ch11 Key
1. Cost estimation is the process of estimating the relationship between costs and the cost drivers that cause
those costs.
2. In the formula, “TC = F + VX”, X is considered to be the cost driver.
3. A step or semifixed cost increases in a linear pattern as activity levels decrease.
4. Step costs are common wherever people are hired in time increments, such as hourly, daily or monthly.
5. The relevant range is the range over which the company expects to operate.
6. All costs can be divided into variable and fixed costs
7. In multiple regression analysis, we assume only one variable may impact the dependent variable
8. A cellular telephone plan that charges $45 per month for up to 1000 minutes per month of airtime and then
charges $0.50 per minute for each minute used over 1000 is an example of a step cost.
9. Learning curve is the mathematical or graphic representation of the systematic relationship between the
amount of experience in performing a task and the time required to perform it.
10. If the learning curve for a production process is 80 percent, the time required to produce each unit is 80
percent of the time to produce the first unit.
11. The learning curve formula “Y = aX raised to b” is a linear relationship.
12. In regression analysis, X is considered to be an independent variable.
13. The high-low method is not considered as technically equal to the regression method.
14. In the cost equation, TC = F + VX, the intercept is represented by “V“.
15. Multiple regression is a regression equation with more than one independent variable.
16. The first step in performing multiple regression is to identify the activities that are logical cost drivers.
17. The use of multiple independent variables usually increases the proportion of the variation in the dependent
variable explained by the cost prediction equation.
18. Cost estimates using regression analysis are usually more accurate than cost estimates using the scattergraph
method.
19. The account analysis approach is more subjective than using a regression approach because account analysis
relies heavily on the personal judgment and experience of accountants.
20. The account analysis and regression approaches will cost approximately the same amount to analyze a
company’s costs.
21. The fixed cost per unit increases as the activity level increases within the relevant range.
22. Engineering estimates are cost estimates based on measurement and pricing of the work involved in the
activities that go into a product.
23. The cost estimation method of “statistical methods“ uses regression analysis.
24. The engineering estimates method is less costly than the other cost estimation methods.
25. The cost being estimated is the dependent variable in the regression analysis of cost behaviors.
26. A scattergraph plots past costs against past cost-driver levels, and visually indicates differences in the
relationship between costs and activity at different activity levels. It can reveal the presence of curvilinear
relationships between costs and it can show any data that appear to be unusual.
27. A disadvantage of the high-low method of cost analysis is that:
28. In the cost equation TC = F + VX, the slope is represented by which of the following?
29. In the cost formula TC = F + VX, which variable is considered to be the independent variable?
30. Which of the following cost estimation methods uses regression analysis?
31. Which of the following statements best describes the account analysis approach to cost estimation?
32. Which of the following statements is not true regarding the scattergraph method of cost estimation?
33. The cost for a salesperson that is paid a flat salary of $2,000 per month plus a 3% commission on all sales is
an example of what type of cost?
34. The learning curve phenomenon could apply to which of the following?
35. Which of the following methods would be most helpful in identifying outliers?
36. In the cost estimation equation TC = F + VX, which of the variables would be considered the cost driver?
37. Which of the following cost estimation methods is typically more expensive to use to analyze a company’s
costs?
38. Which of the following costs would most likely be classified as variable, assuming the account analysis
approach to cost estimation is used?
39. Which of the following would most likely increase when the activity level increases, within the relevant
range?
40. In the cost equation TC = F + VX, F is best described as the:
41. Which of the following cost estimation techniques visually indicates differences in the relationship between
costs and activity at different activity levels?
42. Organizations estimate costs primarily for what reason(s)?
43. How would variable costs on a per unit basis be affected by a decrease in activity level, within the relevant
range?
44. McNair School principal Dr. Ruth Gacoki wants to know whether the school recruitment program is
successful. She used a spreadsheet to estimate the relationship between the number of advertisements and the
number of phone inquiries received. Monthly data for the past two years were entered into the computer. Data
includes months when no advertising was done through months with 1000 advertisements. Unfortunately, only
part of the regression results printed before the computer froze. All Dr. Gacolki saw was “Intercept = 1200″ R2
= .94. From that information she can conclude, with limited certainty, that:
45. Processing costs in the billing department of Alfaro Company are a mixture of variable and fixed
components. Records indicate that average unit processing costs are $0.50 per account processed at an activity
level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500.
Given these data, at a budgeted level of 25,000 accounts:
46. Using the high-low method, which of the following could be used to calculate the intercept?
47. Which of the following represent data problems when using regression or account analysis techniques?
48. Which cost estimation method is based on both past and future data?
49. Which of the following would not be a reason that a company would use cost estimation?
50. Salaries for accounts payable clerks where one clerk can handle up to 500 accounts is an example of what
type of cost?
51. Which method of cost estimation does not use the company records as its primary source of cost-activity
data?
52. The engineering method of cost estimation considers which of the following data?
53. The correlation coefficient that indicates the strongest linear association between two variables is:
Use the following to answer questions 54-57:
Josh Corp. has the following sales and operating expense data for July and August:
(Hint: Use the high-low method to help you answer these questions)
Hilton – Chapter 11
54. Cost A is considered to be a _____ cost.
55. Which of the costs is/are semi variable/mixed?
56.
Which of the above graphs best depicts cost C?
57. If 12,000 units are produced during December, what would be the projected total cost for Cost B during
December?
Use the following to answer questions 58-60:
Shumway Company is making plans for the introduction of a new product that it will sell for $10 per unit. The
following estimates have been made for manufacturing costs assuming 100,000 units will be produced in the
first year:
Direct materials – $180,000
Direct labor – $135,000 (the labor rate is $9 an hour for 15,000 hours)
Manufacturing overhead costs have not yet been estimated for the new product, but monthly data on the total
production and overhead costs for the past 24 months have been analyzed using simple linear regression. The
following results were derived from the simple regression and will provide the basis for overhead cost estimates
for the new product.
Simple Regression Analysis Results
Dependent Variable – Factory overhead costs
Independent variable – Direct labor–hours
Computed values:
Hilton – Chapter 11
58. What percentage of variation in the overhead costs is explained by the independent variable?
59. The total overhead cost for an estimated activity level of 20,000 direct labor hours would be:
60. What is the estimated total product cost per unit for the first year, assuming 100,000 units of the new
product will be produced and sold? (Hint: 15,000 direct labor hours required).
61. Leighlow Company has observed that at an activity level of 4,000 units the cost for maintenance is $30,000,
and at 6,000 units the cost for maintenance is $40,000. Using the high–low method, the cost formula for
maintenance is:
62. A regression equation:
63. A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 40
labor hours to complete. What is the cumulative average time per unit after four units are completed?
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Difficulty: Hard
Hilton – Chapter 11 #63
Learning Objective: 7
Use the following to answer questions 64-65:
YinLee Corp. is looking to introduce a new product with an 80% cumulative learning curve for production
batches of 500 units. The variable production and selling costs, all subject to learning, are $20 per unit for the
first 1,000-unit batch. There are $15,000 in fixed costs not subject to learning.
Hilton – Chapter 11
64. What is the average cost per unit at a production level of 2,000 units?
65. If the YinLee Company can sell all it produces for $20 per unit, what is the profit or loss at a production and
sales level of 4,000 units?
66. Ricardo Industries is preparing a bid for a special project requiring the production of 35,000 units. The
engineering personnel have advised that the units can be produced in groups with the first group consisting of
1,000 units. A labor time needed per unit will be progressively smaller by a constant percentage rate as
experience is gained in the production process. The method that would best estimate Ricardo‘s total cost for the
project is:
Use the following to answer questions 67-70:
(CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual
budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for
this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation
equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance
hours and costs for 2007 and the partial results of the regression are as follows:
t-table for Single–Tailed Values of t
Hilton – Chapter 11