cost driver.
Answer: False Difficulty: 2 Objective: 4
A positive slope of a regression line indicates that costs are higher for higher values of the
cost driver.
22. The high-low method is more accurate than the regression method of estimating a cost
function.
Answer: False Difficulty: 1 Objective: 4
The regression method is more accurate than the high-low method since it uses all
available data to estimate a cost function.
23. If inaccurate cost estimates are too high, then a company may unknowingly reward a
manager for poor performance.
Answer: True Difficulty: 3 Objective: 4
24. Machine-hours is a more economically plausible cost driver of machine maintenance
than number of direct manufacturing labor-hours.
Answer: True Difficulty: 2 Objective: 5
25. The smaller the vertical difference between actual costs and predicted costs the better
the goodness of fit.
Answer: True Difficulty: 2 Objective: 5
26. Choosing an economically plausible cost driver for indirect costs is fairly simple and
knowledge of operations is unnecessary.
Answer: False Difficulty: 2 Objective: 5
Finding an economically plausible cost driver is not always simple and many times
knowledge of operations is necessary.
27. A flat or slightly sloped regression line indicates a strong relationship.
Answer: False Difficulty: 3 Objective: 5
A flat or slightly sloped regression line indicates a weak relationship.
28. When using an activity-based costing system, a batch-level cost must have a
batch-level cost driver.
Answer: True Difficulty: 2 Objective: 5
29. Economic plausibility is an important criterion for choosing a cost driver.
Answer: True Difficulty: 1 Objective: 5
30. A step cost function is an example of a nonlinear cost function.
Answer: True Difficulty: 1 Objective: 6
31. Step fixed-cost functions are variable over the long run.
Answer: True Difficulty: 2 Objective: 6
32. An example of a step variable-cost function is the cost of material-handling labor when
inputs are acquired in discrete quantities.
Answer: True Difficulty: 2 Objective: 6
33. A learning curve measures the effect of learning on efficiency.
Answer: True Difficulty: 1 Objective: 6
34. Plotting learning curve observations is helpful in selecting the appropriate learning
curve model.
Answer: True Difficulty: 1 Objective: 7
35. When new products are introduced, learning-curve effects can have a major influence
on production scheduling.
Answer: True Difficulty: 2 Objective: 7
36. It is appropriate to incorporate expected learning-curve efficiencies when evaluating
performance.
Answer: True Difficulty: 1 Objective: 7
37. The cumulative average-time learning model with a 90% learning curve indicates that
if it takes 100 minutes to manufacture the first unit of a new model, then the second unit
will take only 90 minutes to manufacture.
Answer: False Difficulty: 3 Objective: 7
100 x .90 = 90; (100 + X)/2 = 90; X = 80 minutes
38. The incremental unit-time learning model with a 90% learning curve indicates that if it
takes 100 minutes to manufacture the first unit of a new model, then the second unit will
take only 90 minutes to manufacture.
Answer: True Difficulty: 2 Objective: 7
39. Data collection problems can arise when data is recorded manually rather than
electronically.
Answer: True Difficulty: 1 Objective: 8
40. Misinterpretation of data can arise when fixed costs are reported on a per unit basis.
Answer: True Difficulty: 2 Objective: 8
41. Inflation is a fact, and therefore its influence should not be removed from the data.
Answer: False Difficulty: 2 Objective: 8
Inflation can distort data that are compared over time so purely inflationary effects should
be removed.
42. The coefficient of determination (r2) measures the percentage of variation in Y
explained by X (the independent variable).
Answer: True Difficulty: 1 Objective: A
43. Generally a coefficient of determination (r2) that is less than 0.30 indicates a goodness
of fit.
Answer: False Difficulty: 2 Objective: A
Generally a coefficient of determination (r2) that is 0.30 or higher indicates a goodness of
fit.
MULTIPLE CHOICE
44. Which of the following statements related to assumptions about estimating linear cost
functions is FALSE?
a. Variations in a single cost driver explain variations in total costs.
b. A cost object is anything for which a separate measurement of costs is desired.
c. A linear function approximates cost behavior within the relevant range of the cost driver.
d. A high correlation between two variables ensures that a cause-and-effect relationship
exists.
Answer: d Difficulty: 2 Objective: 1
45. A high correlation between two variables s and t indicates that
a. s may cause t, or t may cause s.
b. they both may be affected by a third variable.
c. the correlation may be due to random chance.
d. all of the above are true.
Answer: d Difficulty: 2 Objective: 2
46. Which of the following does NOT represent a cause-and-effect relationship?
a. Material costs increase as the number of units produced increases.
b. A company is charged 40 cents for each brochure printed and mailed.
c. Utility costs increase at the same time that insurance costs increase.
d. It makes sense that if a complex product has a large number of parts it will take longer
to assemble than a simple product with fewer parts.
Answer: c Difficulty: 3 Objective: 2
47. Dougherty Company employs 20 individuals. Eight employees are paid $12 per hour
and the rest are salaried employees paid $3,000 a month. How would total costs of
personnel be classified?
a. Variable
b. Mixed
c. A variable cost within a relevant range
d. A fixed cost within a relevant range
Answer: b Difficulty: 2 Objective: 2
48. For January, the cost components of a picture frame include $0.35 for the glass, $.65
