Chapter 23 – Cost estimation and cost behaviour
MULTIPLE CHOICE
1. Which of the following decision-making tools would NOT be useful in determining the slope and
intercept of a mixed cost?
a.
linear programming
b.
least-squares method
c.
high-low method
d.
scatter diagrams
2. In the formula Y = a + bx, bx refers to the
a.
total variable costs.
b.
intercept.
c.
dependent variable.
d.
independent variable.
3. In the formula Y = a + bx, b refers to the
a.
slope.
b.
intercept.
c.
dependent variable.
d.
total variable costs.
4. In the formula Y = a + bx, Y refers to the
a.
slope.
b.
intercept.
c.
dependent variable.
d.
independent variable.
5. In the formula Y = a + bx, x refers to the
a.
slope.
b.
intercept.
c.
dependent variable.
d.
independent variable.
6. In the formula Y = a + bx, a refers to the
a.
slope.
b.
intercept.
c.
dependent variable.
d.
independent variable.
Figure 23-1
Lee Ltd. manufactures and sells party items. The following representative direct labour hours and
production costs are provided for a four-month period:
Month
Direct labour Hours
Production Costs
January
3,600
£15,000
February
4,800
17,500
March
6,000
20,000
April
_4,800
_15,000
Total
19,200
£67,500
Let
a
=
b
=
n
=
X
=
Y
=
=
7. Refer to Figure 23-1. Monthly production costs can be expressed as follows:
a.
X = aY + b
b.
Y = a + bX
c.
X = a + bY
d.
Y = b + aX
8. Refer to Figure 23-1. The cost function derived by the least-squares cost estimation method
a.
is linear.
b.
must be tested for minima and maxima.
c.
is parabolic.
d.
is quadratic.
9. English Ltd. analyzed the relationship between total factory overhead and changes in direct labour
hours. It found the following:
Y = £6,000 + £6X
The Y in the equation is an estimate of
a.
total variable costs.
b.
total direct labour hours.
c.
total factory overhead.
d.
total fixed costs.
10. Assume the following information:
Volume
Total Cost
80 units
£1,200
88 units
£1,300
96 units
£1,400
What is the variable cost per unit?
a.
£15.00
b.
£14.78
c.
£13.75
d.
£12.50
11. Advantages of the method of least squares over the high-low method include all of the following
EXCEPT
a.
a statistical method is used to mathematically derive the cost function.
b.
only two points are used to develop the cost function.
c.
the squared differences between actual observations and the line (cost function) are
minimized.
d.
all the observations have an effect on the cost function.
12. Weaknesses of the high-low method include all of the following EXCEPT
a.
only two observations are used to develop the cost function.
b.
the high and low activity levels may not be representative.
c.
the method does not detect if the cost behaviour is nonlinear.
d.
the method is relatively complex and difficult to apply.
13. The high-low method may give unsatisfactory results if
a.
the data points all fall on a line.
b.
volume of activity is heavy.
c.
volume of activity is light.
d.
the points are unrepresentative.
14. The following information is available for electricity costs for the last six months of the year:
Month
Production Volume
Electricity Costs
July
1,400
£3,150
August
2,800
5,400
September
3,200
5,700
October
1,750
3,900
November
1,200
2,400
December
2,100
4,050
Using the high-low method, estimated variable cost per unit of production is
a.
£1.26.
b.
£1.53.
c.
£1.65.
d.
£1.77.
15. The following information was available about supplies cost for the second quarter of the year:
Month
Production Volume
Supplies Cost
April
700
£3,185
May
1,600
7,100
June
600
2,700
Using the high-low method, the estimate of supplies cost at 1,000 units of production is
a.
£2,700.
b.
£4,460.
c.
£4,900.
d.
£7,100.
16. Baker Enterprises developed a cost function for manufacturing overhead costs of Y = £8,000 +
£1.60X. Estimated manufacturing overhead costs at 10,000 units of production are
a.
£16,000.
b.
£17,600.
c.
£24,000.
d.
£26,000.
17. Greene Enterprises has the following information about its truck fleet miles and operating costs:
Year
Miles
Operating Costs
2005
400,000
£256,000
2006
480,000
280,000
2007
560,000
320,000
What is the best estimate of total costs using the high-low method if the expected fleet mileage for
2008 is 500,000 miles?
a.
£288,000
b.
£296,000
c.
£256,000
d.
£320,000
18. Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has
the following data:
Month
Cost of Electricity
Direct labour Hours
January
£ 8,100
750
April
9,000
850
July
10,200
1,000
October
8,700
800
Using the high-low method, which of the following is the best equation?
a.
Y = £900 + £12.00X
b.
Y = £900 + £8.40X
c.
Y = £1,800 + £8.40X
d.
Y = £2,400 + £8.40X
19. Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year’s high
and low observations were as follows:
Maintenance Cost
Sales
£36,000
£400,000
£42,000
£600,000
What is the fixed portion of the maintenance cost?
a.
£24,000
b.
£42,000
c.
£30,000
d.
£12,000
20. The scatterplot method of cost estimation
a.
is influenced by extreme observations.
b.
requires the use of judgment.
c.
uses the least-squares method.
d.
is superior to other methods in its ability to distinguish between discretionary and
committed fixed costs.
21. The following information was taken from a computer printout generated with the least-squares
method for use in estimating overhead costs:
Slope
45
Intercept
5,700
Correlation coefficient
.72
Activity variable
Direct labour hours
The cost formula is
a.
Overhead = £5,700 – £45X.
b.
Overhead = £5,700 + £45X.
c.
Overhead = £5,700 + (£45 0.72).
d.
Overhead = £5,700 0.72.
22. In the method of least squares, the deviation is the difference between the
a.
predicted and estimated costs.
b.
predicted and average costs.
c.
average and actual costs.
d.
predicted and actual costs.
Figure 23-2
The following information is available for maintenance costs:
Month
Production Volume
Maintenance Costs
January
75
£250
February
115
310
March
190
400
April
60
240
May
135
355
23. Refer to Figure 23.2. Using a computer or calculator, compute the estimate of variable cost per unit of
production using the method of least squares. Rounded to two decimal places, this value would be
a.
£3.21.
b.
£2.70.
c.
£1.31.
d.
£1.23.
24. Refer to Figure 23.2. Using a computer or calculator, compute the estimate of the fixed portion of
maintenance costs using the method of least squares. Rounded to the nearest figure, this value would
be
a.
£66.
b.
£160.
c.
£166.
d.
£575.
25. Refer to Figure 23.2 in the above question. Using a computer or calculator, compute the estimate of
maintenance costs at 100 units of production using the method of least squares. This value would be
a.
£291.
b.
£321.
c.
£336.
d.
£698.
26. The coefficient of determination is
a.
a measure of the variability of actual costs around the cost-estimating equation.
b.
used to construct probability intervals for cost estimates.
c.
a standardized measure of the degree to which two variables move together.
d.
a measure of the percent variation in the dependent variable that is explained by the cost
estimating equation.
27. A coefficient of determination of 0.91 means
a.
the two variables move together in the same direction and have a strong relationship.
b.
the parameter is not significant.
c.
the model is significant 91 percent of the time.
d.
that the independent variable explains 91 percent of the cost.
28. A managerial accountant has determined the following relationships between overhead and several
possible bases:
Basis
Correlation with Total Overhead
Direct labour hours
0.842
Direct labour (£)
0.279
Machine hours
-0.837
Employee minutes in coffee breaks
-0.243
The best basis for overhead application is
a.
direct labour hours.
b.
coffee breaks.
c.
direct labour (£)
d.
machine hours.
29. What is the difference between a correlation equal to -1 and a correlation equal to 0?
a.
A correlation equal to -1 means two alternatives are moving in the same direction, whereas
a correlation of 0 means they are moving in opposite directions.
b.
A correlation equal to -1 means two alternatives are moving in the same direction, whereas
a correlation of 0 means they are unrelated.
c.
A correlation equal to -1 means two alternatives are moving in opposite directions,
whereas a correlation of 0 means they are moving in the same direction.
d.
A correlation equal to -1 means two alternatives are moving in opposite directions,
whereas a correlation of 0 means they are unrelated.
30. What is the difference between a correlation equal to -1 and a correlation equal to +1?
a.
A correlation equal to -1 means two alternatives are moving in the same direction, whereas
a correlation of +1 means they are moving in opposite directions.
b.
A correlation equal to -1 means two alternatives are moving in the same direction, whereas
a correlation of +1 means they are unrelated.
c.
A correlation equal to -1 means two alternatives are moving in opposite directions,
whereas a correlation of +1 means they are moving in the same direction.
d.
A correlation equal to -1 means two alternatives are moving in opposite directions,
whereas a correlation of +1 means they are unrelated.
31. The appropriate range for the coefficient of correlation (r) is
a.
0 r 1.
b.
–% r +%.
c.
-1 r 1.
d.
-1 r +%.
32. What does a correlation coefficient near +1 mean?
a.
Two variables are moving in the opposite direction.
b.
Two variables are moving in the same direction.
c.
Two variables are unrelated.
d.
One variable is not a good predictor of the other.
33. What does a correlation coefficient near 0 mean?
a.
Two variables are moving in the opposite direction.
b.
Two variables are moving in the same direction.
c.
Two variables are unrelated.
d.
One variable is a good predictor of the other.
34. What does a correlation coefficient near -1 mean?
a.
Two variables are moving in the opposite direction.
b.
Two variables are moving in the same direction.
c.
Two variables are unrelated.
d.
One variable is not a good predictor of the other.
35. Which of the following statements is NOT true?
a.
In selecting an independent variable for cost behaviour analysis, it is important to
determine the activity that causes the cost being analyzed to occur.
b.
Professional judgment is very important in selecting an activity measure for a particular
cost.
c.
A high correlation between two variables proves that one causes the other.
d.
The least-squares cost estimation method can be used to measure the linear function.
36. The following computer printout estimated overhead costs using linear regression:
t for H(0)
Std. error
Parameter
Estimate
Parameter = 0
Pr > t
of parameter
Intercept
100.41
4.81
0.0003
20.88
DLH
14.05
6.78
0.0001
2.07
R Square (R 2)
0.80
Standard Error (Se)
25.03
Observations
17
Table of Selected Values: t Distribution
Degrees of Freedom
90%
95%
99%
15
1.753
2.131
2.947
16
1.746
2.120
2.921
17
1.740
2.110
2.898
18
1.734
2.101
2.878
19
1.729
2.093
2.861
What is the interval around Y if 95 percent confidence is desired?
a.
Y ± 20.024
b.
Y ± 43.87759
c.
Y ± 52.8133
d.
Y ± 53.33893
37. The following computer printout estimated overhead costs using regression:
t for H(0)
Std. error
Parameter
Estimate
Parameter = 0
Pr > t
of parameter
Intercept
100.41
4.81
0.0003
20.88
DLH
14.05
6.78
0.0001
2.07
R Square (R 2)
0.80
Standard Error (Se)
25.03
Observations
17
What is the 95 percent confidence interval around the slope estimate?
a.
11.98 to 16.13
b.
10.67 to 17.45
c.
9.57 to 18.54
d.
9.63 to 18.48
38. The following computer printout estimated overhead costs using multiple regression:
t for H(0)
Std. error
Parameter
Estimate
Parameter = 0
Pr > t
of parameter
Intercept
1000
1.96
0.0250
510.204
Setup hours
25
81.96
0.0001
0.305
# of parts
100
9.50
0.0001
10.527
R Square (R2)
0.94
Standard Error (Se)
75.00
Observations
160
The degrees of freedom for the model is
a.
157.
b.
158.
c.
159.
d.
160.
39. Which of the following equations uses multiple regression?
a.
Overhead = a + b(MH)
b.
DL Costs = a + b(MH)
c.
Overhead = a + b(DLH)
d.
Overhead = a + b(DLH) + c(MH)
40. The following computer printout estimated overhead costs using multiple regression:
t for H(0)
Std. error
Parameter
Estimate
Parameter = 0
Pr > t
of parameter
Intercept
1000
1.96
0.0250
510.204
Setup hours
25
81.96
0.0001
0.305
# of parts
100
9.50
0.0001
10.527
R Square (R2)
0.94
Standard Error (Se)
75.00
Observations
160
Which slope and intercept parameters are significant at the 0.05 level?
a.
intercept
b.
setup hours
c.
number of parts
d.
All of the above are significant
41. The following computer printout estimated overhead costs using multiple regression:
t for H(0)
Std. error
Parameter
Estimate
Parameter = 0
Pr > t
of parameter
Intercept
1000
1.96
0.0250
510.204
Setup hours
25
81.96
0.0001
0.305
# of parts
100
9.50
0.0001
10.527
R Square (R 2)
0.94
Standard Error (Se)
75.00
Observations
160
The model being measured is
a.
Overhead = 1,000 + 25(Setup hours) + 100(# of parts).
b.
Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts).
c.
Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts).
d.
Overhead = 1,000 + 25(Setup hours).
42. Which of the following statements is TRUE about the learning curve?
a.
The curve decreases at an increasing rate.
b.
The learning effect will eventually disappear as the number of units produced increases.
c.
Failure to recognize learning curve effects will cause units produced later in a new
production process to receive less cost than they should.
d.
All of the above are true.
43. Abboud Company is planning to introduce a new product with an 80 percent incremental unit-time
learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for
the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject
to learning. What is the cumulative total time (labour hours) to produce 2,000 units?
a.
100 hours
b.
80 hours
c.
160 hours
d.
180 hours
Figure 23-3
Abboud Company is planning to introduce a new product with an 80 percent cumulative learning
curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first
1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to
learning.
44. Refer to Figure 23-3. What is the cumulative total time (labour hours) to produce 2,000 units?
a.
100 hours
b.
80 hours
c.
160 hours
d.
20 hours
45. Refer to Figure 23-3. What is the individual unit time (labour hours) to produce 2,000 units?
a.
100 hours
b.
80 hours
c.
20 hours
d.
60 hours
46. Which method can be used to estimate the cost function?
a.
high-low method
b.
scatterplot method
c.
method of least squares
d.
all of the above can be used to estimate the cost function
47. Which of the following is a strength of the high-low advantage method?
a.
Only two observations are used to develop the cost function.
b.
The high and low activity levels may not be representative.
c.
The method does not detect if the cost behaviour is nonlinear.
d.
The method is easy to apply.
48. Which of the following is a weakness of the high-low method?
a.
The method is easy to apply because only two observations are required to develop the
cost function.
b.
The data points used may represent atypical cost-activity relationships.
c.
Any two observers will arrive at the same conclusion.
d.
The method is quick to use and easy to understand.
49. Advantages of the method of least squares over the high-low method include all the following
EXCEPT
a.
a statistical method is used to mathematically derive the cost function.
b.
only two points are used to develop the cost function.
c.
the squared differences between actual observations and the line (cost function) are
minimized.
d.
all the observations have an effect on the cost function.
50. The percentage change in the dependent variable that is explained by the change in the independent
variable is measured by the
a.
intercept.
b.
slope.
c.
coefficient of determination.
d.
correlation coefficient.
51. If the independent variable is production volume and the dependent variable is total manufacturing
cost, a coefficient of determination of .90 indicates
a.
90 percent of the change in manufacturing cost can be explained by the change in the
production volume.
b.
90 percent of the change in volume is caused by changes in manufacturing cost.
c.
10 percent of the change in volume is caused by changes in manufacturing cost.
d.
costs will change by 90 percent of the change in volume.
52. If the coefficient of correlation between machine hours and utilities cost is equal to 0.98 (r = 0.98), the
correlation is
a.
positive.
b.
negative.
c.
not related.
d.
none of the above.
53. When the method of least squares is used to fit an equation involving two or more explanatory or
independent variables, the method is called
a.
simple regression.
b.
multiple regression.
c.
variable regression.
d.
none of the above.
54. Given the cost function, Y = £10,000 + £4X, at what level of the activity cost drivers will total cost be
£22,000?
a.
3,000 units
b.
5,500 units
c.
10,000 units
d.
3,250 units
55. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost
Cost Function
Electricity
£400 + £140 per direct labour hour
Maintenance
£800 + £40 per direct labour hour
Supervisors’ salaries
£16,000 per month
Indirect materials
£50 per direct labour hour
If July production is expected to be 200 units that require 300 direct labour hours, estimated
manufacturing overhead costs would be
a.
£17,430.
b.
£55,200.
c.
£63,200.
d.
£86,200.
56. Silversleeves, SA., shipped 18,000 tons of silver for £450,000 in January and 22,000 tons for £549,000
in February. Shipping costs for 21,000 tons to be shipped in March would be expected to be
a.
£548,111.
b.
£499,500.
c.
£524,250.
d.
none of the above.
February
January
Difference
57. The following information was available about supplies cost for the first three months of the year:
Month
Production Volume
Supplies Cost
January
4,800
£21,700
February
5,000
20,900
March
3,400
16,100
Using the high-low method, an estimate of supplies cost at 4,500 units of production would be
a.
£19,400.
b.
£20,500.
c.
£19,950.
d.
none of the above.
February
March
Difference
58. ____ is a measure of the percent of variation in the dependent variable (such as total cost) that is
explained by variations in the independent variable (such as total shipments) when the least-squares
estimation equation is used.
a.
The constant
b.
The standard error of Y estimate
c.
The coefficient of determination
d.
The standard error of X estimate
59. In a simple least-squares regression where X refers to the number of sales calls made by a sales
department and Y refers to the monthly total cost of the sales department, the constant in the
regression output would represent:
a.
the estimated monthly total costs of the sales department.
b.
the estimated monthly fixed costs of the sales department.
c.
the estimated monthly variable costs per unit of the sales department.
d.
the percent of variation in Y that is explained by X.