Fundamentals of Cost Accounting William Lanen 6e - Test Bank

Fundamentals of Cost Accounting William Lanen 6e – Test Bank

 

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Fundamentals of Cost Accounting, 6e (Lanen)

Chapter 5   Cost Estimation

 

1) Cost behavior is the most important characteristic of costs for managerial decision making.

 

Answer:  TRUE

Explanation:  This is a fundamental concept.

Difficulty: 1 Easy

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

2) In general, accounting records accumulate cost information according to its behavior (i.e., variable and fixed).

 

Answer:  FALSE

Explanation:  Accounting records accumulate cost information by account.

Difficulty: 1 Easy

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

3) In general, cost behavior results are likely to differ between the engineering method and the account analysis method.

 

Answer:  TRUE

Explanation:  Results are likely to differ from method to method.

Difficulty: 1 Easy

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

4) The engineering method of determining cost behavior is particularly useful for new activities or products.

 

Answer:  TRUE

Explanation:  This is true because there often is no history to rely on.

Difficulty: 1 Easy

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

5) One advantage of the engineering method is that it does not require data from prior periods to estimate cost behavior.

 

Answer:  TRUE

Explanation:  The engineering method is based on what needs to be done, not what was done in prior periods.

Difficulty: 2 Medium

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

6) One advantage of the account analysis method for estimating cost behavior is that it includes actual work conditions.

 

Answer:  TRUE

Explanation:  The account analysis method is based on existing circumstances.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

7) The account analysis method is more subjective than other cost estimation methods because it relies heavily on the personal judgment and experience of accountants.

 

Answer:  TRUE

Explanation:  Different accountants will have different experience and will classify items accordingly.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

8) In general, the account analysis method focuses on the underlying relationship between cost and activities from the previous period.

 

Answer:  TRUE

Explanation:  The identification of the relationship between this relationship (the dependent and independent variable) is key to the analysis.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

9) The relevant range represents those activity levels for which valid cost relationships have been observed.

 

Answer:  TRUE

Explanation:  This statement is a definition of the term ‘relevant range.’

Difficulty: 1 Easy

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

10) A scattergraph is useful for identifying outliers/irrelevant data points.

 

Answer:  TRUE

Explanation:  This visual representation gives an indication of unusual or extreme points that are outside the area determined to be the norm.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

11) One disadvantage of the high-low method is the highest and lowest points may not be representative of normal operating activities.

 

Answer:  TRUE

Explanation:  High and low points may reflect unusual circumstances.

Difficulty: 1 Easy

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

12) One advantage that regression techniques have over other cost estimation methods is it generates information that can be used to determine how well the estimated cost equation will predict future costs.

 

Answer:  TRUE

Explanation:  It is objective, provides a number of statistics not available from other methods, and could be the only feasible method when more than one predictor is used.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation; Obtaining Regression Estimates

Learning Objective:  05-04 Estimate costs using statistical analysis.; 05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

13) Because outliers are extreme data points, they can be included in the regression analysis and not significantly affect the results.

 

Answer:  FALSE

Explanation:  Outliers will significantly affect the results as they do in high-low analysis.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

14) In general, the use of multiple independent variables increases the proportion of the variation in the dependent variable explained by the cost equation.

 

Answer:  TRUE

Explanation:  This is a basic principal. The adjusted R-squared (R2) is the correlation coefficient squared and adjusted for the number of independent variables used to make the estimate. This adjustment to R2 recognizes that as the number of independent variables increases, R2 (unadjusted) increases.

Difficulty: 1 Easy

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

15) One way to control the effects of a nonlinear relation between total costs and volume is to reduce the relevant range.

 

Answer:  TRUE

Explanation:  This is done as a basis for defining cost-volume-profit relationship by the use of a smaller range of data in order to avoid the need to use differential calculus.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

16) The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.

 

Answer:  TRUE

Explanation:  As capacity is approached there are changes in the costs such as additional overtime due to scheduling problems.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

17) Cost estimates using regression analysis are always more accurate and dependable than cost estimates using the scattergraph methods.

 

Answer:  FALSE

Explanation:  Not always. If the data is linear, the scattergraph method will give the same results as regression analysis.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

18) A basic assumption of most cost estimation methods is cost behavior patterns are linear within the relevant range.

 

Answer:  TRUE

Explanation:  Most cost estimation models are linear models and assume that the underlying data is linear.

Difficulty: 1 Easy

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

19) The quality of the cost equation depends on collecting appropriate data.

 

Answer:  TRUE

Explanation:  The results obtained are only as good as the data used. If data improves, so will the results.

Difficulty: 1 Easy

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

20) Different cost estimations methods may produce different cost equations, even when using the same set of data.

 

Answer:  TRUE

Explanation:  The general rule is that moving up the hierarchy of cost estimation methods will cost more to implement but will return a more accurate result.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

21) Which of the following statements is(are) true regarding cost behaviors?

 

(A) In general, accounting records accumulate cost information according to its behavior.

(B) Cost behaviors are the most important consideration in managerial decision making.

1. A) Only A is true.
2. B) Only B is true.
3. C) Both of these are true.
4. D) Neither of these is true.

 

Answer:  B

Explanation:  Accounting records accumulate information by account, not by behavior.

Difficulty: 1 Easy

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

22) Which of the following is the difference between variable costs and fixed costs? (CMA adapted)

1. A) Variable costs per unit fluctuate and fixed costs per unit remain constant.
2. B) Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
3. C) Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change.
4. D) Variable costs per unit change in varying increments, while fixed costs per unit change in equal units.

 

Answer:  B

Explanation:  Variable costs per unit are constant, fixed costs in total are constant; in the long term all costs are variable.

Difficulty: 2 Medium

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

23) A cost driver is defined as: (CMA adapted)

1. A) the largest cost in a manufacturing process.
2. B) a fixed cost that cannot be avoided.
3. C) the significant factor in developing a new product.
4. D) a causal factor that increases the total cost of a cost objective.

 

Answer:  D

Explanation:  A cost driver is a causal factor that increases the total cost of a cost objective.

Difficulty: 1 Easy

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

24) Which cost estimation method does not use the company’s cost information as its primary source of information about the relationship between total costs and activity levels?

1. A) Scattergraph.
2. B) High-low.
3. C) Account analysis.
4. D) Engineering estimates.

 

Answer:  D

Explanation:  The engineering method uses time and motion studies (estimates), rather than cost estimates.

Difficulty: 1 Easy

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

25) A manager is trying to estimate the manufacturing costs of a new product. The company makes several other products that utilize some of the same manufacturing procedures as the new product. Which cost estimation method would be the best method to determine the total cost of manufacturing the new product?

1. A) Engineering estimates.
2. B) Regression analysis.
3. C) Account analysis.
4. D) Scattergraph.

 

Answer:  A

Explanation:  A new product has no previous history so there is no past data points, regression, or account analysis ability.

Difficulty: 1 Easy

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

26) Engineering cost estimates are usually based on operating conditions that are considered:

1. A) optimal.
2. B) practical.
3. C) attainable.
4. D) historical.

 

Answer:  A

Explanation:  Engineering estimates are often based on optimal conditions. This results in a difficulty in selecting this technique.

Difficulty: 2 Medium

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

27) which of the following cost estimation methods?

1. A) Scattergraph.
2. B) High-low method.
3. C) Account analysis.
4. D) Linear regression.

 

Answer:  C

Explanation:  Account analysis is a cost estimation method that calls for a review of each account making up the total cost being analyzed.

Difficulty: 1 Easy

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

28) Which of the following costs would most likely be classified as variable, assuming the account analysis method is used to determine cost behaviors?

1. A) Indirect materials.
2. B) Supervisory salaries.
3. C) Equipment maintenance.
4. D) Building occupancy costs.

 

Answer:  A

Explanation:  Only indirect materials would have variable behavior. All the other items have fixed behavior.

Difficulty: 3 Hard

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

29) Given the following information, compute the total number of units for the period:

Direct labor hours		12,000
Direct labor cost	$	2.70	per hour
Direct materials cost	$	75	per unit
Total manufacturing cost	$	132,600
Fixed overhead cost	$	36,000
Variable overhead cost		50	% of total labor cost

 

360. A) 360.
361. B) 432.
362. C) 640.
363. D) 840.

 

Answer:  C

Explanation:  $132,600 = $75(units) + (12,000 × $2.70) + [.50(12,000 × $2.70)] + $36,000; Units = 640.

Difficulty: 3 Hard

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

30) In the cost equation TC = F + VX, “X” is best described as the:

1. A) costs that do not vary with changes in the activity level.
2. B) costs that do vary with changes in the activity level.
3. C) total cost estimate at a particular activity level.
4. D) activity level used to estimate the total cost.

 

Answer:  D

Explanation:  The letter “X” is best described as the activity level used to estimate the total cost; for example, this could be the volume in number of units of output.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

31) In the cost equation TC = F + VX, “V” is best described as the:

1. A) total costs that do not vary with changes in the activity level.
2. B) intercept of the cost equation.
3. C) slope of the cost equation.
4. D) activity level used to estimate the dependent variable.

 

Answer:  C

Explanation:  The letter “V” is the variable cost per unit which makes up the slope of the variable cost curve.

Difficulty: 1 Easy

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

32) Ballard Company incurred a total cost of $8,600 to produce 400 units of pulp. Each unit of pulp required five (5) direct labor hours to complete. What is the total fixed cost if the variable cost was $1.50 per direct labor hour?

700. A) $1,700.
701. B) $3,000.
702. C) $5,600.
703. D) $8,000.

 

Answer:  C

Explanation:  $8,600 = FC + $1.50(400 × 5); FC = $5,600.

Difficulty: 3 Hard

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

33) The term “relevant range,” as used in cost accounting, means the range over which:

1. A) relevant costs are incurred.
2. B) costs may fluctuate.
3. C) cost relationships are valid.
4. D) cost data is available.

 

Answer:  C

Explanation:  Relevant range is the level of activity for which a cost estimate may be valid.

Difficulty: 1 Easy

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Remember

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

34) Which of the following cost estimation methods is based on two cost observations?

1. A) Engineering approach.
2. B) High-low method.
3. C) Account analysis.
4. D) Linear regression.

 

Answer:  B

Explanation:  The high-low cost estimation method estimates costs based on two cost observations, usually at the highest and lowest activity levels.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

35) A disadvantage of the high-low method of cost analysis is that it:

1. A) typically results in a totally inaccurate cost formula.
2. B) is too time consuming to apply.
3. C) uses only two data points, which may not be representative of normal conditions.
4. D) relies totally on the judgment of the person performing the cost analysis.

 

Answer:  C

Explanation:  The estimates are not always inaccurate; the high-low method is fast to apply, and it doesn’t rely solely on judgment.

Difficulty: 1 Easy

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

36) Obtaining regression estimates for cost estimation requires establishing the existence of a logical relation between activities and the cost to be estimated. Which of the following is not used to refer to these activities?

1. A) independent variables.
2. B) predictors.
3. C) dependent variables.
4. D) X terms.

 

Answer:  C

Explanation:  These activities are referred to as predictors, X terms, independent variables, or the right-hand side (RHS) of a regression equation.

Difficulty: 1 Easy

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

37) Obtaining regression estimates for cost estimation requires establishing the existence of a logical relation between activities and the cost to be estimated. Which of the following is not used to refer to the cost to be estimated?

1. A) left-hand side (LHS).
2. B) dependent variable.
3. C) Y term.
4. D) independent variable.

 

Answer:  D

Explanation:  The cost to be estimated can be called the dependent variable, the Y term, or the left-hand side (LHS) of the regression equation.

Difficulty: 1 Easy

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

38) Which of the following is not true of regression techniques for estimating costs?

1. A) They permit the inclusion of more than one predictor.
2. B) They typically use the highest and lowest activity points to estimate the relation between cost and activity.
3. C) They help develop estimates that have a broader base than those based on a few select points.
4. D) They are designed to generate a line that best fits a set of data points.

 

Answer:  B

Explanation:  The high-low cost estimation is the method that typically uses the highest and lowest activity points to estimate the relation between cost and activity.

Difficulty: 1 Easy

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

39) The correlation coefficient is:

1. A) the range of values over which the probability may be estimated based upon the regression equation results.
2. B) the proportion of the total variance in the dependent variable explained by the independent variable.
3. C) the measure of variability of the actual observations from the predicting (forecasting) equation line.
4. D) the relative degree that changes in one variable can be used to estimate changes in another variable.

 

Answer:  C

Explanation:  The correlation coefficient measures the proximity of the data points to the regression line.

Difficulty: 1 Easy

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

40) Brewsky’s is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer visits		1,462
Average monthly total costs	$	4,629
Regression Results
Intercept	$	1,496
b coefficient	$	2.08
R2		0.86814

 

In a regression equation expressed as y = a + bx, how is the letter b best described? (CMA adapted)

1. A) An estimate of the probability of return customers.
2. B) The fixed costs per customer visit.
3. C) The estimate of the cost for an additional customer visit.
4. D) The proximity of the data points to the regression line.

 

Answer:  C

Explanation:  The letter b is best described as the estimate of the cost for an additional customer visit.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

41) Brewsky’s is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer visits		1,462
Average monthly total costs	$	4,629
Regression Results
Intercept	$	1,496
b coefficient	$	2.08
R2		0.86814

 

In a regression equation expressed as y = a + bx, how is the letter y best described? (CMA adapted)

1. A) An estimate of the total customers for the month.
2. B) The observed store cost for a given month.
3. C) The estimate of the number of new customer visits for the month.
4. D) The proximity of the data points to the regression line.

 

Answer:  B

Explanation:  The letter y is best described as the observed store cost for a given month.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

42) Brewsky’s is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer visits		1,462
Average monthly total costs	$	4,629
Regression Results
Intercept	$	1,496
b coefficient	$	2.08
R2		0.86814

 

In a regression equation expressed as y = a + bx, how is the letter x best described? (CMA adapted)

1. A) Fixed costs per each customer-visit.
2. B) The observed store costs for a given month.
3. C) The estimate of the number of new customer visits for the month.
4. D) The observed customer visits for a given month.

 

Answer:  D

Explanation:  The letter x is best described as the observed customer visits for a given month.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

43) Brewsky’s is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer visits		1,462
Average monthly total costs	$	4,629
Regression Results
Intercept	$	1,496
b coefficient	$	2.08
R2		0.86814

 

Based on the data derived from the regression analysis, what are the estimated costs for 1,600 customer visits in a month? (CMA adapted)

125. A) $6,125.
126. B) $4,629.
127. C) $3,328.
128. D) $4,824.

 

Answer:  D

Explanation:  The estimated costs for a month with 1,600 customer visits is $4,824 [= $1,496 + ($2.08 × 1,600 customer visits)].

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

44) Brewsky’s is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows:

Average monthly customer visits		1,462
Average monthly total costs	$	4,629
Regression Results
Intercept	$	1,496
b coefficient	$	2.08
R2		0.86814

 

What is the percent of the total variance that can be explained by the regression equation? (CMA adapted)

86. A) 86.8%
87. B) 31.6%
88. C) 97.7%
89. D) 71.9%

 

Answer:  A

Explanation:  The total variance that can be explained by the regression is 86.8% (= R2).

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

45) The Macon Company uses the high-low method to determine its cost equation. The following information was gathered for the past year:

	Machine Hours					Direct Labor Costs
Busiest month (June)		14,000					$	200,000
Slowest month (December)		6,000					$	120,000

 

What are the direct labor costs per machine hour?

20. A) $20.00.
21. B) $16.00.
22. C) $14.29.
23. D) $10.00.

 

Answer:  D

Explanation:  Direct Labor Costs per Machine Hour = ($200,000 – $120,000) / (14,000 – 6,000) = $10.00.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

46) The Macon Company uses the high-low method to determine its cost equation. The following information was gathered for the past year:

	Machine Hours					Direct Labor Costs
Busiest month (June)		14,000					$	200,000
Slowest month (December)		6,000					$	120,000

 

If Macon expects to use 10,000 machine hours next month, what are the estimated direct labor costs?

1. A) $160,000.
2. B) $180,000.
3. C) $175,000.
4. D) $150,000.

 

Answer:  A

Explanation:  Direct Labor Costs per Machine Hour = [($200,000 – $120,000) / (14,000 – 6,000)] = $10.00: FC = [$120,000 – $10 (6,000)] = $60,000; TC = [$60,000 + $10 (10,000)] = $160,000.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

47) Fromme’s Frocks has the following machine hours and production costs for the last six months of last year:

 

Month	Machine Hours					Production Cost
July		15,000					$	12,075
August		13,500						10,800
September		11,500						9,580
October		15,500						12,080
November		14,800						11,692
December		12,100						9,922

 

If Fromme expects to incur 14,000 machine hours in January, what will be the estimated total production cost using the high-low method?

750. A) $8,750.00.
751. B) $11,142.50.
752. C) $22,400.00.
753. D) $10,889.10.

 

Answer:  B

Explanation:  VC per hr. = [($12,080 − $9,580) / (15,500 − 11,500)] = $0.625; FC = [$12,080 − $0.625 (15,500)] = $2,392.50; TC = [$2,392.50 + $0.625 (14,000)] = $11,142.50.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

48) The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies needed for the Cleveland Plant for the month of July, when production is expected to be 470,000 units to meet the ending inventory requirements and sales of 475,000 units. Fortnight Co.’s budget analyst has the following actual data for the last three months.

 

Month	Production in Units					Manufacturing Supplies
March		450,000				$	723,060
April		540,000					853,560
May		480,000					766,560

 

Using the high-low method to develop a cost estimating equation, the total estimated cost of needed manufacturing supplies for July would be: (CMA adapted)

500. A) $681,500.
501. B) $688,750.
502. C) $749,180.
503. D) $752,060.

 

Answer:  D

Explanation:  VC per unit = [($853,560 − $723,060) / (540,000 − 450,000)] = $1.45 per unit; FC = [$853,560 − $1.45 (540,000)] = $70,560; TC = $70,560 + $1.45 (470,000) = $752,060.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

49) The Crater Manufacturing Company recorded overhead costs of $14,182 at an activity level of 4,200 machine hours and $8,748 at 2,300 machine hours. The records also indicated that overhead of $9,730 was incurred at 2,600 machine hours. What is the variable cost per machine hour using the high-low method to estimate the cost equation?

2. A) $2.78.
3. B) $2.86.
4. C) $3.10.
5. D) $3.38.

 

Answer:  B

Explanation:  [($14,182 – $8,748) / (4,200 – 2,300)] = $2.86.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

50) The Missou Manufacturing Company recorded overhead costs of $14,182 at an activity level of 4,200 machine hours and $8,748 at 2,300 machine hours. What is the total estimated cost for 2,600 machine hours using the high-low method to estimate the cost equation?

730. A) $9,730.
731. B) $9,606.
732. C) $9,106.
733. D) $8,788.

 

Answer:  B

Explanation:  VC = [($14,182 – $8,748) / (4,200 – 2,300)] = $2.86; FC = [$14,182 – $2.86 (4,200)] = $2,170; TC = $2,170 + $2.86 (2,600) = $9,606.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

51) The cost accountants at the Barkley Company regressed total overhead costs and direct labor hours for the past 30-months and reported the following results:

Slope	$	41.27
Intercept	$	596.36
Correlation Coefficient		0.934

 

What is the estimated overhead cost if 225 direct labor hours are expected to be used in the upcoming period? (rounded to the nearest whole dollar)

534. A) $10,534.
535. B) $9,882.
536. C) $9,230.
537. D) $8,617.

 

Answer:  B

Explanation:  [$596.36 + $41.27 (225)] = $9,882.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

52) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

 

 

What would be the cost equation if regression analysis is used?

7. A) Maintenance Costs = $7.2884 + ($684.65 × Hours of Activity).
8. B) Maintenance Costs = $684.65 + ($49.515 × Hours of Activity).
9. C) Maintenance Costs = $684.65 + ($7.2884 × Hours of Activity).
10. D) Maintenance Costs = $34.469 + ($0.99724 × Hours of Activity).

 

Answer:  C

Explanation:  Maintenance Costs = 684.65 + ($7.2884 × Hours of Activity).

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

53) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

 

 

Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at: (rounded to the nearest whole dollar)

797. A) $3,797.
798. B) $3,780.
799. C) $3,746.
800. D) $3,600.

 

Answer:  C

Explanation:  $684.65 + $7.2884 (420) = $3,746.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

54) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

 

What is the variable cost per hour using the high-low method to estimate the cost equation?

9. A) $9.00.
10. B) $7.50.
11. C) $0.1333.
12. D) $0.1111.

 

Answer:  B

Explanation:  [($4,470 – $2,820) / (520 – 300)] = $7.50.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

55) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

What is the fixed cost per month using the high-low method to estimate the cost equation?

570. A) $570.
571. B) $600.
572. C) $1,140.
573. D) $2,250.

 

Answer:  A

Explanation:  VC per hour = [($4,470 – $2,820) / (520 – 300)] = $7.50; FC = [$2,820 – $7.50 (300)] = $570.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

56) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at:

150. A) $3,150.
151. B) $3,600.
152. C) $3,720.
153. D) $3,780.

 

Answer:  C

Explanation:  VC per hour = [($4,470 – $2,820) / (520 – 300)] = $7.50; FC = $2,820 – $7.50 (300) = $570; TC = $570 + $7.50(420) = $3,720.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

57) The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

 

 

What would be the cost equation if the high-low method is used?

9. A) Maintenance Costs = $9.00 × Hours of Activity.
10. B) Maintenance Costs = 3,600 + (400 × Hours of Activity).
11. C) Maintenance Costs = $570 + ($7.50 × Hours of Activity).
12. D) Maintenance Costs = $34.469 + ($0.99724 × Hours of Activity).

 

Answer:  C

Explanation:  VC per hour = [($4,470 − $2,820) / (520 – 300)] = $7.50; FC = [$2,820 − $7.50 (300)] = $570.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

58) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses the high-low method to estimate costs, the variable cost per credit hour is:

82. A) $82.33.
83. B) $103.56.
84. C) $111.96.
85. D) $201.22.

 

Answer:  C

Explanation:  VC per credit hour = [($225,580 – $82,613) /(1,392 – 115)] = $111.96.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

59) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost equation for administrative costs is:

808. A) $198,808.00.
809. B) $69,731.68.
810. C) $96,409.42.
811. D) $19,943.58.

 

Answer:  B

Explanation:  VC per credit hour = [($225,580 – $82,613) / (1,392 – 115)] = $111.96; FC = $225,580 – ($111.96 × 1,392) = $69,731.68.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

60) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses the high-low method to estimate costs, the cost equation for administrative costs is

409. A) Administrative Costs = $96,409.42 + $103.56 × Credit-hours.
410. B) Administrative Costs = $69,731.68 + $111.96 × Credit-hours.
411. C) Administrative Costs = $201.21 × Credit-hours.
412. D) Administrative Costs = $198,808.

 

Answer:  B

Explanation:  VC per credit hour = ($225,580 – $82,613)/(1,392 – 115) = $111.96; FC = $225,580 – ($111.96 × 1,392) = $69,731.68.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

61) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

Based on the results of the high-low analysis, the estimate of administrative costs in a month with 1,000 credit hours would be: (rounded to the nearest whole dollar)

692. A) $181,692.
693. B) $199,969.
694. C) $201,210.
695. D) $198,808.

 

Answer:  A

Explanation:  VC per credit hour = ($225,580 – $82,613)/(1,392 – 115) = $111.96; FC = $225,580 – ($111.96 × 1,392) = $69,731.68.

 

$69,731.68 + ($111.96 × 1,000 credit hours) = $181,691.68.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

62) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses regression analysis to estimate costs, the cost equation for administrative costs is:

943. A) Administrative Costs = $19,943.58 + ($13.00 × Credit hours).
944. B) Administrative Costs = $69,474.40 + ($114.30 × Credit hours).
945. C) Administrative Costs = $96,647.02 + ($103.06 × Credit hours).
946. D) Administrative Costs = $12,521.26 + ($11.99 × Credit hours).

 

Answer:  C

Explanation:  Using the Excel output, Cost = $96,647.02 + ($103.06 × Credit hours).

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

63) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses regression analysis to estimate costs, the estimate of the variable portion of administrative costs is:

8. A) Variable Costs = $8.63 × Credit hours.
9. B) Variable Costs = $0.87 × Credit hours.
10. C) Variable Costs = $103.06 × Credit hours.
11. D) Variable Costs = $11.99 × Credit hours.

 

Answer:  C

Explanation:  Using the Excel output, Variable Costs = $103.06 × Credit hours.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

64) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of administrative costs is:

103. A) Fixed Cost = $103.56.
104. B) Fixed Cost = $12,521.26.
105. C) Fixed Cost = $19,943.58.
106. D) Fixed Cost = $96,647.02.

 

Answer:  D

Explanation:  Using the Excel output, Cost = $96,647.02.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

65) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

Based on the results of the regression analysis, the estimate of administrative costs in a month with 1,000 credit hours would be: (rounded to the nearest whole dollar)

808. A) $198,808.
809. B) $201,000.
810. C) $199,707.
811. D) $96,409.

 

Answer:  C

Explanation:  $96,647.02 + ($103.06 × 1,000) = $199,707.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

66) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

The correlation coefficient (rounded to the 3rd decimal) for the regression equation for administrative costs is:

1. A) 0.932.
2. B) 0.868.
3. C) 0.856.
4. D) 0.966.

 

Answer:  A

Explanation:  The correlation coefficient for the regression equation for administrative costs is Multiple R or 0.932.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

67) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

The percent of the total variance that can be explained by the regression is:

93. A) 93.3%.
94. B) 86.8%.
95. C) 85.9%.
96. D) 96.6%.

 

Answer:  B

Explanation:  The percent of the total variance that can be explained by the regression is R-squared or 86.8%.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

68) The College of Business at Northeast College is accumulating data as a first step in the preparation of next year’s budget development. One cost that is being looked at closely is administrative costs as a function of student credit hours. Data on administrative costs and credit hours for the past thirteen months are shown below:

 

Month	Administrative Costs					Credit Hours
July		$	129,301				250
August			82,613				115
September			225,580				1,392
October			216,394				1,000
November			258,263				1,309
December			184,449				1,112
January			219,137				1,339
February			245,000				1,373
March			209,462				1,064
April			191,925				1,123
May			249,978				1,360
June			170,418				420
July			128,167				315
Total		$	2,510,687				12,172
Average		$	193,130				936

 

The controller’s office has analyzed the data and has given you the results from the regression analysis:

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9317157
R Square	0.868094147
Adjusted R Square	0.856102705
Standard Error	20,134.92395
Observations	13

 

ANOVA
	df	SS	MS	F	Significance F
Regression	1	29,349,143,514	29,349,143,514	72.3928117	3.61909E-06
Residual	11	4,459,566,787	405,415,162.4
Total	12	33,808,710,301

 

 

 

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	96,647.02398	12,641.66539	7.64511803	1.00291E-05	68,822.90608	124,471.1419	68,822.90608	124,471.1419
X Variable 1	103.0607697	12.11283103	8.508396541	3.61909E-06	76.40060833	129.720931	76.40060833	129.720931

 

Based on the results of the regression analysis, the estimate of the variable portion of administrative costs in a month with 200 credit hours would be:

808. A) $198,808.
809. B) $20,612.
810. C) $117,121.
811. D) $40,242.

 

Answer:  B

Explanation:  $103.06 × 200 = $20,612.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

69)  Which of the following cost estimation methods relies heavily on personal judgment?

1. A) Scattergraph method.
2. B) Simple regression.
3. C) High and low point method.
4. D) Account analysis method.

 

Answer:  D

Explanation:  Management analysis of data is a judgmental approach.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

70) Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of the material handled? (CPA adapted)

1. A) Economic order quantity analysis.
2. B) Probability analysis.
3. C) Correlation analysis.
4. D) Multiple regression analysis.

 

Answer:  D

Explanation:  Only multiple regression analysis is a cost estimation approach.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

71) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses the high-low method to estimate costs, the variable cost per machine hour is:

6. A) $6.25.
7. B) $6.90.
8. C) $5.77.
9. D) $11.70.

 

 

 

Answer:  A

Explanation:  VC per machine hour = [($31,000 – $13,500) / (4,700 – 1,900)] = $6.25.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

72) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses the high-low method to estimate costs, the fixed cost portion of the cost equation for electricity costs is:

726. A) $3,726.88.
727. B) $1,425.18.
728. C) $1,625.00.
729. D) $22,825.00.

 

 

 

Answer:  C

Explanation:  VC per machine hour = [($31,000 – $13,500) / (4,700 – 1,900)] = $6.25; FC =  $31,000 – ($6.25 × 4,700) = $1,625.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

73) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses the high-low method to estimate costs, the cost equation for electricity costs is:

726. A) Electricity Costs = $3,726.88 + ($5.77 × Machine-hours).
727. B) Electricity Costs = $1,625.00 + ($6.25 × Machine-hours).
728. C) Electricity Costs = $6.90 × Machine-hours.
729. D) Electricity Costs = $22,825.

 

 

 

Answer:  B

Explanation:  VC per machine hour = [($31,000 – $13,500) / (4,700 – 1,900)] = $6.25; FC = $31,000 − ($6.25 × 4,700) = $1,625.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

74) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

Based on the results of the high-low analysis, the estimate of electricity costs in a month with 2,200 machine hours would be:

375. A) $15,375.
376. B) $22,825.
377. C) $15,180.
378. D) $16,427.

 

 

 

Answer:  A

Explanation:  VC per machine hour = [($31,000 – $13,500) / (4,700 – 1,900)] = $6.25; FC = $31,000 − ($6.25 × 4,700) = $1,625.

 

$1,625 + ($6.25 × 2,200 machine-hours) = $15,375.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

75) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses regression analysis to estimate costs, the cost equation for electricity costs is:

425. A) Electricity Costs = $1,425.18 + ($12.00 × Machine hours).
426. B) Electricity Costs = $3,726.88 + ($1,682.82 × Machine hours).
427. C) Electricity Costs = $1,682.82 + ($0.49 × Machine hours).
428. D) Electricity Costs = $3,726.88 + ($5.77 × Machine hours).

 

 

 

Answer:  D

Explanation:  Using the Excel output, Electricity Costs = $3,726.88 + ($5.77 × Machine hours).

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

76) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses regression analysis to estimate costs, the estimate of the variable portion of electricity costs is:

11. A) Electricity Costs = $11.70 × Machine hours.
12. B) Electricity Costs = $0.93 × Machine hours.
13. C) Electricity Costs = $5.77 × Machine hours.
14. D) Electricity Costs = $0.49 × Machine hours.

 

 

 

Answer:  C

Explanation:  Using the Excel output, Electricity Costs = $5.77 × Machine hours.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

77) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

If the controller uses regression analysis to estimate costs, the estimate of the fixed portion of electricity costs is:

5. A) Fixed Cost = $5.77.
6. B) Fixed Cost = $1,682.82.
7. C) Fixed Cost = $1,425.18.
8. D) Fixed Cost = $3,726.88

 

 

 

Answer:  D

Explanation:  Using the Excel output, Fixed Cost = $3,726.88 (Intercept).

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

78) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

Based on the results of the regression analysis, the estimate of electricity costs in a month with 2,200 machine hours would be: (rounded to the nearest whole dollar)

727. A) $3,727.
728. B) $16,421.
729. C) $15,180.
730. D) $22,825.

 

 

 

Answer:  B

Explanation:  $3,726.88 + ($5.77 × 2,200) = $16,421.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

79) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

The correlation coefficient for the regression equation for electricity costs is:

1. A) 0.965.
2. B) 0.932.
3. C) 0.925.
4. D) 0.982.

 

 

 

Answer:  A

Explanation:  Multiple R, or the correlation coefficient, for the regression equation for electricity costs is 0.965.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

80) Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Electricity Costs
January	2,500	$	18,400
February	2,900		21,000
March	1,900		13,500
April	3,100		23,000
May	3,800		28,250
June	3,300		22,000
July	4,100		24,750
August	3,500		22,750
September	2,000		15,500
October	3,700		26,000
November	4,700		31,000
December	4,200		27,750

 

Summary Output
Regression Statistics
Multiple R	0.965
R Square	0.932
Adjusted R2	0.925
Standard Error	1,425.18
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	3,726.88	1,682.82	2.21	0.05	(22.69)	7,476.45
Machine Hours	5.77	0.49	11.7	0.00	4.67	6.87

 

The percent of the total variance that can be explained by the regression is:

96. A) 96.5%.
97. B) 93.2%.
98. C) 92.5%.
99. D) 98.2%.

 

 

 

Answer:  B

Explanation:  The percent of the total variance that can be explained by the regression is the R-square or 93.2% (0.932).

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

81) Balcom Enterprises is planning to introduce a new product that will sell for $110 per unit. Manufacturing cost estimates for 20,000 units for the first year of production are:

 

∙ Direct materials $1,000,000.

∙ Direct labor $720,000 (based on $18 per hour × 40,000 hours).

 

Although overhead has not be estimated for the new product, monthly data for Balcom’s total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows:

Dependent variable	Factory overhead costs
Independent variable	Direct labor hours
Intercept	$	120,000
Coefficient on independent variable	$	5.00
Coefficient of correlation		0.911
R2		0.814

 

Based on this information, what percentage of the variation in overhead costs is explained by the independent variable?

1. A) 24%
2. B) 81.4%
3. C) 91.1 %
4. D) 9.7%

 

Answer:  B

Explanation:  R2 explains the variation in Y from the X regressor.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

82) Balcom Enterprises is planning to introduce a new product that will sell for $110 per unit. Manufacturing cost estimates for 20,000 units for the first year of production are:

 

∙ Direct materials $1,000,000.

∙ Direct labor $720,000 (based on $18 per hour × 40,000 hours).

 

Although overhead has not be estimated for the new product, monthly data for Balcom’s total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows:

Dependent variable	Factory overhead costs
Independent variable	Direct labor hours
Intercept	$	120,000
Coefficient on independent variable	$	5.00
Coefficient of correlation		0.911
R2		0.814

 

Based on this information, what is the total overhead cost for an estimated activity level of 45,000 direct labor-hours?

1. A) $125,000
2. B) $345,000
3. C) $600,000
4. D) $225,000

 

Answer:  B

Explanation:  $120,000 + ($5 × 45,000) = $345,000

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

83) Balcom Enterprises is planning to introduce a new product that will sell for $110 per unit. Manufacturing cost estimates for 20,000 units for the first year of production are:

 

∙ Direct materials $1,000,000.

∙ Direct labor $720,000 (based on $18 per hour × 40,000 hours).

 

Although overhead has not be estimated for the new product, monthly data for Balcom’s total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows:

Dependent variable	Factory overhead costs
Independent variable	Direct labor hours
Intercept	$	120,000
Coefficient on independent variable	$	5.00
Coefficient of correlation		0.911
R2		0.814

 

Based on this information, how much is the variable manufacturing cost per unit, using the variable overhead estimated by the regression (assuming that direct materials and direct labor are variable costs)?

1. A) $78
2. B) $91
3. C) $96
4. D) $71

 

Answer:  C

Explanation:  40,000 hours ÷ 20,000 units = 2 labor hours per unit

 

($1,000,000 ÷ 20,000) + ($720,000 ÷ 20,000) + ($5 × 2 labor-hours) = $50 + $36 + $10 = $96

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

84) Balcom Enterprises is planning to introduce a new product that will sell for $110 per unit. Manufacturing cost estimates for 20,000 units for the first year of production are:

 

∙ Direct materials $1,000,000.

∙ Direct labor $720,000 (based on $18 per hour × 40,000 hours).

 

Although overhead has not be estimated for the new product, monthly data for Balcom’s total production for the last two years has been analyzed using simple linear regression. The analysis results are as follows:

Dependent variable	Factory overhead costs
Independent variable	Direct labor hours
Intercept	$	120,000
Coefficient on independent variable	$	5.00
Coefficient of correlation		0.911
R2		0.814

 

Based on this information, what is the expected contribution margin per unit to be earned during the first year on 20,000 units of the new product? (Assume that all marketing and administrative costs are fixed.)

1. A) $14
2. B) $13
3. C) $99
4. D) $32

 

Answer:  A

Explanation:  40,000 hours ÷ 20,000 units = 2 labor hours per unit

 

($1,000,000 ÷ 20,000) + ($720,000 ÷ 20,000) + ($5 × 2 labor-hours) = $50 + $36 + $10 = $96; $110 – $96 = $14

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

85) Given actual amounts of a semi-variable cost for various levels of output, the method that will always give the most reliable measure of the fixed and variable components is the:

1. A) high-low method.
2. B) linear regression method.
3. C) scattergraph method.
4. D) account analysis method.

 

Answer:  B

Explanation:  Linear regression will always give the most reliable measure of the fixed and variable components for various levels of output; high-low may give the best line, but scattergraph and account analysis rely on judgment.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

86) Which of the following statements regarding regression analysis is (are) true?

 

(A) One way to control the effects of a nonlinear relationship between total costs and activity is reduce the relevant range.

(B) The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.

1. A) Only A is true.
2. B) Only B is true.
3. C) Both of these are true.
4. D) Neither of these is true.

 

Answer:  C

Explanation:  Both A and B are true; when capacity is approached there are more scheduling problems and overtime may be needed, changing the variable cost.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

87) Which of the following is a common assumption of cost estimation?

1. A) Cost behavior depends on many cost drivers.
2. B) Cost behavior patterns are nonlinear outside of the relevant range.
3. C) Cost behavior patterns are linear within the relevant range.
4. D) Costs are curvilinear.

 

Answer:  C

Explanation:  The two basic assumptions of cost estimation are: single (or few) cost driver(s) and linearity of costs.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

88) Which of the following is not a data problem an analyst must watch for when estimating cost behavior?

1. A) Missing data.
2. B) Outliers.
3. C) Allocated costs.
4. D) Depreciable assets.

 

Answer:  D

Explanation:  Depreciable assets do not create data problems.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

89) Which of the following is not a data problem an analyst must watch for when estimating cost behavior?

1. A) Non-numeric data.
2. B) Inflation.
3. C) Discretionary costs.
4. D) Mismatched time periods.

 

Answer:  A

Explanation:  Non-numeric data is easily incorporated into the analysis using indicator variables.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-09 (Appendix A) Use Microsoft Excel to perform a regression analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

90) In the learning curve equation Y = aXb, the Y term represents:

1. A) the labor time required to produce the first unit.
2. B) the labor time required to produce the last single unit.
3. C) the cumulative number of units.
4. D) the index of learning.

 

Answer:  B

Explanation:  In this equation, the Y term represents the labor time required to produce the last single unit.

Difficulty: 2 Medium

Topic:  Learning Curves (Appendix B)

Learning Objective:  05-10 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

91) In the learning curve equation Y = aXb, the X term represents:

1. A) the labor time required to produce the first unit.
2. B) the labor time required to produce the last single unit.
3. C) the cumulative number of units.
4. D) the index of learning.

 

Answer:  C

Explanation:  In this equation, the X term represents the cumulative number of units.

Difficulty: 2 Medium

Topic:  Learning Curves (Appendix B)

Learning Objective:  05-10 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

92) In the learning curve equation Y = aXb, the “a” term represents:

1. A) the labor time required to produce the first unit.
2. B) the labor time required to produce the last single unit.
3. C) the cumulative number of units.
4. D) the index of learning.

 

Answer:  A

Explanation:  In this equation, the “a” term represents the labor time required to produce the first unit.

Difficulty: 2 Medium

Topic:  Learning Curves (Appendix B)

Learning Objective:  05-10 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

93) In the learning curve equation Y = aXb, the “b” term represents:

1. A) the labor time required to produce the first unit.
2. B) the labor time required to produce the last single unit.
3. C) the cumulative number of units.
4. D) the index of learning.

 

Answer:  D

Explanation:  In this equation, the “b” term represents the index of learning.

Difficulty: 2 Medium

Topic:  Learning Curves (Appendix B)

Learning Objective:  05-10 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

94) Which of the following statements regarding the learning phenomenon is true?

1. A) The more units that are produced, the greater the average time to produce a single unit.
2. B) The relationship between number of units produced and the marginal time to produce the latest unit is linear.
3. C) Total labor cost is a linear function of the total units produced.
4. D) As production doubles, the time to produce the latest unit decreases.

 

Answer:  D

Explanation:  Correct! Learning curves are nonlinear. Learning means the latest unit takes less time than the previous units. So, as production doubles, the time to produce the latest unit decreases.

Difficulty: 3 Hard

Topic:  Learning Phenomenon; Learning Curves (Appendix B)

Learning Objective:  05-10 (Appendix B) Understand the mathematical relationship describing the learning phenomenon.; 05-07 Incorporate the effects of learning when estimating costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

95) Bachmann Products, Inc., has found that new products follow a learning curve. The first two units have been completed with the following results:

 

Units Produced	Marginal Labor Time
1	80.00
2	68.00

 

How much time will be needed to complete the 4th unit?

74. A) 74.00 hours.
75. B) 57.80 hours.
76. C) 56.00 hours.
77. D) 54.40 hours.

 

Answer:  B

Explanation:  68/80 = 85% × 68 = 57.80 hours

Difficulty: 3 Hard

Topic:  Learning Phenomenon

Learning Objective:  05-07 Incorporate the effects of learning when estimating costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

96) Bachmann Products, Inc., has found that new products follow a learning curve. The first two units have been completed with the following results:

 

Units Produced	Marginal Labor Time
1	80.00
2	68.00

 

How much time will be needed to complete the 8th unit?

74. A) 74.00 hours.
75. B) 57.80 hours.
76. C) 56.00 hours.
77. D) 49.13 hours.

 

Answer:  D

Explanation:  68/80 = 85% × 68 = 57.80 hours for 4th unit × 85% = 49.13 hours for 8th unit

Difficulty: 3 Hard

Topic:  Learning Phenomenon

Learning Objective:  05-07 Incorporate the effects of learning when estimating costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

97) The following manufacturing costs were incurred by the Miracle Mile Company in 2019:

Direct materials	$	225,000
Direct labor		350,000
Manufacturing overhead		470,000

 

These costs were incurred to produce 50,000 units of product. Variable manufacturing overhead was 70% of the direct materials cost.

 

In 2020, the direct material and variable overhead costs per unit will increase by 12%, but the direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to increase by 8%.

 

Required:

(a.) Prepare a cost estimate for an activity level of 40,000 units of product in 2020.

(b.) Determine the total product costs per unit for 2019 and 2020.

 

Answer:

(a.)

Variable overhead costs (2019) = 0.70 ($225,000) = $157,500.

Fixed overhead costs (2019) = $470,000 – $157,500 = $312,500.

 

2019                   2020

Direct materials                                             $   225,000          $  201,600       (1)

Direct labor                                                        350,000              280,000       (2)

Variable overhead costs                                     157,500              141,120       (3)

Fixed overhead costs                                         312,500              337,500       (4)

Total                                                              $   1,045,000       $  960,220

 

(1) [($225,000/50,000) (1.12)] (40,000) = $201,600.

(2) ($350,000/50,000) (40,000) = $280,000.

(3) [($157,500/50,000) (1.12)] (40,000) = $141,120.

(4) ($312,500) (1.08) = $337,500.

 

(b.)

2019 unit cost: $1,045,000/50,000 = $20.90; 2020 unit cost: $960,220/40,000 = $24.01.

Difficulty: 3 Hard

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

98) The following manufacturing costs were incurred by the Trinitram Company in 2019:

Direct materials	$	112,500
Direct labor		175,000
Manufacturing overhead		235,000

 

These costs were incurred to produce 25,000 units of product. Variable manufacturing overhead was 80% of the direct materials cost.

In 2020, the direct material and variable overhead costs per unit will increase by 15%, but the direct labor costs per unit are not expected to change. Fixed manufacturing costs are expected to increase by 7.5%.

 

Required:

(a.) Prepare a cost estimate for an activity level of 20,000 units of product in 2020.

(b.) Determine the total product costs per unit for 2019 and 2020.

 

Answer:

(a.)

Variable overhead costs (2019) = 0.80 ($112,500) = $90,000

Fixed overhead costs (2019) = $235,000 – $90,000 = $145,000

 

2019                    2020

Direct materials                                                $   112,500          $   103,500       (1)

Direct labor                                                           175,000               140,000      (2)

Variable overhead costs                                        90,000                 82,800        (3)

Fixed overhead costs                                            145,000               155,875      (4)

Total                                                                 $   522,500               $482,175

 

(1) [($112,500/25,000) (1.15)] (20,000) = $103,500.

(2) ($175,000/25,000) (20,000) = $140,000.

(3) [($90,000/25,000) (1.15)] (20,000) = $82,800.

(4) ($145,000) (1.075) = $155,875.

(b.)

2019 unit cost: $522,500 / 25,000 = $20.90; 2020 unit cost: $482,175/20,000 = $24.11

Difficulty: 3 Hard

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

99) The Thomas Company’s total overhead costs at various levels of activity are presented below:

 

Month	Direct Labor Hours				Total Overhead
July		7,500			$	272,000
August		6,000				234,000
September		9,000				319,000
October		10,500				340,500

 

Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 9,000 direct labor hour level of activity is as follows:

 

Utilities (V)	$	137,700
Supervisory Salaries (F)		80,000
Maintenance (M)		101,300
		319,000

 

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.

(b.) Express the company’s total overhead costs in linear equation form.

 

Answer:

(a.)

Utilities per hour = $137,700/9,000 = $15.30 per direct labor hour.

Utility cost at the high point = $15.30 (10,500) = $160,650.

Utility cost at the low point = $15.30 (6,000) = $91,800.

Maintenance cost at the high point = $340,500 – $80,000 – $160,650 = $99,850.

Maintenance cost at the low point = $234,000 – $80,000 – $91,800 = $62,200.

Maintenance cost per hour = ($99,850 – $62,200)/(10,500 – 6,000) = $8.36667.

Fixed Maintenance costs per month = $99,850 – ($8.36667 × 10,500) = $12,000.

Total maintenance costs = $12,000 + ($8.36667 per Direct Labor Hour).

(b.)

Total overhead costs = ($80,000 + $12,000) + [($15.30 + 8.36667) × Direct Labor Hours] = $92,000 + ($23.66667 × Direct Labor Hours).

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

100) The Feline Company has been having some difficulties estimating its manufacturing overhead costs. In the past, manufacturing overhead costs have been related to production levels. However, some production managers have indicated that the size of their production lots might also be having an impact on the amount of their monthly manufacturing overhead costs. In order to investigate this possibility, the company collected information on its monthly manufacturing overhead costs, production in units, and average production lot size for 2020.

 

Month	Production (Units)				Manufacturing Overhead Cost					Average Monthly Production Lot Size
1		75,000			$	925,800					20
2		90,000				843,875					19
3		65,000				910,125					24
4		80,000				946,000					19
5		55,000				879,000					24
6		50,000				825,000					18
7		85,000				960,000					22
8		105,000				1,053,500					25
9		102,000				1,020,000					23
10		68,000				905,000					20
11		75,000				938,000					22
12		95,000				995,000					24

 

Required:

(a.) Use the high-low method to estimate next month’s manufacturing overhead costs, assuming the company is planning to produce 92,000 units.

(b.) Use the high-low method to estimate next month’s manufacturing overhead costs, assuming the company is planning to run a 21-lot size.

 

Answer:

(a.)

Variable cost per unit = ($1,053,500 − $825,000)/(105,000 − 50,000) = $4.154

Fixed costs = $1,053,500 − ($4.154) (105,000) = $617,330

TC = $617,330 + ($4.154) (92,000) = $999,498

(b.)

Variable cost per unit = ($1,053,500 − $825,000)/(25 − 18) = $32,642.857

Fixed costs = $1,053,500 − ($32,642.857)(25) = $237,429

TC = $237,429 + ($32,642.857) (21) = $922,929

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

101) Argo Company ran a regression analysis using direct labor hours as the independent variable and manufacturing overhead costs as the dependent variable. The results are summarized below:

Intercept	$	14,600
Slope	$	12.55
Correlation coefficient		0.931
R-squared		0.867

 

Argo is planning on operating at a level that would require 12,000 direct labor hours per month in the upcoming year.

 

Required:

 

(a.) Use the information from the regression analysis to write the cost estimation equation for the manufacturing overhead costs.

(b.) Compute the estimated manufacturing overhead costs per month for the upcoming year.

 

Answer:

(a.)

Total manufacturing overhead costs = $14,600 + ($12.55 × Direct Labor Hours)

 

(b.)

Total manufacturing overhead costs = $14,600 + [($12.55) (12,000)] = $165,200

Difficulty: 1 Easy

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

102) The Feline Company has been having some difficulties estimating its manufacturing overhead costs. In the past, manufacturing overhead costs have been related to production levels. However, some production managers have indicated that the size of their production lots might also be having an impact on the amount of their monthly manufacturing overhead costs. In order to investigate this possibility, the company collected information on its monthly manufacturing overhead costs, production in units, and average production lot size for 2020.

 

Month	Production (Units)				Manufacturing Overhead Cost					Average Monthly Production Lot Size
1		75,000			$	925,800					20
2		90,000				843,875					19
3		65,000				910,125					24
4		80,000				946,000					19
5		55,000				879,000					24
6		50,000				825,000					18
7		85,000				960,000					22
8		105,000				1,053,500					25
9		102,000				1,020,000					23
10		68,000				905,000					20
11		75,000				938,000					22
12		95,000				995,000					24

 

Regression analysis results of the information presented above are as follows:

Ordinary regression:

 

Equation:	$691,741 + $3.0692 × units
r-square:	0.628

 

Multiple regression:

 

Equation:	$482,172 + $2.4918 × units + $11,770.939 × lot size
r-square:	0.777

 

Required:

(a.) Use the results from the ordinary regression and estimate next month’s manufacturing overhead costs, assuming the company is planning to produce 92,000 units. (final answer should be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month’s manufacturing costs, assuming the company is planning to produce 92,000 units with an average lot size of 21. (final answer should be rounded to the nearest whole dollar)

(c.) Comment on which regression seems to be more appropriate under these circumstances. What additional information would you like to see? Be specific.

 

Answer:

(a.)

Total manufacturing overhead costs = $691,741 + ($3.0692 × 92,000) = $974,107.

(b.)

Total manufacturing overhead costs = [$482,172 + ($2.4918 × 92,000) + ($11,770.939 × 21)] = $958,607.

(c.)

The multiple regression improves the fit over the ordinary regression. The r-square improves from .628 to .777. Additional information may include tests to determine the significance of the coefficients.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

103) The Ornate Company produces a single product and has total costs ranging from $321,875 (at 20,000 units) to $966,875 (at 80,000 units). Sales volume in 2020 was 32,000, and operating income was $45,125. Ornate’s product is highly specialized; therefore, no units are kept in inventory.

 

Required:

(a.) Determine the cost equation for Ornate’s costs.

(b.) Prepare a contribution margin income statement for 2020 including separate columns for total dollars, per unit dollars, and percentages.

(c.) Determine the break-even point (in units and in dollars).

 

Answer:

(a.)

Variable cost per unit = ($966,875 – $321,875)/(80,000 – 20,000) = $10.75.

Fixed costs = $966,875 – (80,000) ($10.75) = $106,875.

Total Costs = $106,875 + ($10.75 × units).

 

(b.)

Total contribution margin = $45,125 + 106,875 = $152,000.

Total variable costs = $10.75 (32,000) = $344,000.

Total sales = $344,000 + 152,000 = $496,000.

Selling price per unit = $496,000/32,000 = $15.50.

Contribution margin per unit = $152,000/32,000 = $4.75.

Contribution margin ratio = $152,000/$496,000 = 30.645%.

 

	Total			Per Unit			%
Sales	$	496,000		$	15.50			100.000
Variable costs		344,000			10.75			69.355
Contribution margin		152,000		$	4.75			30.645
Fixed costs		106,875
Operating profits	$	45,125

 

(c.)

BE = $106,875/$4.75 = 22,500 units.

BE = $106,875/0.30645 = $348,752 (or 22,500 units × $15.50 = $348,750).

 

22,500 units; $348,750

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

104) Iowa Enterprises had an average cost of $10.75 during a month when 50,000 units were produced. When production doubled several months later, the average cost dropped to $8.25.

 

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 80,000 units?

 

Answer:  Total costs must be used rather than unit costs.

(a.)

Month 1: 50,000 units × $10.75 = $537,500; Month 2: 100,000 × $8.25 = $825,000. Variable cost = ($825,000 – $537,500) / (100,000 – 50,000) = $5.75.

Fixed cost = $825,000 – (100,000 × $5.75) = $250,000.

 

(b.)

$250,000 + ($5.75 × 80,000) = $710,000; $710,000 / 80,000 units = $8.875.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

105) Washington Products had costs of $600,000 when sales equaled 75,000 units. When sales increased by 25,000 units, costs increased by $125,000. The selling price is $9 per unit.

 

Required:

(a.) Determine the fixed and variable portions of costs.

(b.) Prepare a contribution margin income statement for a month with sales of 80,000 units.

 

Answer:

(a.)

Variable cost per unit = $125,000 / 25,000 = $5.00. Fixed cost = $600,000 – (75,000 × $5.00) = $225,000.

 

Total Costs = $225,000 + ($5 × units sold)

 

(b.)

Revenue (80,000 × $9)	$	720,000
Variable costs (80,000 × $5)		400,000
Contribution margin		320,000
Fixed cost		225,000
Operating profit	$	95,000

 

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

106) New Venture, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus contract, with the total to be received equal to the total labor cost + 20%. New Venture found that the first unit of a new product required 120 hours to complete. The second unit was completed using only 114 hours. New Venture believes that the rate of learning that was observed will continue for all 8 units of the contract. The labor wage paid is $25/hour. The following factors are available for various rates of learning: 80% learning, b = –0.3219; 85%, b = –0.2345; 90%, b = –0.1520; 95%, b = –0.0740.

 

Required:

(a.) What will the total labor cost be for the contract?

(b.) What will the total amount of the contract?

 

Answer:

(a.)

The learning rate is 114 hrs/120 hrs = 95% learning rate.

 

Units Produced	Marginal Labor Time	Cumulative Labor Time
1(120 × 1–0.074)	120.00	120.00
2(120 × 2–0.074)	114.00	234.00
3(120 × 3–0.074)	110.63	344.63
4(120 × 4–0.074)	108.30	452.93
5(120 × 5–0.074)	106.53	559.46
6(120 × 6–0.074)	105.10	664.56
7(120 × 7–0.074)	103.91	768.47
8(120 × 8–0.074)	102.89	871.36

 

871.36 hrs × $25 = $21,784

 

(b.)

$21,784 × 120% = $26,140.80

Difficulty: 3 Hard

Topic:  Regression Analysis Using Microsoft Excel (Appendix A)

Learning Objective:  05-09 (Appendix A) Use Microsoft Excel to perform a regression analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

107) Market Products, Inc., has found that new products follow a learning curve. The first two units have been completed with the following results:

 

Units Produced	Marginal Labor Time
1	250.00
2	225.00

 

Required:

(a.) How much time will be needed to complete the 4th unit?

(b.) How much time will be needed to complete the 8th unit?

(c.) How much time will be needed to complete the 16th unit?

 

Answer:  Learning rate = 225/250 = 90%

(a.)

225 × 0.9 = 202.50

(b.)

202.50 × 0.9 = 182.25

(c.)

182.25 × 0.9 = 164.025

Difficulty: 3 Hard

Topic:  Regression Analysis Using Microsoft Excel (Appendix A)

Learning Objective:  05-09 (Appendix A) Use Microsoft Excel to perform a regression analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

108) Clough Company is interested in establishing the relationship between utility costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Utility Costs
January	3,250	$	22,080
February	3,770		25,200
March	2,470		16,200
April	4,030		27,600
May	4,940		33,900
June	4,290		26,400
July	5,330		29,700
August	4,550		27,300
September	2,600		18,600
October	4,810		31,200
November	6,110		37,200
December	5,460		33,300

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	96.5	%
R Square	93.2	%
Adjusted R-Square	92.5	%
Standard Error	1,710.21
Observations	12.00

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	4,472.26	2,019.39	2.21	0.051	–27.23	8971.74
Machine Hours	5.329	0.455	11.70	3.69E–07	4.314	6.343

 

Required:

(a.) What is the equation for utility costs using the regression analysis?

(b.) Does the variable “machine hours” have statistical significance? Explain.

(c.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

 

 

 

Answer:

(a.)

$4,472.26 + ($5.329 × machine hours)

(b.)

Yes, the t-stat of 11.70 exceeds the general rule of thumb of 2.

(c.)

$4,472.26 + ($5.329 × 3,000) = $20,459.26

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

109) Clough Company is interested in establishing the relationship between utility costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:

 

Month	Machine Hours	Utility Costs
January	3,250	$	22,080
February	3,770		25,200
March	2,470		16,200
April	4,030		27,600
May	4,940		33,900
June	4,290		26,400
July	5,330		29,700
August	4,550		27,300
September	2,600		18,600
October	4,810		31,200
November	6,110		37,200
December	5,460		33,300

 

Required:

(a.) What is the equation for utility costs using the high-low method?

(b.) Prepare an estimate of utility costs for a month when 3,000 machine hours are worked.

 

Answer:

(a.)

Variable cost per unit: ($37,200 – $16,200)/(6,110 – 2,470) = $5.7692; Fixed = $37,200 – (6,110 × 5.7692) = $1,950.19

Total Utility Costs = $1,950.19 + ($5.7692 × units)

(b.)

$1,950.19 + (5.7692 × 3,000) = $19,257.79

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

110) Yates Corp. wants to develop a cost equation for its administrative costs. The controller believes the appropriate cost driver is units produced. Last year’s data are presented below:

 

Month	Units Produced				Administrative Costs
January		32,500				$	24,288
February		37,700					27,720
March		24,700					17,820
April		40,300					30,360
May		49,400					37,290
June		42,900					29,040
July		53,300					32,670
August		45,500					30,030
September		26,000					20,460
October		48,100					34,320
November		61,100					40,920
December		54,600					36,630
Total		516,100				$	361,548
Average		43,008				$	30,129

 

Required:

(a.) What is the equation for administrative costs using the high-low method?

(b.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.

 

Answer:

(a.)

Variable cost per unit: ($40,920 – $17,820)/(61,100 – 24,700) = $0.6346; Fixed = $40,920 – (61,100 × 0.6346) = $2,145.94

Total Administrative Costs = $2,145.94 + ($0.6346 × units)

(b.)

$2,145.94 + ($0.6346 × 30,000) = $21,183.94

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

111) Yates Corp. wants to develop a cost equation for its administrative costs. The controller believes the appropriate cost driver is units produced. Last year’s data are presented below:

 

Month	Units Produced			Administrative Costs
January		32,500		$	24,288
February		37,700			27,720
March		24,700			17,820
April		40,300			30,360
May		49,400			37,290
June		42,900			29,040
July		53,300			32,670
August		45,500			30,030
September		26,000			20,460
October		48,100			34,320
November		61,100			40,920
December		54,600			36,630

 

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.965383
R Square	0.931965
Adjusted R-Square	0.925162
Standard Error	1,881.232
Observations	12

 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	4,919.48	2,221.329	2.21	0.051156	–29.9485	9,868.909
Units produced	0.586154	0.050082	11.70	3.69E–07	0.474566	0.697743

 

Required:

(a.) What is the equation for administrative costs using the regression analysis?

(b.) Does the variable “units produced” have statistical significance? Explain.

(c.) Prepare an estimate of administrative costs for a month when 30,000 units are produced.

 

 

 

Answer:

(a.)

Total Administrative Costs = $4,919.48 + ($0.586154 × units)

(b.)

Yes, the t-stat of 11.70 exceeds the general rule of thumb of 2.

(c.)

$4,919.48 + ($0.586154 × 30,000) = $22,504.10

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

112) The Wonder Drug Company’s total overhead costs at various levels of activity are presented below:

 

Month	Direct Labor Hours				Total Overhead
September		15,000			$	472,000
October		12,000				409,400
November		18,000				542,000
December		21,000				604,700

 

Assume that the overhead costs above consist of indirect labor, scheduling salaries, and maintenance. The breakdown of these costs for the month of November is as follows:

 

Indirect labor (V)                                                                                  $219,600

Maintenance (M)                                                                                    197,400

Scheduling Salaries (F)                                                                          125,000

$542,000

 

Required:

(a.) Using the high-low method, determine the cost formula for maintenance.

(b.) Express the company’s total overhead costs in linear equation form.

 

 

 

Answer:

(a.)

Indirect labor per hour = $219,600 / 18,000 = $12.20 per direct labor hour.

Indirect labor cost at the high point = $12.20 (21,000) = $256,200.

Indirect labor cost at the low point = $12.20 (12,000) = $146,400.

Maintenance cost at the high point = $604,700 – 125,000 – 256,200 = $223,500.

Maintenance cost at the low point = $409,400 – 125,000 – 146,400 = $138,000.

Variable Maintenance cost per hour = ($223,500 – $138,000) / (21,000 – 12,000) = $9.50.

Fixed Maintenance cost per month = $223,500 – ($9.50 × 21,000) = $24,000

Total maintenance costs = $24,000 + ($9.50 × Direct Labor Hours).

 

(b.)

Total overhead costs = ($125,000 + $24,000) + ($12.20 + $9.50) × Direct Labor Hours = $149,000 + ($21.70 × Direct Labor Hours).

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

113) The Norcross Company has traditionally estimated manufacturing overhead costs using production volume. Some of the production managers believe that the number of setups may also have an impact on monthly manufacturing overhead costs. In order to investigate this possibility, the company collected information on its monthly manufacturing overhead costs, production in units, and number of setups for 2020.

 

Month	Production (Units)				Manufacturing Overhead Cost				Number of Setups
1		50,000			$	800,100				17
2		65,000				752,500				16
3		40,000				795,100				21
4		55,000				822,750				16
5		30,000				771,225				21
6		25,000				706,200				15
7		60,000				843,000				19
8		80,000				935,200				22
9		77,000				901,750				20
10		43,000				786,400				17
11		50,000				819,600				19
12		70,000				880,900				21

 

Regression analysis results of the information presented above are as follows:

Ordinary regression:

Equation: $650,398 + $3.1061 × units

r-square: .707

Multiple regression:

Equation: [$464,481 + ($2.5356 × units)] + [($11,631.6048 × number of set ups)]

r-square: .867

 

Required:

(a.) Use the results from the ordinary regression and estimate next month’s manufacturing overhead costs, assuming the company is planning to produce 75,000 units. (final answer should be rounded to the nearest whole dollar)

(b.) Use the results from the multiple regression and estimate the next month’s manufacturing overhead costs, assuming the company is planning to produce 75,000 units with 18 set ups. (final answer should be rounded to the nearest whole dollar)

(c.) Comment on which regression seems to be more appropriate under these circumstances. What additional information would you like to see? Be specific.

 

 

 

Answer:

(a.)

Total manufacturing overhead costs = $650,398 + ($3.1061 × 75,000) = $883,356.

(b.)

Total manufacturing overhead costs = [$464,481 + ($2.5356 × 75,000)] + [($11,631.6048 × 18)] = $864,020

(c.)

The multiple regression improves the fit over the ordinary regression. The r-square improves from .707 to .867. Additional information may include tests to determine the significance of the coefficients.

Difficulty: 3 Hard

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

114) Barnard Enterprises had an average cost of $8.60 during a month when 75,000 units were produced. When production was 125,000 units several months later, the average cost dropped to $6.98.

 

Required:

(a.) Determine the fixed and variable portions of production costs.

(b.) What will unit cost be when production equals 110,000 units?

 

Answer:  Total costs must be used rather than unit costs.

(a.)

Month 1: 75,000 units × $8.60 = $645,000; Month 2: 125,000 × $6.98 = $872,500.

Variable cost per unit = ($872,500 – $645,000) / (125,000 – 75,000) = $4.55.

Fixed cost = $872,500 – (125,000 × $4.55) = $303,750.

Total production costs = $303,750 (FC) + ($4.55 × units).

(b.)

$303,750 + ($4.55 × 110,000) = $804,250; $804,250 / 110,000 units = $7.3114.

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

115) Doran Products had costs of $950,000 when sales equaled 55,000 units. When sales increased to 85,000 units, total costs increased to $1,400,000. The selling price is $21 per unit.

 

Required:

(a.) Determine the fixed and variable portions of total costs.

(b.) Prepare a contribution margin income statement for a month with sales of 70,000 units.

 

Answer:

(a.)

Variable cost per unit = ($1,400,000 – 950,000) / (85,000 – 55,000) = $15.00. Fixed cost = $950,000 – (55,000 × $15.00) = $125,000.

 

Total Costs = $125,000 + ($15 × units sold)

 

(b.)

Revenue (70,000 × $21)                                                       $   1,470,000

Variable costs (70,000 × $15)                                                   1,050,000

Contribution margin                                                                     420,000

Fixed cost                                                                                     125,000

Operating profit                                                                   $      295,000

Difficulty: 3 Hard

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

116) Markham, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus contract, with the total to be received equal to the total labor cost + 30%. Markham found that the first unit of a new product required 90 hours to complete. The second unit was completed using only 76.5 hours. Markham believes that the rate of learning that was observed will continue for all 8 units of the contract. The labor wage paid is $40/hour. The following factors are available for various rates of learning: 80% learning, b = −0.3219; 85%, b = −0.2345; 90%, b = −0.1520; 95%, b = −0.0740.

 

Required:

(a.) What will the total labor cost be for the contract?f

(b.) What will be the total amount of the contract?

 

Answer:

(a.)

The learning rate is 76.5 hrs/90 hrs = 85% learning rate.

 

Units Produced	Marginal Labor Time	Cumulative Labor Time
1(90 × 1–0.2345)	90.00	90.00
2(90 × 2–0.2345)	76.50	166.50
3(90 × 3–0.2345)	69.56	236.06
4(90 × 4–0.2345)	65.02	301.08
5(90 × 5–0.2345)	61.71	362.79
6(90 × 6–0.2345)	59.12	421.91
7(90 × 7–0.2345)	57.03	478.94
8(90 × 8–0.2345)	55.27	534.21

 

534.21 hrs × $40 = $21,368.40

 

(b.)

$21,368.40 × 130% = $27,778.92

Difficulty: 3 Hard

Topic:  Regression Analysis Using Microsoft Excel (Appendix A)

Learning Objective:  05-09 (Appendix A) Use Microsoft Excel to perform a regression analysis.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

117) Woodman Products, Inc., has found that new products follow a learning curve. The first two units have been completed with the following results:

 

Units Produced	Marginal Labor Time
1	112.50
2	90.00

 

Required:

(a.) How much time will be needed to complete the 4th unit?

(b.) How much time will be needed to complete the 8th unit?

(c.) How much time will be needed to complete the 16th unit?

 

Answer:  Learning rate = 90/112.5 = 80%

(a.)

90 × 0.8 = 72.00 hours

(b.)

72.00 × 0.8 = 57.60 hours

(c.)

57.60 × 0.8 = 46.08 hours

Difficulty: 3 Hard

Topic:  Regression Analysis Using Microsoft Excel (Appendix A)

Learning Objective:  05-09 (Appendix A) Use Microsoft Excel to perform a regression analysis.

Bloom’s:  Apply

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

118) Below are several examples of costs that are labeled fixed or variable according to their typical accounting designations. Under which circumstances would any of these costs behave in a manner opposite to that listed?

 

1. Direct labor—variable.
2. Equipment depreciation—fixed.
3. Utilities (with a minimum charge)—variable.
4. Supervisory salaries—fixed.
5. Indirect materials purchased in given lot sizes that become spoiled within a few days—variable.

 

Answer:

a.

Direct labor would be fixed if a union contract limited the company’s ability to lay off unneeded personnel or if management were contemplating a change in facilities but maintaining the same labor force.

b.

Equipment depreciation would be a variable cost if computed on a unit-of-production basis.

c.

Utilities are variable above the minimum, but if the company’s usage falls to the minimum or below, the costs would be fixed.

d.

Supervisory salaries normally increase in steps. If the activity range is narrow, the costs are fixed; but if the range is wide enough so that several “steps” would fall within the range, then the costs would appear to be variable.

e.

A certain (fixed) level of spoilage may be a fact of life in some operations. An example might be certain waste that occurs in setting up machines.

Difficulty: 2 Medium

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

119) When using past data to predict a cost that has fixed and variable components, it is possible to have an equation with a negative intercept. Does this mean that at a zero production level, the company will make money on its fixed costs? Explain.

 

Answer:  It is possible for empirical data to show a negative intercept even though fixed costs cannot be negative. It may be that the slope of the cost curve is particularly steep over the values used in the estimation process. It may be that the operations are relatively far away from the intercept. This would be particularly likely if the company were operating close to capacity. Negative intercepts usually mean that there is some error in the specification of the cost estimate. If the company is operating close to capacity, for example, then the assumption of a linear cost function may be in error—or may only be a reasonable approximation in the range of activity close to capacity.

Difficulty: 2 Medium

Topic:  Basic Cost Behavior Patterns

Learning Objective:  05-01 Understand the reasons for estimating fixed and variable costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

120) Describe the engineering method of cost estimation. Provide two advantages and two disadvantages associated with the engineering approach to cost estimation.

 

Answer:  The engineering method is based on what needs to be performed in order to produce a good or service. One advantage is it can detail each step required to perform the operation; a second advantage is it does not require data from prior activities—it can be used for new activities. One disadvantage is it can be expensive to conduct since it evaluates every activity; a second disadvantage is the estimates are often based on optimal conditions.

Difficulty: 2 Medium

Topic:  Engineering Method

Learning Objective:  05-02 Estimate costs using engineering estimates.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

121) Explain the difference between the engineering method of cost estimation and the account analysis method.

 

Answer:  The engineering method is based on what must be done to perform an activity; the account analysis analyzes what was done in the past to perform the activity. Engineering is what should, account analysis is what was.

Difficulty: 2 Medium

Topic:  Engineering Method; Account Analysis Method

Learning Objective:  05-02 Estimate costs using engineering estimates.; 05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

122) When preparing cost estimates for account analysis purposes, should the costs be extracted from the historical accounting records?

 

Answer:  Data in the historical accounting records should only be used as long as similar trends are likely to continue in the future. In periods of price instability or technological innovation, use of the historical data without adjustment is likely to result in incorrect estimates. A better alternative is to use the costs that are expected to be incurred during the period for which the cost estimate is prepared.

Difficulty: 2 Medium

Topic:  Account Analysis Method

Learning Objective:  05-03 Estimate costs using account analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

123) Describe two advantages and two disadvantages of the high-low method of cost estimation.

 

Answer:  Advantages:

(1) only requires two data points.

(2) easy to apply.

 

Disadvantages:

(1) most of the information available is ignored.

(2) high and low points may not be representative of typical activity.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

124) Is it possible to compensate for the effects of price instability when preparing cost estimates using high-low or regression techniques?

 

Answer:  Yes, possible ways include:

∙ Adjusting the data to present all costs in some common dollar measure;

∙ Using activity measures that are expressed in dollars that move with the price change effects in the cost to be estimated;

∙ Using a multiple regression approach with a suitable price index as one of the predictor variables.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-04 Estimate costs using statistical analysis.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

125) J.C. Riley, who owns Riley’s Auto Repair Shop is trying to determine whether the company’s advertising program is successful. He has used a spreadsheet program to estimate the relationship between advertising expenditures and sales dollars. Monthly data for the past two years were entered into the program. The regression results indicated the following:

Sales dollars = $169, 000 − ($200 × Advertising expenditures)

Correlation coefficient = −0.864

To J.C., the results imply that advertising is actually reducing sales. Can you help explain to him what might cause the negative relationship between advertising expenditures and sales?

 

Answer:  This is a frequently encountered problem when applying analytical techniques to certain costs. Quite often the advertising expenditures result in sales being generated in the following month or so. In addition, many companies increase their advertising when sales are declining and cut back on advertising when there is capacity business. A better model might be developed by relating this month’s sales to last month’s advertising.

Similar problems can also exist for repair and maintenance costs. This is because machines are usually given routine repairs and maintenance during slow periods.

Difficulty: 2 Medium

Topic:  Statistical Cost Estimation

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

126) Southside Hospital is trying to get a better idea of the costs in its cardiac surgical unit. Unit cost data for supplies, labor, etc. have been collected for a three-year period. After analyzing the data using Excel, the following output was generated, based on 1,500 procedures.

Intercept = $2,169, 000

Coefficient on procedures $972

Correlation coefficient = 0.448

R2 = 0.189

The controller asks you for advice on whether to rely on this estimate. Based on the output, what would you say?

 

Answer:  Since the R2 for the equation is only 18.9%, this is very low for this type of regression. The controller might want to consider other methods.

More than likely, the problem centers on the amount of variation in the nature of procedures, such that the estimate of an average procedure cost is not very precise or reliable. By their very nature, an open-heart triple bypass surgery will be much more costly, and require different drivers, than a heart catheterization where the patient requires no overnight hospital stay.

Difficulty: 2 Medium

Topic:  Obtaining Regression Estimates

Learning Objective:  05-05 Interpret the results of regression output.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

127) What are “outliers” and what effect does their presence have when using regression analysis for cost estimation?

 

Answer:  An outlier is a data point that lies a significant distance away from the regression line. Since the regression line is computed so the sum of the square of each error (distance between the predicted value and the actual value) is minimized, one point situated at an extreme distance will cause a very large impact on estimating the regression line.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

128) Describe the effect on cost estimation of four of the following five problems: 1) missing data, 2) outliers, 3) allocated and discretionary costs, 4) inflation, or 5) mismatched time periods.

 

Answer:  Students should choose any 4 of the 5:

 

1) Missing data: Depending on the data, this could have little impact (if the data are representative) or have a very large impact (if the data include extreme values).

2) Outliers: Extreme observations can unduly affect the cost estimates. Since regression minimizes the sum of the square of the errors, the outlier has a larger impact on the estimation than a more representative point.

3) Allocated and discretionary costs: An allocated cost may in fact be fixed, but the allocation relates it to activity, so it will appear variable. Discretionary cost behavior may be budgeted so that it appears variable.

4) Inflation: Historical data will not reflect future cost behavior due to changing prices.

5) Mismatched time periods: This will cause inaccuracies in relating cost with the activity. The cost will be for one period, the activity will be from a different period.

Difficulty: 2 Medium

Topic:  Practical Implementation Problems

Learning Objective:  05-06 Identify potential problems with regression data.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

129) Your manager asks you for a cost estimate to open a new retail outlet and says, “I want you to use statistical analysis, so it will be objective because it is based on real data.” How would you respond?

 

Answer:  It is certainly possible that for this example a statistical analysis is best. However, it depends on the goal of the analysis. Good data might not be available. For example, the new outlet might be located in an area in which the company has no operations. In addition, historical data might not be representative of the future. It would be best to use a combination of methods and compare the estimates.

Difficulty: 2 Medium

Topic:  How is an Estimation Method Chosen?

Learning Objective:  05-08 Evaluate the advantages and disadvantages of alternative cost estimation methods.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

130) Fast-food restaurants, like Taco Bell and McDonalds, are known for high employee turnover, high quality, and low costs. Using your knowledge of the learning phenomenon, how do these fast-food chains get high quality and low costs when they have so much employee turnover?

 

Answer:  These chains use standardized techniques and processes that are able to transmit information to employees effectively so that they can learn quickly and learn on the job.

Difficulty: 2 Medium

Topic:  Learning Phenomenon

Learning Objective:  05-07 Incorporate the effects of learning when estimating costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

131) Assume that as part of their recent merger, Dell and EMC are perfecting a new device that will access and coordinate the internet of things. The new company is interested in estimating the impact of learning on the cost of producing this new device and plan to use data from previous products to estimate the learning parameter. What are the advantages of doing this? What are the disadvantages?

 

Answer:  Data from previous products, which are likely to be similar, provide information about how learning might affect the cost of the new product. The disadvantage is that the products are different and these differences might lead to learning rates that are different and, as a result, cost estimates that are not realistic. Also, since Dell is primarily a hardware company and EMC primarily works with digital or cloud-based solutions, the learning curve of these two different environments are very different in functionality and may result in unrealistic results.

Difficulty: 2 Medium

Topic:  Learning Phenomenon

Learning Objective:  05-07 Incorporate the effects of learning when estimating costs.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation