Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 10 Determining How Costs Behave
Objective 10.1
1) A cost function is a ________.
A) process of calculating present value of projected cash flows
B) process of allocating costs to cost centers or cost objects
C) mathematical description of how a cost changes with changes in the level of an activity relating to that
cost
D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship
between inputs and outputs
2) Bennet Company employs 20 individuals. Eighteen employees are paid $18 per hour and the rest are
salaried employees paid $3,000 a month. Which of the following is the total cost function of personnel?
A) y = a + bX
B) y = b
C) y = bX
D) y = a
3) Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs
of personnel be classified?
A) variable cost
B) mixed cost
C) irrelevant cost
D) fixed cost
4) For February, the cost components of a picture frame include $0.30 for the glass, $0.75 for the wooden
frame, and $0.80 for assembly. The assembly desk and tools cost $500. Two hundred fifty frames are
expected to be produced in the coming year. What cost function best represents these costs?
A) y = 1.85 + 500X
B) y = 500 + 1.85X
C) y = 3.85 + 600X
D) y = 1.05 + 500X
5) The cost components of a heater include $30 for the compressor, $10 for the sheet molded compound
frame, and $75 per unit for assembly. The factory machines and tools cost is $60,000. The company
expects to produce 1,000 heaters in the coming year. What cost function best represents these costs?
A) y = 60,000 + 115X
B) y = 1,000 + 60,000X
C) y = 60,000 + 1,000X
D) y = 1,000 + 115X
6) Which of the following statements is true of a linear cost function?
A) It presents variable cost as a slope coefficient.
B) It presents total cost as an intercept.
C) It presents variable cost as an intercept.
D) It presents total cost as slope coefficient.
7) A finance manager has to select one of the four different suppliers of raw materials. The total cost
functions under the four options are given below. Assume the quality of the raw material to be the same,
which of the following is preferred by the finance manager?
A) y = 200 + 5X
B) y = 200 + 5.50X
C) y = 200 + 4.50X
D) y = 200 + 4.70X
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8) If the total cost function is y = 5,000 + 7X, calculate the variable cost for 4,000 units.
A) $33,000
B) $28,000
C) $20,000
D) $5,000
9) The cost function y = 2,000 + 6X ________.
A) has a slope coefficient of 2,000
B) has an intercept of 6
C) is a straight line
D) represents a fixed cost
10) The cost function y = 150 + 10X ________.
A) has a slope coefficient of 150
B) has an intercept of 150
C) is a nonlinear
AACSB: Analytical thinking
11) The cost function y = 10,000 + 3X ________.
A) represents a mixed cost
B) will intersect the y-axis at 3
C) has a slope coefficient of 10,000
D) is a curved line
12) Which of the following functions represents the least total cost assuming the number of units is equal
in each case?
A) y = 180 + 7X
B) y = 90 + 6X
C) y = 90 + 7X
D) y = 180 + 6X
13) Which of the following is an equation of a fixed cost function?
A) y = (a + b)X
B) y = a + bX
C) y = bX
D) y = a
14) 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.
15) A cost function is a mathematical description of how a cost changes with changes in the level of an
activity relating to that cost.
16) All cost functions are linear.
17) In a cost function y = 18,000, the slope coefficient is zero.
18) When estimating a cost function, cost behavior can be approximated by a linear cost function within
19) y = a + bX, y = a, and y = bX are the three basic types of linear cost functions.
20) All other things being equal, the longer the time horizon the more likely a cost will be fixed.
21) Outside of the relevant range, variable and fixed cost-behavior patterns remain constant.
22) A particular cost item could be variable for one cost object and fixed for another cost object.
23) Write a linear cost function equation for each of the following conditions. Use y for estimated costs
and X for activity of the cost driver.
a. Direct manufacturing labor is $10 per hour.
b. Direct materials cost $15.60 per cubic yard.
c. Utilities have a minimum charge of $5,000, plus a charge of $0.30 per kilowatt-hour.
d. Machine operating costs include $300,000 of machine depreciation per year, plus $100 of utility costs
for each day the machinery is in operation.
24) Write a linear cost function equation for each of the following conditions. Use y for estimated costs
and X for activity of the cost driver.
a. Direct materials cost is $1.70 per pound
b. Total cost is fixed at $8,000 per month regardless of the number of units produced.
c. Auto rental has a fixed fee of $80.00 per day plus $2.00 per mile driven.
d. Machine operating costs include $1,000 of maintenance per month, and $12.00 of coolant usage costs
for each day the machinery is in operation.
Objective 10.2
1) A linear cost function can only represent fixed cost behavior.
2) In a graphical display of a cost function, the steepness of a line represents the total amount of fixed
costs.
3) It can be inferred that when there is a high correlation between two variables, one is the cause of the
other.
4) An example of a physical cause-and-effect relationship is when additional units of production increase
total direct material costs.
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5) Managers should use past data to create a cost function and then use the exact information provided
by that cost function to create the budgetary forecast for the next year.
6) What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that
a linear cost function may behave?
Objective 10.3
1) The conference method estimates cost functions ________.
A) using quantitative methods that can be very time consuming and costly
B) based on analysis and opinions gathered from various departments
C) using time-and-motion studies
D) by mathematically analyzing the relationship between inputs and outputs in physical terms
2) The account analysis method estimates cost functions ________.
A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis
B) using time-and-motion studies
C) at a high cost, which renders it seldom used
D) in a manner that cannot be usefully combined with any other cost estimation methods
3) Quantitative analysis methods estimate cost functions ________.
A) using the time-and-motion studies
B) based on analysis and opinions gathered from various departments
C) using a formal mathematical method to fit cost functions to past data observations
D) using the pooling of knowledge from each value chain function
4) Variable cost per labor-hour is $8.50. Fixed cost is $10,500. Calculate the total cost for 350 labor hours.
Machine hours during the period are 50.
A) $10,925
B) $13,475
C) $13,900
D) $3,400
5) Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed
using qualitative methods?
A) the account analysis method
B) the conference method
C) the marginal costing method
D) the incremental costing method
6) Which cost estimation method uses a formal mathematical method to develop cost functions based on
past data?
A) the cash accounting method
B) the conference method
C) the accrual accounting method
D) the quantitative analysis method
7) Which cost estimation method may use time-and-motion studies to analyze the relationship between
inputs and outputs in physical terms?
A) the accrual accounting method
B) the high-low method
C) the industrial engineering method
D) the cash accounting method
At the Auric Company, the cost of the personnel department has always been charged to production
departments based upon number of employees. Recently, opinions gathered from the department
managers indicate that the number of new hires might be a better predictor of personnel costs.
Total personnel department costs are $287,500.
Department A B C
Number of employees 70 280 225
Number of new hires 25 13 12
8) If the number of employees is considered the cost driver, what amount of personnel costs will be
allocated to Department A?
A) $35,000
B) $10,667
C) $140,000
D) $43,700
9) If the number of new hires is considered the cost driver, what amount of personnel costs will be
allocated to Department A?
A) $35,000
B) $10,667
C) $143,750
D) $43,700
10) Which cost estimation method is being used by Auric Company?
A) the simple regression method
B) the conference method
C) the account analysis method
D) the marginal costing method
Answer the following questions using the information below:
At the Verill Company, the cost of the library and information center has always been charged to the
various departments based upon number of employees. Recently, opinions gathered from the department
managers indicate that the number of engineers within a department might be a better predictor of
library and information center costs.
Total library and information center costs are $200,000.
Department A B C
Number of employees 135 530 135
Number of engineers 0 80 20
11) Which cost estimation method is being used by Verill Company?
A) the regression analysis method
B) the marginal costing method
C) the conference method
D) the operating costing method
12) If the number of employees is considered the cost driver, what amount of library and information
center costs will be allocated to Department A?
A) $30,000
B) $33,750
C) $0
D) $66,667
13) If the number of engineers is considered the cost driver, what amount of library and information
center costs will be allocated to Department A?
A) $30,000
B) $33,750
C) $0
D) $66,667
Isondo’s TV and Appliance Store is a small company that has hired you to perform some management
advisory services. The following information pertains to 2015 operations.
Sales (1,200 televisions) $ 1,200,000
Cost of goods sold 540,000
Store manager’s salary per year 108,000
Operating costs per year 216,000
Advertising and promotion per year 24,000
Commissions (3% of sales) 36,000
14) What was the variable cost per unit sold for 2015?
A) $30
B) $480
C) $770
D) $450
15) What were total fixed costs for 2015?
A) $924,000
B) $576,000
C) $348,000
D) $224,000
16) What are the estimated total costs if the company expects to sell 3,500 units next year?
A) $2,028,000
B) $3,619,000
C) $3,271,000
D) $1,429,000
17) Which cost estimation method is being used by Isondo‘s TV and Appliance Store?
A) the operating costing method
B) the marginal costing method
C) the account analysis method
D) the cost-volume-profit analysis method
Answer the following questions using the information below:
Genend’s Good Value Appliance Store is a small company that has hired you to perform some
management advisory services. The following information pertains to 2015 operations.
Sales (6,000 microwave ovens) $ 1,740,000
Cost of goods sold 960,000
Store manager’s salary per year 100,000
Operating costs per year 250,000
Advertising and promotion per year 30,000
Commissions (3% of sales) 52,200
18) Which cost estimation method is being used by Genend’s Good Value Appliance Store?
A) the account analysis method
B) the operating costing method
C) the marginal costing method
D) the cost-volume-profit analysis method
19) What was the variable cost per unit sold for 2015?
A) $8.70
B) $160
C) $168.70
D) $232
20) What were the total fixed costs for 2015?
A) $1,392,200
B) $380,000
C) $350,000
D) $1,012,200
21) What are the estimated total costs if Genend’s store expects to sell 8,000 units next year?
A) $812,117
B) $1,729,600
C) $1,952,200
D) $380,450
Answer the following questions using the information below:
Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is
labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager
and the management accountant determine that over the period the indirect manufacturing labor costs
are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing
labor costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable
($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours
during the next period.
22) Which of the following represents the correct linear cost function?
A) y = $390,000 + $ 48.75X
B) y = $110,000 + $100 X
C) y = $110,000 + $78 X
D) y = $390,000 + $62.50 X
23) What will be the variable cost per hour?
A) $78
B) $48.75
C) $62.50
D) $100
24) What will be the total variable cost for the estimated 7,000 hours?
A) $341,250
B) $546,000
C) $700,000
D) $437,500
25) What will be the total cost for the estimated 7,000 hours?
A) $451,250
B) $547,500
C) $700,000
D) $656,000
26) The quantitative analysis method of cost estimation is based on opinions from various departments
and is quick and of low cost to apply.
27) The account analysis method of cost estimation classifies account costs as fixed, mixed, or variable
using qualitative judgments.
28) The account analysis method estimates cost functions by classifying various cost accounts as variable,
fixed, or mixed with respect to the identified level of activity.
29) The quantitative analysis method uses a formal mathematical method to identify cause-and-effect
relationships among past data observations.
30) The cost of the personnel department at the Binix Company has always been charged to the
production departments based upon number of employees. Recently, opinions gathered from the
department managers indicated that the number of new hires might also be a predictor of personnel costs
to be assigned. Total personnel department costs are $180,000.
Department Department Department
Cost Driver A B C
Number of employees 390 325 65
The number of new hires 25 35 20
Required:
Using the above data, prepare a report that contrasts the different amounts of personnel department cost
that would be allocated to each of the production departments if the cost driver used is:
a. number of employees.
b. the number of new hires.
c. Which cost estimation method is being used by Binix Company?
31) Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12
months. List and discuss the different approaches Munir can use to estimate a cost function for overhead
costs using direct labor-hours as the cost driver.
Objective 10.4
1) The cost to be predicted is referred to as the ________.
A) independent variable
B) dependent variable
C) cost driver
D) regression
2) In the estimation of a cost function using quantitative analysis, the independent variable ________.
A) is the cost to be predicted
B) is the product of fixed costs and slope coefficient
C) is the factor used to predict the dependent variable
D) is the product of total costs and slope coefficient
3) How many separate cost pools should be formed given the following information?
Cost Cost driver
Postage costs # of brochures mailed
Printing and paper costs # of brochures mailed
Quality control costs # of inspections
Customer service costs # of customers served
A) 1 cost pool
B) 2 cost pools
C) 3 cost pools
D) 4 cost pools
4) Place the following steps in order for estimating a cost function using quantitative analysis.
A = Plot the data
B = Collect data on the dependent variable and the cost driver.
C = Choose the dependent variable
D = Identify the independent variable, or cost driver
E = Estimate the cost function
A) D C E A B
B) C D B A E
C) A D C E B
D) E D C B A
5) All individual cost items included in the dependent variable should have ________.
A) a different cost driver
B) an independent relationship with the independent variable
C) an economically plausible relationship with the cost driver
D) a heterogeneous cost pool
6) Which of the following represents cross-sectional data?
A) indirect manufacturing labor costs for the past 5 years
B) number of machine-hours used for the past 10 years
C) personnel costs of a month at 10 different organizations
D) maintenance cost of machine in a plant for the past 3 years
7) A plot of data that results in bunched points with little slope generally indicates ________.
A) a strong relationship
B) a weak relationship
C) a positive relationship
D) a negative relationship
8) A plot of data that results in one extreme observation most likely indicates that ________.
A) more than one cost pool should be used
B) an unusual event such as a plant shutdown occurred during that month
C) the cost-allocation base has been incorrectly identified
D) individual cost items do not have the same cost driver
9) Cross-sectional data analysis includes ________.
A) using a variety of time periods to measure the dependent variable
B) using the highest and lowest observation
C) observing different entities during the same time period
D) comparing information in different cost pools
10) Time-series data analysis includes ________.
A) using a variety of time periods to measure the dependent variable
B) using the highest and lowest observation
C) observing different entities during the same time period
D) comparing information in different cost pools
11) When using the high-low method, the two observations used are the high and low observations of the
________.
A) cost driver
B) fixed cost component
C) slope coefficient
D) direct cost
12) When using the high-low method, the numerator of the equation that determines the slope is the
________.
A) difference between the positive and negative values of dependent and independent variables
B) difference between the fixed cost and variable cost associated with the cost driver
C) difference between the high and low observations of the cost driver
D) difference between the costs associated with highest and lowest observations of the cost driver
13) The high-low method ________.
A) measures the difference between actual cost and estimated cost for each observation of the cost driver
B) calculates the standard deviation of residuals
C) calculates the slope coefficient using only two observed values within the relevant range and their
respective costs
D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations,
Y
14) Put the following steps in order for using the high-low method of estimating a cost function:
A = Identify the cost function
B = Calculate the constant
C = Calculate the slope coefficient
D = Identify the highest and lowest observed values
A) D C A B
B) C D A B
C) A D C B
D) D C B A