Managerial Accounting, 16e (Garrison)
Appendix 5A Analyzing Mixed Costs
1) The engineering approach to the analysis of mixed costs involves a detailed statistical analysis
of cost behavior using methods that minimize the squared errors.
2) A major advantage of the high-low method of cost estimation is that it omits all data from the
analysis other than the lowest and highest costs.
3) The highest and lowest costs are always used to analyze a mixed cost under the high-low
method.
4) The high and low points used in the high-low method tend to be unusual and therefore the cost
formula for the mixed cost may not accurately represent all of the data.
5) In a scattergraph of cost and activity, activity is the independent variable because it causes
variations in the cost.
6) Managers can use a variety of methods to estimate the fixed and variable components of a
mixed cost. In account analysis, an account is classified as either variable or fixed based on the
analyst’s prior knowledge of how the cost in the account behaves.
7) The least-squares regression method computes the regression line that minimizes the sum of
the squared deviations from the plotted points to the line.
8) The R2 (i.e., R-squared) tells us the percentage of the variation in the dependent variable
(cost) that is explained by variation in the independent variable (activity).
9) The R2 (i.e., R-squared) varies from 0% to 100%, and the lower the percentage, the better the
fit of the data to a straight line.
10) A quick look at a scattergraph of cost versus activity can reveal that there is little relation
between the cost and the activity or that the relation is something other than a simple straight
line. In such cases, least square regression is highly recommended for estimating fixed and
variable costs.
11) Least-squares regression selects the values for the intercept and slope of a straight line that
minimize the sum of the errors.
12) Which of the following statements is true when referring to the high-low method of cost
analysis?
A) The high-low method has no major weaknesses.
B) The high-low method is very hard to apply.
C) In essence, the high-low method draws a straight line through two data points.
D) The high-low method uses all of the available data to estimate fixed and variable costs.
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13) In describing the cost formula equation, Y = a + bX, which of the following is correct:
A) “Y” is the independent variable.
B) “a” is the variable cost per unit.
C) “a” and “b” are valid for all levels of activity.
D) in the high-low method, “b” equals the change in cost divided by the change in activity.
14) Larker Brothers, Inc., used the high-low method to derive its cost formula for electrical
power cost. According to the cost formula, the variable cost per unit of activity is $4 per
machine-hour. Total electrical power cost at the high level of activity was $19,200 and at the low
level of activity was $18,400. If the high level of activity was 3,300 machine hours, then the low
level of activity was:
A) 3,100 machine hours
B) 3,200 machine hours
C) 3,000 machine hours
D) 2,900 machine hours
15) Gamach Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the product
for $104.50 per unit.
Sales volume (units)
5,000
6,000
Cost of sales
$
295,000
$
354,000
Selling and administrative costs
$
186,000
$
202,800
The best estimate of the total monthly fixed cost is:
A) $102,000
B) $518,900
C) $556,800
D) $481,000
Total cost at 6,000 units
$
354,000
Less variable cost element: 6,000 units × $59.00 per unit
354,000
Fixed cost
$
Total cost at 6,000 units
$
202,800
Less variable cost element: 6,000 units × $16.80 per unit
100,800
Fixed cost
$
102,000
16) Hara Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
$159.80 per unit.
Sales volume (units)
6,000
7,000
Cost of sales
$
363,600
$
424,200
Selling and administrative costs
$
531,000
$
547,400
The best estimate of the total variable cost per unit is:
A) $77.00
B) $60.60
C) $149.10
D) $138.80
17) Maintenance costs at a Straiton Corporation factory are listed below:
Machine-
Hours
Maintenance
Cost
3,627
$
54,384
3,588
$
53,980
3,637
$
54,453
3,638
$
54,491
3,572
$
53,843
3,611
$
54,196
3,644
$
54,550
3,609
$
54,181
3,669
$
54,767
Management believes that maintenance cost is a mixed cost that depends on machine-hours. Use
the high-low method to estimate the variable and fixed components of this cost. Compute the
variable component first and round off to the nearest whole cent. Compute the fixed component
second and round off to the nearest whole dollar. These estimates would be closest to:
A) $0.10 per machine-hour; $54,382 per month
B) $15.00 per machine-hour; $54,316 per month
C) $9.12 per machine-hour; $21,309 per month
D) $9.53 per machine-hour; $19,801 per month
18) Iacob Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
$103.40 per unit.
Sales volume (units)
5,000
6,000
Cost of sales
$
315,500
$
378,600
Selling and administrative costs
$
162,500
$
177,600
The best estimate of the total contribution margin when 5,300 units are sold is:
A) $56,710
B) $133,560
C) $41,340
D) $213,590
19) Edal Corporation has provided the following production and total cost data for two levels of
monthly production volume. The company produces a single product.
Production volume
5,000
units
6,000
units
Direct materials
$
266,500
$
319,800
Direct labor
$
52,000
$
62,400
Manufacturing overhead
$
748,500
$
769,200
The best estimate of the total variable manufacturing cost per unit is:
A) $63.70
B) $84.40
C) $53.30
D) $20.70
20) Bakan Corporation has provided the following production and average cost data for two
levels of monthly production volume. The company produces a single product.
Production volume
3,000
units
4,000
units
Direct materials
$
86.30
per unit
$
86.30
per unit
Direct labor
$
26.40
per unit
$
26.40
per unit
Manufacturing overhead
$
75.90
per unit
$
60.40
per unit
The best estimate of the total variable manufacturing cost per unit is:
A) $126.60
B) $86.30
C) $13.90
D) $112.70
21) Supply costs at Coulthard Corporation’s chain of gyms are listed below:
Client-
Visits
Supply Cost
March
12,855
$
23,598
April
12,283
$
23,278
May
13,104
$
23,742
June
12,850
$
23,607
July
12,493
$
23,415
August
12,794
$
23,562
September
12,686
$
23,496
October
12,765
$
23,541
November
13,018
$
23,687
Management believes that supply cost is a mixed cost that depends on client-visits. Use the high-
low method to estimate the variable and fixed components of this cost. Compute the variable
component first, rounding off to the nearest whole cent. Then compute the fixed component,
rounding off to the nearest whole dollar. Those estimates are closest to:
A) $1.85 per client-visit; $23,547 per month
B) $1.77 per client-visit; $557 per month
C) $0.55 per client-visit; $16,579 per month
D) $0.57 per client-visit; $16,273 per month
22) Electrical costs at one of Finfrock Corporation’s factories are listed below:
Machine-
Hours
Electrical
Cost
3,642
$
40,537
3,616
$
40,319
3,667
$
40,706
3,634
$
40,462
3,665
$
40,703
3,659
$
40,680
3,644
$
40,547
3,612
$
40,268
3,624
$
40,364
Management believes that electrical cost is a mixed cost that depends on machine-hours. Use the
high-low method to estimate the variable and fixed components of this cost. Compute the
variable component first, rounding off to the nearest whole cent. Then compute the fixed
component, rounding off to the nearest whole dollar. Those estimates are closest to:
A) $7.96 per machine-hour; $11,517 per month
B) $11.13 per machine-hour; $40,510 per month
C) $9.61 per machine-hour; $5,533 per month
D) $0.13 per machine-hour; $40,246 per month