Objective 10.6
1) Which of the following is a nonlinear cost function?
A) increase in revenues with increase in sales in units
B) total fixed cost of $25,000
C) variable cost of $5 per unit
D) learning curve function
2) Which of the following is an example of nonlinear cost function?
A) variable-cost functions
B) fixed-cost functions
C) learning curves
D) mixed cost functions
3) With a step fixed-cost function ________.
A) the cost varies with the changes in the activity
B) fixed cost is often approximated with a continuous variable-cost function
C) fixed cost changes proportionally with the level of activity
D) the cost remains the same over wide ranges of the activity in each relevant range
4) A step variable-cost function ________.
A) is fixed over the long run but not over the short run
B) is often approximated with a continuous variable-cost function
C) remains the same over a wide range of activity
D) example includes adding additional warehouse space
5) A learning curve is a function ________.
A) that measures the decline in labor-hours per unit due to workers becoming better at a job
B) that increases at a greater rate as workers become more familiar with their tasks
C) where unit costs increase as productivity increases
D) that is linear
6) An experience curve ________.
A) is a narrower application of the learning curve
B) measures the decline in cost per unit as production decreases for various value-chain functions such as
marketing as production increases
C) only measures the decline in labor-hours per unit as units produced increases
D) measures the increase in cost per unit as productivity increases
7) To complete the first setup on a new machine took an employee 300 minutes. Using an 85% cumulative
average-time learning curve indicates that the second setup on the new machine is expected to take
________.
A) 127.50 minutes
B) 210 minutes
C) 277.50 minutes
D) 255 minutes
8) To complete the first setup on a new machine took an employee 100 minutes. Using an 80%
incremental unit-time learning model indicates that the second setup on the new machine is expected to
take ________.
A) 80 minutes
B) 120 minutes
C) 70 minutes
D) 60 minutes
9) As a result of learning curve, ________.
A) unit costs increase as productivity increases and the unit-cost function behaves nonlinearly
B) unit costs decrease as productivity increases and the unit-cost function behaves nonlinearly
C) unit costs increase as productivity increases and the unit-cost function behaves linearly
D) unit costs decrease as productivity increases and the unit-cost function behaves linearly
10) The learning-curve models presented in the text examine ________.
A) how quality increases over time
B) how efficiency increases as more units are produced
C) how setup costs decline as more workers are added
D) the change in variable costs when quantity discounts are available
11) Which of the following is a learning-curve model?
A) the cumulative average-time learning model and the incremental unit-time learning model
B) the simple regression model and the multiple regression model
C) the multicollinearity learning model and the goodness of fit learning model
D) the account analysis learning model and the conference learning method model
12) An “economy of scale” function is an example of a linear cost function.
13) A step cost function is an example of a linear cost function.
14) Step fixed-cost functions are variable over the long run.
15) An experience curve is a function that measures the decline in cost per unit in various business
functions of the value chain as the amount of these activities increases.
16) A learning curve measures the effect of learning on efficiency.
17) In the cumulative average-time learning model, cumulative average time per unit declines by a
constant percentage each time the cumulative quantity of units produced doubles.
18) When new products are introduced, learning-curve effects can have a major influence on production
scheduling.
19) It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance.
20) The cumulative average-time learning model with a 85% learning curve indicates that if it takes 200
minutes to manufacture the first unit of a new model, then the second unit will take only 170 minutes to
manufacture.
21) The incremental unit-time learning model with a 80% learning curve indicates that if it takes 150
minutes to manufacture the first unit of a new model, then the second unit will take only 120 minutes to
manufacture.
22) A learning curve is a function that measures how labor-hours per unit decrease, as units of
production decrease.
23) Harold’s Picture manufactures various picture frames. Each new employee takes 6 hours to make the
first picture frame and 4.8 hours to make the second. The manufacturing overhead charge per hour is $25.
Required:
a. What is the learning-curve percentage, assuming the cumulative average method?
b. What is the time needed to build 8 picture frames by a new employee using the cumulative average-
time method? You may use an index of −0.1520.
c. What is the time needed to produce the 16th frame by a new employee using the incremental unit-
time method? You may use an index of −0.3219.
d. How much manufacturing overhead would be charged to the 16 picture frames using the average-
time approach?
24) Each time Mayberry Nursery hires a new employee, it must wait for some period of time before the
employee can meet production standards. Management is unsure of the learning curve in its operations
but it knows the first job by a new employee averages 40 hours and the second job averages 32 hours.
Assume all jobs to be equal in size.
Required:
a. What is the learning-curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to build 16 units with this learning curve using the cumulative
average-time method? You may use an index of −0.1520.
25) Jake’s Copy Center hires a new employee. Jake knows he has to be patient with the employee until the
employee gains enough experience to meet production standards. Jake is unsure of the learning curve in
his operation, but he knows the first job by a new employee averages 50 minutes and the second job
averages 40 minutes. Assume all jobs to be equal in size.
Required:
a. What is the learning-curve percentage, assuming the cumulative average-time method?
b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative
average-time method? You may use an index of −0.1520.
26) Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples.
27) Explain the difference between the cumulative average-time learning model and the incremental unit-
time learning model.
1) The ideal database for estimating cost functions contains ________.
A) numerous cost driver observations
B) only the independent variable and not the dependent variable
C) cost driver observations spanning a narrow range
D) a few values of the cost driver that are grouped closely together
2) Data collection problems arise when ________.
3) Which of the following is a step to overcome problems related to data collection for estimating cost
function?
A) The analyst should remove the inflationary effects.
B) The analyst should consider fixed costs as variable.
C) The analyst should also use extreme values while calculating cost functions.
D) The analyst should not use accrual accounting.
4) Which of the following is a step followed by an analyst to overcome problems related to data collection
for estimating cost function?
A) to use cash accounting
B) to consider fixed costs as variable costs and treat allocated fixed cost per unit as a variable cost
C) to eliminate unusual observations if extreme values of observations occur
D) to include the inflationary price effects in the data
5) Which of the following is a problem related to cost analysis?
A) fixed costs are allocated as if they are variable costs
B) extreme observations are adjusted or removed
C) a company keeps accounting records on the accrual basis
D) inflationary effects are removed
6) Data collection problems can arise when extreme values of observations occur.
7) Misinterpretation of data can arise when fixed costs are reported on a per unit basis.
8) Inflation can distort data that are compared over time so purely inflationary effects should be removed.
9) Fixed costs are sometimes allocated to individual products as part of the standard costing system.
When this is the case, they should be treated as variable costs for purposes of future cost estimation.
10) Roger Moon has just purchased the film studio of a movie company that specializes in comedies. He
found that the company did not try to estimate the cost of making a movie. Instead, it just gave the
producer a budget and told him/her to make a movie within budget. Mr. Moon does not like the former
movie-budget concept and desires to establish a formal cost estimation system.
Required:
What are some of the potential problems that may be encountered in changing from a budget to a cost
estimation movie making system?
Objective 10.A
1) The coefficient of determination is important in explaining variances in estimating equations. For a
certain estimating equation, the unexplained variation was given as 22,506. The total variation was given
as 51,150. What is the coefficient of determination for the equation?
A) 0.34
B) 0.43
C) 0.56
D) 0.75
2) The Perize Corporation used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost Explained by Units Produced
Constant $15,685
Standard error of Y estimate $3,500
r2 0.7832
Number of observations 20
X coefficient(s) 10.25
Standard error of coefficient(s) 2.1876
A) Y = $15,685 + $10.25X
B) Y = $3,500 + $5.15X
C) Y = $19,185 + $4.48X
D) Y = $12,285 + $10.25X
3) Corise’s Cola was to manufacture 500 cases of cola next week. The accountant provided the following
analysis of total manufacturing costs.
Variable Coefficient Standard Error t-Value
Constant 115 82.73 1.39
Independent variable 230 105.50 2.18
r2 = 0.82
What is the estimated cost of producing the 500 cases of cola?
A) $115,115
B) $57,730
C) $24,380
D) $9,744
4) Midose’s Stables used two different independent variables (trainer hours and number of horses) in two
different equations to evaluate the cost of training horses. The most recent results of the two regressions
are as follows:
Trainer’s hours:
Variable Coefficient Standard Error t-Value
Constant $1,004.65 $217.93 4.61
Independent Variable $22.99 $3.23 7.11
r2 = 0.56
Number of horses:
Variable Coefficient Standard Error t-Value
Constant $5,240.95 $1,180.40 4.44
Independent Variable $951.48 $271.85 3.50
r2 = 0.63
What is the estimated total cost for the coming year if 15,000 trainer hours are incurred and the stable has
350 horses to be trained, based upon the best cost driver?
A) $96,327.90
B) $338,258.95
C) $345,854.65
D) $14,277,440.95
5) A major concern that arises with multiple regression is multicollinearity, which exists when ________.
A) the dependent variable is not normally distributed
B) the standard errors of the coefficients of the individual variables decrease
C) the R2 statistic is low
D) two or more independent variables are highly correlated with one another
6) In multiple regression, when two or more independent variables are highly correlated with one
another, the situation is known as ________.
A) heteroscedasticity
B) homoscedasticity
C) multicollinearity
D) autocorrelation
7) Which of the following is the mathematical expression to calculate the coefficient of determination?
A) Coefficient of determination = 1 – (Unexplained variation / Total variation)
B) Coefficient of determination = (1 + Total variation ) / Unexplained variation)
C) Coefficient of determination = (1 – Unexplained variation ) / Total variation)
D) Coefficient of determination = 1 – Unexplained variation + Total variation)
8) The coefficient of determination (r2) measures the percentage of variation in X (the independent
variable) explained by Y (the dependent variable).
9) Generally a coefficient of determination (r2) of 0.30 or higher passes a goodness of fit test.
10) Goodness of fit has meaning only if the relationship between the cost drivers and costs is
economically plausible.
11) Multicollinearity exists in multiple regression when two or more independent variables are highly
correlated with each other.
12) The t-value of a coefficient measures how large the value of the estimated coefficient is relative to its
standard error.
13) The standard error of the estimated coefficient indicates how much the estimated value, b, is likely to
be affected by random factors.
14) The new cost analyst in your accounting department has just received a computer-generated report
that contains the results of a simple regression program for cost estimation. The summary results of the
report appear as follows:
Variable Coefficient Standard Error t-Value
Constant $74.79 $16.82 4.45
Independent variable $1,081.76 $215.67 5.02
r2 = 0.75
Required:
a. What is the cost estimation equation according to the report?
b. What is the goodness of fit? What does it tell about the estimating equation?
15) Degen Company used least squares regression analysis to obtain the following output:
Payroll Department Cost
Explained by Number of Employees
Constant $7,540
Standard error of Y estimate 819
r2 0.8924
Number of observations 20
X coefficient(s) $2.473
Standard error of coefficient(s) 0.0966
Required:
a. What is the total fixed cost?
b. What is the variable cost per employee?
c. Prepare the linear cost function.
d. What is the coefficient of determination? Comment on the goodness of fit.
16) Schotte Manufacturing Company uses two different independent variables (machine-hours and
number of packages) in two different equations to evaluate costs of the packaging department. The most
recent results of the two regressions are as follows:
Machine-hours:
Variable Coefficient Standard Error t-Value
Constant $748.30 $341.20 2.19
Independent Variable $52.90 $35.20 1.50
r2 = 0.33
Number of packages:
Variable Coefficient Standard Error t-Value
Constant $242.90 $75.04 3.24
Independent Variable $5.60 $2.00 2.80
r2 = 0.73
Required:
a. What are the estimating equations for each cost driver?
b. Which cost driver is best and why?
17) Arfaei Company manufactures chairs. Because the efforts of manufacturing are approximately equal
between labor and machinery, management is considering other possible cost drivers. By considering
different cost drivers, it is anticipated that the estimating process can be improved. The following cost
estimating equations with their r2 values have been determined for 20X5:
1. X = cutting time y = $19,500 + $20X r2 = 0.65
2. X = labor y = $5,000 + $25X r2 = 0.49
3. X = machinery y = $44,500 + $5X r2 = 0.55
Required:
a. Which equation should be selected for the analysis?
b. What other factors should be included in the selection of the estimating equation?