Managerial Accounting Creating Value in a Dynamic Business Environment Ronald Hilton 11e - Test Bank

Managerial Accounting Creating Value in a Dynamic Business Environment Ronald Hilton 11e – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

Chapter 06

Activity Analysis, Cost Behavior, and Cost Estimation

True / False Questions

The determination of cost behavior is called a cost prediction.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01

Feedback True: This statement is incorrect regarding the relevant range.

Feedback False: Correct! The determination of cost behavior is called cost estimation.

Cost estimation typically focuses on the future.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01

Feedback True: This statement is incorrect because cost estimation often focuses on historical data.

Feedback False: Correct! Cost estimation often focuses on historical data; cost prediction focuses on the future.

Variable costs change in direct proportion to a change in the activity level.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02

Feedback True: Correct! Variable costs change in direct proportion to a change in the activity level.

Feedback False: It is true that variable costs change in direct proportion to a change in the activity level.

Cost that are nearly variable, but increase in small steps instead of continuously are called step-variable costs.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02

Feedback True: Correct! Step-variable costs include mostly variable inputs, but increase in small steps rather than continuously.

Feedback False: This statement is true and the definition of step-variable costs.

The relevant range is that range of activity where a company achieves its maximum efficiency.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03

Feedback True: This statement is incorrect regarding the relevant range.

Feedback False: Correct! This statement is false regarding relevant range.

If the organization operates at an activity level outside the relevant range, any cost predictions based on data from the relevant range may not be very accurate.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03

Feedback True: Correct! Data outside the relevant range may not yield accurate cost predictions.

Feedback False: This statement is true regarding cost predictions with data outside the relevant range.

A committed cost results from a management decision to spend a particular amount of money for some purpose.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback True: This statement is false.

Feedback False: Correct! A discretionary cost rather than a committed cost results from a management decision to spend a particular amount of money for some purpose.

An example of a discretionary cost is the cost of research and development.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback True: Correct! Research and development costs are discretional costs.

Feedback False: This statement is true.

The least-squares regression method of cost estimation relies on only two data points.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback True: This does not describe least-squares regression.

Feedback False: Correct! This statement about least-squares regression is incorrect.

In regression analysis, the variable that is being predicted is known as the independent variable.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback True: This variable is not the independent variable.

Feedback False: Correct! This variable is not the independent variable.

Multiple regression is a statistical method that estimates a linear (straight-line) relationship between one dependent variable and one independent variable.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-06

Feedback True: This statement is false because multiple regression estimates the relationship between one dependent variable and two or more independent variables.

Feedback False: Correct! Multiple regression is a statistical method that estimates a linear (straight-line) relationship between one dependent variable and two or more independent variables.

When the engineering method is applied to costs other than labor, it is referred to as the experience method.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-06

Feedback True: This statement is false.

Feedback False: Correct! When the learning-curve approach is applied to costs other than labor, it is referred to as the experience-curve approach.

Mismatched time periods are not issues in the collection of data for cost estimation.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-07

Feedback True: This statement is incorrect.

Feedback False: Correct! Mismatched time periods is an issue in the collection of data for cost estimation.

Outliers are a common data collection problem.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-07

Feedback True: Correct! Outliers are a common data collection problem.

Feedback False: This statement is true.

In the least-squares regression method, the cost line is estimated so as to maximize the sum of the squared deviations between the cost line and the data points.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-08

Feedback True: This statement is incorrect.

Feedback False: Correct! In the least-squares regression method, the cost line is estimated so as to minimize the sum of the squared deviations between the cost line and the data points.

The slope of a regression line measures how steeply the cost line rises as activity increases.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-08

Feedback True: Correct! This statement provides an accurate description of the slope of a regression line.

Feedback False: This statement is true.

Multiple Choice Questions

The relationship between cost and activity is known as:
A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01
Feedback A: Cost estimation is not the relationship between cost and activity.

Feedback B: Cost prediction is not the relationship between cost and activity.

Feedback C: Correct! Cost behavior is the relationship between cost and activity.

Feedback D: Cost analysis is not the relationship between cost and activity.

Feedback E: Cost approximation is not the relationship between cost and activity.

A forecast of a cost at a particular level of activity is known as:
A.cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-01
Feedback A: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback B: Correct! Cost prediction is a forecast of a cost at a particular level of activity.

Feedback C: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback D: This is not the correct term for a forecast of a cost at a particular level of activity.

Feedback E: This is not the correct term for a forecast of a cost at a particular level of activity.

Which of the following costs changes in direct proportion to a change in the activity level?
A.Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Step-fixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: Correct! Variable cost changes in direct proportion to a change in activity level.

Feedback B: Fixed cost does not behave in this manner.

Feedback C: Semivariable cost does not behave in this manner.

Feedback D: Step-variable cost does not behave in this manner.

Feedback E: Step-fixed cost does not behave in this manner.

Macon Company has a variable selling cost. If sales volume increases, how will the total variable cost and the variable cost per unit behave?

	Total Variable Cost	Variable Cost Per Unit
A.	Increase	Increase
B.	Increase	Remain constant
C.	Increase	Decrease
D.	Remain constant	Decrease
E.	Decrease	Increase

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This pair of relationships is incorrect.

Feedback B: Correct! If sales volume increases, total variable cost will increase and variable cost per unit will remain constant.

Feedback C: This pair of relationships is incorrect.

Feedback D: This pair of relationships is incorrect.

Feedback E: This pair of relationships is incorrect.

What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units)	Cost Per Unit
50,000	$1.95
70,000	1.95

Variable cost.
B.Fixed cost.
C. Semivariable cost.
D. Discretionary fixed cost.
E. Step-fixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: Correct! Variable costs are shown.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Paige Corporation observed that when 25,000 units were sold, a particular cost amounted to $75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e., $3.00 per unit). The cost that Paige is studying can best be described as a:
A.variable cost.
B. fixed cost.
C. semivariable cost.
D. discretionary fixed cost.
E. step-fixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: Correct! This cost is a variable cost.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

When graphed, a typical variable cost appears as:
A.a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: Correct! A typical variable cost appears as a diagonal line that slopes upward to the right.

Norman Company pays a sales commission of 4% on each unit sold. If a graph is prepared, with the vertical axis representing per-unit cost and the horizontal axis representing units sold, how would a line that depicts sales commissions be drawn?
A.As a straight diagonal line, sloping upward to the right.
B. As a straight diagonal line, sloping downward to the right.
C. As a horizontal line.
D. As a vertical line.
E. As a curvilinear line.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: Correct! The line that depicts sales commissions would be drawn as a horizontal line.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

A company observed a decrease in the cost per unit. All other things being equal, which of the following is most likely true?
A.The company is studying a variable cost, and total volume has increased.
B. The company is studying a variable cost, and total volume has decreased.
C. The company is studying a fixed cost, and total volume has increased.
D. The company is studying a fixed cost, and total volume has decreased.
E. The company is studying a fixed cost, and total volume has remained constant.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! The company is studying a fixed cost, and total volume has increased.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Ralston has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead, $165,000; fixed overhead, $250,000. If Ralston now revises its anticipated production slightly upward, it would expect:
A.total fixed overhead of $250,000 and a lower hourly rate for variable overhead.
B. total fixed overhead of $250,000 and the same hourly rate for variable overhead.
C. total fixed overhead of $250,000 and a higher hourly rate for variable overhead.
D. total variable overhead of less than $165,000 and a lower hourly rate for variable overhead.
E. total variable overhead of less than $165,000 and a higher hourly rate for variable overhead.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This statement is incorrect.

Feedback B: Correct! If Ralston revises it anticipated production slightly upward, it would expect total fixed overhead of $250,000 and the same hourly rate for variable overhead.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units)	Total Cost	Cost Per Unit
50,000	$150,000	$3.00
80,000	150,000	1.88

Variable cost.
B.Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Mixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: Correct! This is the cost behavior of a fixed cost.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

When graphed, a typical fixed cost appears as:
A.a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: Correct! A typical fixed cost appears as a horizontal line when graphed.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Straight-line depreciation is a typical example of a:
A.variable cost.
B. step-variable cost.
C. fixed cost.
D. mixed cost.
E. curvilinear cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: Correct! Straight-line depreciation is a typical example of a fixed cost.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Which of the following choices denotes the typical cost behavior of advertising and sales commissions?

	Advertising	Sales Commissions
A.	Variable	Variable
B.	Variable	Fixed
C.	Fixed	Variable
D.	Fixed	Fixed
E.	Semivariable	Variable

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This relationship is incorrect.

Feedback B: This relationship is incorrect.

Feedback C: Correct! The typical cost behavior of advertising is fixed and sales commissions are variable.

Feedback D: This relationship is incorrect.

Feedback E: This relationship is incorrect.

Costs that remain the same over a wide range of activity, but jump to a different amount outside that range, are known as:
A.step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
E. mixed costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: Correct! These are step-fixed costs.

Feedback B: This cost is incorrect.

Feedback C: This cost is incorrect.

Feedback D: This cost is incorrect.

Feedback E: This cost is incorrect.

When graphed, a typical step-fixed cost appears as:
A.a horizontal line.
B. a vertical line.
C. a series of staggered horizontal lines
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: Correct! A typical step-fixed cost appears as a series of staggered horizontal lines when graphed.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Each of Boggart’s production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Boggart’s salary cost can best be described as a:
A.variable cost.
B. semivariable cost.
C. step-variable cost.
D. fixed cost.
E. step-fixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: Correct! Boggart’s salary cost can best be described as a step-fixed cost.

Sophie Corporation recently produced and sold 100,000 units. Fixed costs at this level of activity amounted to $50,000; variable costs were $100,000. How much cost would the company anticipate if during the next period it produced and sold 102,000 units?
A.$150,000.
B. $151,000.
C. $152,000.
D. $153,000.
E. None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02
Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Variable cost per unit = $100,000 / 100,000 units = $1 per unit; $102,000 + $50,000 = $152,000.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

Organize, Inc. has only variable costs and fixed costs. A review of the company’s records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $800,000 and the cost per unit manufactured totaled $11. On the basis of this information, how much cost would the firm anticipate at an activity level of 205,000 units?
A.$2,235,000.
B. $2,222,000.
C. $2,214,000.
D. $2,200,000.
E. None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02
Feedback A: Correct! Variable cost per unit = (200,000 x $11) – $800,000 = $1,400,000 ÷ 200,000 = $7;

Anticipated level of 205,000 units: ($7 x 205,000) + $800,000 = $2,235,000.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

A review of Parson Corporation’s accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parson anticipate at a volume of 85,000 units?
A.$1,020,000.
B. $1,040,000.
C. $1,060,000.
D. $1,080,000.
E. None of the answers is correct.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-02
Feedback A: This amount is incorrect.

Feedback B: Correct! Fixed costs = 90,000 x $4 = $360,000; Total cost = Total Variable + Total fixed = (85,000 x $8) + $360,000 = $1,040,000.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

A cost that has both a fixed and variable component is known as a:
A.step-fixed cost.
B. step-variable cost.
C. semivariable cost.
D. curvilinear cost.
E. discretionary cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is incorrect.

Feedback B: This is incorrect.

Feedback C: Correct! A cost that is both fixed and variable is called semivariable.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

A mixed cost is also known as a:
A.semivariable cost.
B. step-fixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: Correct! A mixed cost is also known as a semivariable cost.

Feedback B: This is incorrect.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Brock Morton has a fast-food franchise and must pay a franchise fee of $45,000 plus 4% of gross sales. In terms of cost behavior, the fee is known as a:
A.variable cost.
B. fixed cost.
C. step-fixed cost.
D. semivariable cost.
E. curvilinear cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This fee is not a variable cost.

Feedback B: This fee is not a fixed cost.

Feedback C: This fee is not a step-fixed cost.

Feedback D: Correct! This cost is known as a semivariable cost.

Feedback E: This fee is not a curvilinear cost.

Which of the following is (are) example(s) of a mixed cost?
I. A building that is used for both manufacturing and sales activities.
II. An employee’s compensation, which consists of a flat salary plus a commission.
III. Depreciation that relates to five different machines.
IV. Maintenance cost that must be split between sales and administrative offices.
A.I only.
B. II only.
C. I and III.
D. I, III, and IV.
E. I, II, III, and IV.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This is not a mixed cost.

Feedback B: Correct! An employee’s compensation, consisting of a flat salary plus a commission, is a mixed cost.

Feedback C: These are not mixed costs.

Feedback D: These are not mixed costs.

Feedback E: Not all of these are mixed costs.

Which of the following costs exhibits both decreasing and increasing marginal costs over a specific range of activity?
A.Semivariable cost.
B. Curvilinear cost.
C. Step-fixed cost.
D. Step-variable cost.
E. Fixed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02
Feedback A: This cost is incorrect.

Feedback B: Correct! Curvilinear costs exhibit both decreasing and increasing marginal costs over a specific range of activity.

Feedback C: This cost is incorrect.

Feedback D: This cost is incorrect.

Feedback E: This cost is incorrect.

The relevant range is that range of activity:
A.where a company achieves its maximum efficiency.
B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03
Feedback A: This statement is incorrect.

Feedback B: This statement is incorrect.

Feedback C: Correct! The relevant range is that range of activity where management expects the firm to operate.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Within the relevant range of activity, costs:
A.can be estimated with reasonable accuracy.
B. can be expected to change radically.
C. exhibit decreasing marginal cost patterns.
D. exhibit increasing marginal cost patterns.
E. cannot be estimated satisfactorily.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium
Learning Objective: 06-03
Feedback A: Correct! Within the relevant range of activity, costs can be estimated with reasonable accuracy.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

Within the relevant range, a curvilinear cost function can sometimes be graphed as a:
A.sloping straight line.
B. jagged line.
C. vertical straight line.
D. curved line.
E. horizontal straight line.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-03
Feedback A: Correct! Within the relevant range a curvilinear cost function can sometime be graphed as a sloping straight line.

Feedback B: This statement is incorrect.

Feedback C: This statement is incorrect.

Feedback D: This statement is incorrect.

Feedback E: This statement is incorrect.

A variable cost that has a definitive physical relationship to the activity measure is called a (n):
A.discretionary cost.
B. engineered cost.
C. managed cost.
D. programmed cost.
E. committed cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

Feedback A: This is an incorrect cost type.

Feedback B: Correct! A variable cost that has a definitive physical relationship to the activity measure is called an engineered cost.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

Costs that result from a company’s ownership or use of facilities and its basic organizational structure are known as:
A.discretionary fixed costs.
B. committed fixed costs.
C. discretionary variable costs.
D. committed variable costs.
E. engineered costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is an incorrect cost type.

Feedback B: Correct! Costs that result from a company’s ownership or use of facilities and its basic organization structure are known as committed fixed costs.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

Property taxes are an example of a (n):
A.committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: Correct! Property taxes are an example of a committed fixed cost.

Feedback B: This is an incorrect cost type.

Feedback C: This is an incorrect cost type.

Feedback D: This is an incorrect cost type.

Feedback E: This is an incorrect cost type.

Which of the following is not an example of a committed fixed cost?
A.Property taxes.
B. Depreciation on buildings.
C. Salaries of management personnel.
D. Outlays for advertising programs.
E. Equipment rental costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is a committed fixed cost.

Feedback B: This is a committed fixed cost.

Feedback C: This is a committed fixed cost.

Feedback D: Correct! This is not an example of a committed fixed cost.

Feedback E: This is a committed fixed cost.

Committed fixed costs would include:
A.advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is not a committed fixed cost.

Feedback B: This is not a committed fixed cost.

Feedback C: Correct! Depreciation on buildings and equipment is a committed fixed cost.

Feedback D: This is not a committed fixed cost.

Feedback E: This is not a committed fixed cost.

Amounts spent for charitable contributions are an example of a (n):
A.committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This is not a committed fixed cost.

Feedback B: This is not a committed variable cost.

Feedback C: Correct! Charitable contributions are an example of a discretionary fixed cost.

Feedback D: This is not a discretionary variable cost.

Feedback E: This is not an engineered cost.

Which of the following would not typically be classified as a discretionary fixed cost?
A.Equipment depreciation.
B. Employee development (education) programs.
C. Advertising.
D. Outlays for research and development.
E. Charitable contributions.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: Correct! Equipment depreciation would not typically be classified as a discretionary fixed cost.

Feedback B: This would typically be classified as a discretionary fixed cost.

Feedback C: This would typically be classified as a discretionary fixed cost.

Feedback D: This would typically be classified as a discretionary fixed cost.

Feedback E: This would typically be classified as a discretionary fixed cost.

Which of the following choices correctly classifies a committed fixed cost and a discretionary fixed cost?

	Committed	Discretionary
A.	Promotion	Management salaries
B.	Building depreciation	Charitable contributions
C.	Management training	Property taxes
D.	Equipment rentals	Equipment depreciation
E.	Research and development	Advertising

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04

Feedback A: This pair of costs is incorrect.

Feedback B: Correct! Building depreciation is classified as a committed fixed cost and charitable contributions are discretionary fixed costs.

Feedback C: This pair of costs is incorrect.

Feedback D: This pair of costs is incorrect.

Feedback E: This pair of costs is incorrect.

Which type of fixed cost (1) tends to be more long-term in nature and (2) can be cut back more easily in bad economic times without doing serious harm to organizational goals and objectives?

	Long Term in Nature	Can be Cut Back More Easily In Bad Economic Times
A.	Committed	Committed
B.	Committed	Discretionary
C.	Discretionary	Committed
D.	Discretionary	Discretionary
E.	Committed	No difference between committed and discretionary

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium

Learning Objective: 06-04

Feedback A: These costs do not match the definitions given.

Feedback B: Correct! Fixed costs that are long-term in nature are committed and those that can be cut back more easily in bad economic times are discretionary.

Feedback C: These costs do not match the definitions given.

Feedback D: These costs do not match the definitions given.

Feedback E: These costs do not match the definitions given.

Which of the following techniques is not used to analyze cost behavior?
A.Least-squares regression.
B. High-low method.
C. Visual-fit method.
D. Linear programming.
E. Multiple regression.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05
Learning Objective: 06-06

Feedback A: This technique is used to analyze cost behavior.

Feedback B: This technique is used to analyze cost behavior.

Feedback C: This technique is used to analyze cost behavior.

Feedback D: Correct! Linear programming is not used to analyze cost behavior.

Feedback E: This technique is used to analyze cost behavior.

The high-low method and least-squares regression are used by accountants to:
A.evaluate divisional managers for purposes of raises and promotions.
B. choose among alternative courses of action.
C. maximize output.
D. estimate costs.
E. control operations.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This is not a correct used of these two techniques.

Feedback B: This is not a correct used of these two techniques.

Feedback C: This is not a correct used of these two techniques.

Feedback D: Correct! Both of these techniques are used by accountants to estimate costs.

Feedback E: This is not a correct used of these two techniques.

Which of the following statements about the visual-fit method is (are) true?
I. The method results in the creation of a scatter diagram.
II. The method is not totally objective because of the manner in which the cost line is determined.
III. The method is especially helpful in the determination of outliers.
A.I only.
B. II only.
C. I and II.
D. I and III.
E. I, II, and III.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Feedback A: While this statement is true, there is a better answer.

Feedback B: While this statement is true, there is a better answer.

Feedback C: While these statements are true, there is a better answer.

Feedback D: While these statements are true, there is a better answer.

Feedback E: Correct! All of these statement are true regarding the visual-fit method.

The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the:
A.least-squares regression method.
B. high-low method.
C. visual-fit method.
D. account analysis method.
E. multiple regression method.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This is not the definition of this method.

Feedback B: This is not the definition of this method.

Feedback C: Correct! The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the visual-fit method.

Feedback D: This is not the definition of this method.

Feedback E: This is not the definition of this method.

Which of the following methods of cost estimation relies on only two data points?
A.Least-squares regression.
B. The high-low method.
C. The visual-fit method.
D. Account analysis.
E. Multiple regression.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This method uses more than two data points.

Feedback B: Correct! The high-low method relies on only two data points.

Feedback C: This method uses more than two data points.

Feedback D: This method uses more than two data points.

Feedback E: This method uses more than two data points.

Use the following information to answer Questions 59-61.

Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of $360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the high-low method to analyze costs.

Fulton’s variable cost per copy is:
A.$0.040.
B. $0.051.
C. $0.053.
D. $0.056.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) = ($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

Fulton’s monthly fixed fee is:
A.$80.
B. $102.
C. $106.
D. $112.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: Correct! Variable costs (using the low level) = 5,000 x $0.040 = $200; Total costs – variable costs = fixed costs (or $280 – $200 = $80); alternatively, Variable costs (using the high level): 7,000 x $0.04 = $280; Total costs – variable costs = fixed costs (or $360 – $280 = $80.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

How much would Fulton pay if it made 5,500 copies?
A.$382.50.
B. $322.
C. $300.
D. $292.50
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! The variable cost per unit is (High – Low costs) ÷ (High – Low Units) = ($360 – $280) ÷ (7,000 – 5,000) = $0.04 per copy. Variable costs (using the low level) = 5,000 x $0.040 = $200; Total costs – variable costs = fixed costs (or $280 – $200 = $80)

Units x Variable cost per unit + Fixed costs = (5,500 x $0.04) + $80 = $300.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

Use the following information to answer Questions 62-64.

Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company’s utilities cost. The company’s relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year:

Month	Utilities	Machine Hours
January	$8,700	800
February	8,360	720
March	8,950	810
April	9,360	920
May	9,625	950
June	9,150	900

The variable utilities cost per machine hour for Barkoff is:
A.$0.18.
B. $4.50.
C. $5.00.
D. $5.50.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! (High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-720) = $1,265 ÷ 230 = $5.50 variable cost per unit

Feedback E: This answer is wrong, because there is a correct amount listed.

The fixed utilities cost per month for Barkoff is:
A.$3,764.
B. $4,400.
C. $4,760.
D. $5,100.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: Correct!

(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-720) = $1,265 ÷ 230 = $5.50 variable cost per unit

Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed costs (or $9,625 – $5,225 = $4,400).

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

Using the high-low method, the utilities cost for Barkoff associated with 980 machine hours would be:
A.$9,510.
B. $9,660.
C. $9,700.
D. $9,790.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct!

(High – Low costs) ÷ (High – Low Units) = ($9,625 – $8,360) ÷ (950-720) = $1,265 ÷ 230 = $5.50 variable cost per unit

Variable costs (using the high level) = 950 x $5.50 = $5,225; Total costs – variable costs = fixed costs (or $9,625 – $5,225 = $4,400).

At the anticipated 980 machine hours: (980 x $5.50) + $4,400 = $5,390 + $4,400 = $9,790.

Feedback E: This answer is wrong, because there is a correct amount listed.

Use the following information to answer Questions 65-67.

Swan, Inc. uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40.

On the basis of this information, the variable cost per machine hour for Swan was:
A.$8.40.
B. $22.00.
C. $25.00.
D. $30.40.
E. $33.40.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: Correct! Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000 = $8.40.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

On the basis of this information, the fixed cost for Swan was:
A.$184,800.
B. $210,000.
C. $550,000.
D. $734,800.
E. $760,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct!

Variable cost per machine hour = (High level cost – Low level cost) ÷ (High units – Low units) = [($30.40 x 25,000) – ($33.40 x 22,000)] ÷ (25,000 – 22,000) = ($760,000 – $734,800) ÷ 3,000 = $8.40.

Total variable costs (using the low level): 22,000 x $8.40 = $184,800;

Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

On the basis of this information, what were total maintenance costs when Swan experienced 23,000 machine hours?
A.$193,200.
B. $550,000.
C. $734,800.
D. $743,200.
E. $760,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct!

Total variable costs (using the low level): 22,000 x $8.40 = $184,800;

Total costs – Variable costs = Fixed costs; $734,800 – $184,800 = $550,000.

Using the cost equation at the 23,000 machine hour level: (23,000 x $8.40) + $550,000 = $743,200.

Feedback E: This amount is incorrect.

Tallequah, Inc. uses the high-low method to analyze cost behavior. The company observed that at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $9.75. On the basis of this information, the company’s fixed maintenance costs were:
A.$24,000.
B. $90,000.
C. $210,000.
D. $234,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);

[(24,000 x $9.75) – ($10.50 x 20,000)] ÷ (24,000 – 20,000) = $6 per unit variable cost per unit;

Calculate Variable cost at High level= 24,000 x $6 = $144,000;

Total cost – Variable cost = Fixed cost;

$234,000 – $144,000 = $90,000.

Feedback C: This amount is incorrect.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

The following data relate to the Torrence Company for May and August of the current year:

	May	August
Maintenance hours	25,000	29,000
Maintenance cost	$1,175,000	$1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. Which of the following statements is true?
A. The variable maintenance cost is $43 per hour.
B. The variable maintenance cost is $45 per hour.
C. The variable maintenance cost is $47 per hour.
D. The fixed maintenance cost is $725,000 per month.
E. More than one of the other answers is true.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);

($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable per unit;

Calculating Fixed cost at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost.

Feedback E: This answer is wrong, because there is only one correct answer listed.

Data below relate to the Torrence Company for May and August of the current year:

	May	August
Maintenance hours	25,000	29,000
Maintenance cost	$1,175,000	$1,247,000
May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. Which of the following statements is true? A. The variable maintenance cost is $18 per hour. B. The variable maintenance cost is $22 per hour. C. The variable maintenance cost is $24 per hour. D. The fixed maintenance cost is $72,000 per month. E. More than one of the other answers is true. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units); ($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable cost per unit Feedback B: This amount is incorrect. Feedback C: This amount is incorrect. Feedback D: This amount is incorrect. Feedback E: This answer is wrong, because there is only one correct answer listed.

The following data relate to the Torrence Company for May and August:

	May	August
Maintenance hours	25,000	29,000
Maintenance cost	$1,175,000	$1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A. The variable maintenance cost is $18 per hour.
B. The variable maintenance cost is $22 per hour.
C. The variable maintenance cost is $24 per hour.
D. The fixed maintenance cost is $72,000 per month.
E. More than one of the other answers is true.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);

($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable cost per unit

Feedback B: This is not the variable maintenance cost.

Feedback C: This is not the variable maintenance cost.

Feedback D: This is not the fixed maintenance cost.

Feedback E: This answer is wrong, because there is only one correct answer listed.

The following data relate to the Torrence Company for May and August:

	May	August
Maintenance hours	25,000	29,000
Maintenance cost	$1,175,000	$1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true?
A. Total maintenance costs will be $1,175,000.
B. Total maintenance costs will be $1,182,000.
C. Total maintenance costs will be $1,193,000.
D. Total maintenance costs will be $1,221,000.
E. Total maintenance costs will be $1,247,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Variable cost per unit = (High level cost – Low level cost) ÷ (High units – Low units);

($1,247,000 – $1,175,000) ÷ (29,000 – 25,000) = $18 variable per unit; Calculating Fixed cost at high level: $1,247,000 – (29,000 x $18) = $725,000 fixed cost. Total maintenance costs (calculated at estimated 26,000 hours): $1,193,000= (26,000 x $18) + $725,000).

Feedback D: This amount is incorrect.

Feedback E: This amount is incorrect.

Use the following information to answer Questions 73-75.

Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below.

	Type A	Type B	Type C	Total
5,000 units	$4	$9	$4	$17
7,500 units	4	6	3	13

The cost types shown above are identified by behavior as:

	Type A	Type B	Type C
A.	Fixed	Variable	Semivariable
B.	Fixed	Semivariable	Variable
C.	Variable	Semivariable	Fixed
D.	Variable	Fixed	Semivariable
E.	Semivariable	Variable	Fixed

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02
Learning Objective: 06-05

Feedback A: This answer shows incorrect cost classifications.

Feedback B: This answer shows incorrect cost classifications.

Feedback C: This answer shows incorrect cost classifications.

Feedback D: Correct! Based on the per unit costs, Type A is variable, Type B is fixed, and Type C is semivariable.

Feedback E: This answer shows incorrect cost classifications.

If Shum produces 10,000 units, the total cost would be:
A.$90,000.
B. $100,000.
C. $110,000.
D. $125,000.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: Correct! Variable cost = $4 x 10,000 = $40,000; Fixed = $45,000; Semi-variable = ($22,500 – $20,000) ÷ (5,000 – 2,500) = $1 variable portion;

Fixed portion: $20,000 – ($1 x 5,000) = $15,000; $40,000 + $45,000 + ($1 x 10,000) + $15,000 = $110,000.

Feedback D: This amount is incorrect.

Feedback E: This answer is wrong, because there is a correct amount listed.

The cost formula that expresses the behavior of Shum’s total cost is:
A.Y = $0 + $17X.
B. Y = $20,000 + $13X.
C. Y = $40,000 + $9X.
D. Y = $45,000 + $4X.
E. Y = $60,000 + $5X.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This equation is incorrect.

Feedback B: This equation is incorrect.

Feedback C: This equation is incorrect.

Feedback D: This equation is incorrect.

Feedback E: Correct! $4 variable + $1 from semivariable = $5 x variable; $45,000 fixed + $15,000 fixed from semivariable = $60,000.

In regression analysis, the variable that is being predicted is known as the:
A.independent variable.
B. dependent variable.
C. explanatory variable.
D. interdependent variable.
E. functional variable.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-05

Feedback A: This is incorrect.

Feedback B: Correct! The variable that is being predicted is the dependent variable.

Feedback C: This is incorrect.

Feedback D: This is incorrect.

Feedback E: This is incorrect.

Almed Products has determined that the number of machine hours worked (MH) drives the amount of manufacturing overhead incurred (MOH). On the basis of this relationship, a staff analyst has constructed the following regression equation:
MOH = 240,000 + 8MH
Which of the choices correctly depicts the nature of Almed’s variables?

	Dependent	Independent
A.	MOH	MOH
B.	MOH	MH
C.	MH	MOH
D.	MH	MH
E.	8	240,000

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This is an incorrect choice.

Feedback B: Correct! Since MOH is being predicted it is the dependent variable and MH is the independent variable.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: This is an incorrect choice.

Focus, Inc. operates a small package delivery service in the Atlanta suburbs. If the company uses a regression equation to forecast total operating costs, the equation’s intercept would correspond to the:
A.variable operating cost per delivery.
B. fixed operating costs.
C. number of deliveries.
D. total variable operating costs.
E. total operating costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05
Feedback A: This is an incorrect choice.

Feedback B: Correct! The fixed operating costs correspond to the intercept.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: This is an incorrect choice.

Rushmont, Inc. operates a small package delivery service in the Nashville suburbs. If the company uses a regression equation to forecast total operating costs, the coefficient of the equation’s independent variable would correspond to the:
A.variable operating cost per delivery.
B. fixed operating costs.
C. number of deliveries.
D. total variable operating costs.
E. total operating costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05

Feedback A: Correct! The coefficient of the equation’s independent variable is variable operating cost per delivery.

Feedback B: This is an incorrect choice.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: This is an incorrect choice.

Corrine Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours?
A.Total manufacturing overhead is represented by the variable “X.”
B. The company anticipates $495,000 of fixed manufacturing overhead.
C. “X” is commonly known as the dependent variable.
D. “X” represents the number of machine hours.
E. The company anticipates $495,000 of fixed manufacturing overhead and “X” represents the number of machine hours.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-05

Feedback A: This is an incorrect choice.

Feedback B: This is an incorrect choice.

Feedback C: This is an incorrect choice.

Feedback D: This is an incorrect choice.

Feedback E: Correct! The company anticipates $495,000 of fixed manufacturing overhead and “X” represents the number of machine hours.

Blaster, Inc. recently conducted a least-squares regression analysis to predict selling expenses. The company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of the following statements is false if the primary cost driver is number of units sold?
A.The company anticipates $329,000 of fixed selling expenses.
B. “Y” represents total selling expenses.
C. The company expects both variable and fixed selling expenses.
D. For each unit sold, total selling expenses will increase by $7.80.
E. “X” represents the number of hours worked during the period.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02
Learning Objective: 06-05

Feedback A: This is a true statement.

Feedback B: This is a true statement

Feedback C: This is a true statement

Feedback D: This is a true statement

Feedback E: Correct! X is the number of units sold, not hours worked.

Trey, Inc. is studying marketing cost and sales volume, and has generated the following information by use of a scatter diagram and a least-squares regression analysis:

	Scatter Diagram	Regression Analysis
Variable cost per unit sold	$6.50	$6.80
Total monthly fixed cost	$45,000	$42,500

Trey is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data presented, compute the most accurate sales forecast possible.
A. $159,500.
B. $162,000.
C. $164,900.
D. $167,400.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 06-05

Feedback A: This is an incorrect choice.

Feedback B: This is an incorrect choice.

Feedback C: Correct! Regression is more accurate than a scatter diagram, so the answer is: (18,000 x $6.80) + $42,500 = $164,900.

Feedback D: This is an incorrect choice.

Feedback E: This answer is wrong, because there is a correct amount listed.

Bogata Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata should use:
A.simple regression.
B. multiple regression.
C. a scatter diagram.
D. complex regression.
E. the high-low method.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-06

Feedback A: This tool is incorrect.

Feedback B: Correct! To arrive at an objective forecast of revenues for the next accounting period, multiple regression should be used.

Feedback C: This tool is incorrect.

Feedback D: This tool is incorrect.

Feedback E: This tool is incorrect.

Which of the following tools is not associated with cost estimation?
A.Least-squares regression.
B. Multiple regression.
C. Inversion equations.
D. Time and motion (engineering) studies.
E. Learning curves.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 06-05
Learning Objective: 06-06

Feedback A: This tool is associated with cost estimation.

Feedback B: This tool is associated with cost estimation.

Feedback C: Correct! Inversion equations are not associated with cost estimation.

Feedback D: This tool is associated with cost estimation.

Feedback E: This tool is associated with cost estimation.

A staff assistant at Warrington Corporation recently determined that the first five units completed in a new manufacturing process took 500 hours to complete, or an average of 100 hours per unit. The assistant also found that when the cumulative output produced doubles, the average labor time declines by 20%. On the basis of this information, how many total hours would Warrington use if it produces a cumulative amount of 40 units?
A.128.
B. 160.
C. 1,280.
D. 2,048.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-06

Feedback A: This amount is incorrect.

Feedback B: This amount is incorrect.

Feedback C: This amount is incorrect.

Feedback D: Correct! See Exhibit 6-11 in text.

Feedback E: This answer is wrong, because there is a correct amount listed.

Which of the following is not an issue in the collection of data for cost estimation?
A.Outliers.
B. Missing data.
C. Mismatched time periods.
D. Inflation.
E. All of the answers are issues in data collection.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-07

Feedback A: This is a data collection issue, but there is a better answer.

Feedback B: This is a data collection issue, but there is a better answer.

Feedback C: This is a data collection issue, but there is a better answer.

Feedback D: This is a data collection issue, but there is a better answer.

Feedback E: Correct! All of the answers are issues in data collection.

Essay Questions

Consider the graphs that follow (the horizontal axis represents activity; the vertical axis represents total dollars).
Required:
For items A-I that follow, choose the graph that best represents the cost behavior pattern described. Note: Graphs can be used more than once.
A. Straight-line depreciation on machinery.
B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a flight; it then drops to $600 per hour.
C. The wages of table service personnel in a restaurant. The employees are part-time workers who can be called upon for as little as 4 hours at a time.
D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made during the month.
E. The cost of tires used in the production of trucks.
F. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.). Gradually, however, at high levels of sales, freight costs start to increase at an increasing rate, which reflects more transactions made to customers in far-away locations.
G. Equipment leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per month.
H. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay $20,000 plus 5% of gross dollar sales.
I. The cost of electricity during peak demand periods, which is based on the following schedule:
Up to 20,000 kilowatt hours (KWH): $4,000
Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

Solution:

2 B. 4 C. 7 D. 5 E. 1 F. 8 G. 9 H. 6 I. 3

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02

Consider the six costs that follow.
1. Advertising and promotion costs of a do-it-yourself retailer
2. Surgical supplies used in a hospital’s operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimum-use fee, for a small business
5. Annual business licensing fee paid by a daycare center
6. Truck fuel consumed by a road construction company
Required:
A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable.
B. Briefly describe the behavior of a per-unit variable cost as activity changes.
C. What elements are present in a semivariable cost that cause it to behave in a semivariable manner?
D. Generally speaking, does management have more flexibility when dealing with committed fixed costs or discretionary fixed costs?

Solution:

1. Discretionary fixed
2. Variable
3. Committed fixed
4. Semivariable
5. Committed fixed
6. Variable
B. Per-unit variable costs remain constant as activity levels change.
C. Semivariable, or mixed costs, contain both a variable and fixed component.
D. Discretionary fixed costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02
Learning Objective: 06-04

Rolling Hills Bistro produces one of the best sausage products in Tennessee. The company’s controller compiled the following information by analyzing the accounting records:
1. Meat costs the company $3.25 per pound of sausage produced.
2. Compensation of production employees is $2.25 per pound of sausage produced.
3. Supervisory salaries total $23,000 per month.
4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.
5. Insurance and property taxes average $6,400 per month.

Required:
A. Classify each cost as variable, fixed, or semivariable.
B. Write a formula to express the behavior of the firm’s production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

Solution:

1. Variable
2. Variable
3. Fixed
4. Semivariable
5. Fixed

Supervision	$23,000	Meat	$3.25
Fixed utilities	9,000	Labor	2.25
Insurance and property taxes	6,400	Variable utilities	0.35
Total fixed	$38,400	Total variable	$5.85
Production cost per month: Y = $38,400 + $5.85 X

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-02
Learning Objective: 06-05

Vargis Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs:

	At a 40% Utilization Rate	At a 90% Utilization Rate
Cost A:
Total	$440,000	$440,000
Per hour	$5.50	?
Cost B:
Total	?	$1,944,000
Per hour	$10.80	$10.80
Cost C:
Total	$680,000	$1,330,000
Per hour	$8.50	$7.39

Vargis uses the high-low method to analyze cost behavior.

Required:
A. Classify each of the costs as being either variable, fixed, or semivariable.
B. Calculate amounts for the two unknowns in the preceding table.
C. Calculate the total amount that Vargis would expect at a 75% utilization rate for Cost A, Cost B, and Cost C.
D. Develop an equation that Vargis can use to predict total cost for any level of hours within its range of operation.

Solution:

Cost A: Fixed (same total amount at each level of activity)
Cost B: Variable (constant per-hour figures)
Cost C: Semivariable (changing total and per-hour figures)
B. Cost A: $440,000 ¸ (200,000 hours ´ 90%) = $2.44
Cost B: (200,000 hours ´ 40%) ´ $10.80 = $864,000
C. Analysis of Cost C (variable portion):
($1,330,000 – $680,000) ¸ [(200,000 ´ 90%) – (200,000 ´ 40%)] = $6.50 per hour

Analysis of Cost C (fixed portion):
Total cost at 40% utilization	$680,000
Variable cost (200,000 x 40% x $6.50)	520,000
Fixed cost	$160,000

75% utilization: 200,000 x 75% = 150,000 hours

Cost A	$440,000
Cost B (150,000 x $10.80)	1,620,000
Cost C:
Variable portion (150,000 x $6.50)	975,000
Fixed portion	160,000
Total cost	$3,195,000

Variable cost per hour: $10.80 + $6.50 = $17.30
Fixed cost: $440,000 + $160,000 = $600,000
Equation: Y = $600,000 + $17.30X
where Y = total cost and X = number of hours

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-02
Learning Objective: 06-05

Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid by the month.

Required:
A. If the lab’s patient count increases by 15%, will the lab’s total operating costs increase by 15%? Explain.
B. Cheyenne is considering opening an additional lab in a new suburban medical building. What will likely happen to the lab’s level of fixed cost incurrence? Why?
C. What analysis methods would be available to the office manager and/or Cheyenne management if a close look at the lab’s cost behavior is desired?

Solution:

No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office manager are step-fixed in nature, meaning that a 15% hike in client load will likely do nothing to these expenditures. A possibility exists, though, that an increase in patient load could create the need for an added technician.
B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the original facility will continue with existing personnel and not implement a job-sharing arrangement through a cutback in operating hours.
C. Possible methods include account classification, visual fit, high-low, and least-squares regression.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-02
Learning Objective: 06-05

The following selected data were taken from the accounting records of Colorado Enterprises:

Month	Machine Hours	Manufacturing Overhead
May	46,000	$889,000
June	60,000	1,130,000
July	68,000	1,274,000
August	52,000	980,000
Manufacturing overhead consists of three different costs; (1) machine supplies (variable), (2) property taxes (fixed), and (3) plant maintenance (semivariable). July’s overhead costs were $170,000 for machine supplies, $24,000 for property taxes, and $1,080,000 for plant maintenance. Required: A. Determine the machine supplies and property taxes for May. B. By using the high-low method, analyze Colorado’s plant maintenance cost and calculate the monthly fixed portion and the variable cost per machine hour. C. Assume that present cost behavior patterns continue into future months. Estimate the total amount of manufacturing overhead the company can expect in September if 56,000 machine hours are worked.

Solution:

Machine supplies: $170,000 ¸ 68,000 hours = $2.50 per hour; 46,000 hours ´ $2.50 = $115,000
Property taxes: Fixed at $24,000
B. Plant maintenance in May: $889,000 – $115,000 – $24,000 = $750,000
Variable plant maintenance: ($1,080,000 – $750,000) ¸ (68,000 – 46,000) = $15 per hour
Fixed plant maintenance:

Total plant maintenance for 68,000 hours	$1,080,000
Less: Variable plant maintenance (68,000 x $15)	1,020,000
Fixed cost	$60,000

C. Manufacturing overhead at 56,000 hours:
Machine supplies at $2.50 per hour	$140,000
Property Taxes	24,000
Plant maintenance:
Variable at $15 per hour	840,000
Fixed	60,000
Total	$1,064,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-02
Learning Objective: 06-05

Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows.

Month	Machine Hours Worked	Utilities Cost
April	4,500	$9,560
May	4,200	9,440
June	6,500	10,725
July	7,000	11,400

Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs.
Required:
A. Calculate the variable and fixed components of the utilities cost.
B. Using the data calculated above, estimate the utilities cost for August.
C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

Solution:

Variable cost:
($11,400 – $9,440) ¸ (7,000 – 4,200) = $0.70 per hour

Total cost for 7,000 hours	$11,400
Less: Variable cost (7,000 x $0.70)	4,900
Fixed cost	$6,500

Variable cost (5,000 x 1.5 x $0.70)	$5,250
Fixed cost	6,500
Total cost	$11,750
C. The high-low method uses only two data observations, the highest and the lowest, whereas the visual-fit method utilizes all data points that have been gathered (except outliers). Many analysts would say the visual-fit method is advantageous in this regard. However, the visual-fit method lacks total objectivity because of the manner in which the cost line is fit through the data points (drawn by “visual approximation”). The high-low method is therefore said to be more objective. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05

Trane Medical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $32 per patient day; annual fixed costs of $480,000, which are incurred evenly throughout the year; and semivariable costs that displayed the following behavior at the “peak” and “valley” of activity:
January (2,400 patient days): $258,400
August (2,900 patient days): $278,900

Required:
A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior patterns continue. Trane uses the high-low method to analyze cost behavior.
B. There is a high probability that Trane’s volume will increase in forthcoming months as patients take advantage of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say, 3,800 patient days? Why or why not?

Solution:

Analysis of semivariable cost (variable portion) :
($278,900 – $258,400) ¸ (2,900 – 2,400) = $41 per patient day

Analysis of semivariable cost (fixed portion):
Total cost for 2,900 patient days	$278,900
Less:Variable cost (2,900 x $41)	118,900
Fixed cost	$160,000

Variable cost (2,800 x $32)	$89,600
Fixed cost ($480,000 ÷ 12 months)	40,000
Semivariable cost:
Variable portion (2,800 x $41)	114,800
Fixed portion	160,000
Total cost	$404,400
B. No. The “peak” and “valley” of operation were 2,900 patient days and 2,400 patient days, respectively. The 3,800-patient-day data point is well outside this range of observed cost relationships and recent activity (i.e., the relevant range). Costs can change outside of this range (e.g., fixed costs may be higher), and the lack of past experience will likely create unknowns for the analyst. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Learning Objective: 06-03 Learning Objective: 06-05

Hogan Mining extracts ore for eight different companies in South Dakota. The firm anticipates variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred evenly throughout the year. These costs exclude the following semivariable costs, which are expected to total the amounts shown for the high and low points of ore extraction activity: March (850 tons): $39,900
August (1,300 tons): $46,200
Hogan uses the high-low method to analyze cost behavior.
Required:
A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted.
B. Calculate the total cost for that same month.
C. Hogan uses Martinez Trucking to haul extracted ore. Martinez’s monthly charges are as follows:

800 to 1,099 tons	$ 70,000
1,100 to 1,399 tons	90,000
1,400 + tons	110,000

From a cost behavior perspective, what type of cost is this?
2. If Hogan plans to extract 875 tons, is the company being very “cost effective” with respect to Martinez’s billing rates? Briefly discuss.

Solution:

A. Analysis of semivariable cost (variable portion):
($46,200 – 39,900) ÷ (1,300 – 850) = $14 per ton
Analysis of semivariable cost (fixed portion):
Total cost for 1,300 tons	$46,200
Less:Variable cost (1,300 x $14)	18,200
Fixed cost	$28,000

Variable Portion (875 x $14)	$12,250
Fixed Portion	28,000
Total	$40,250

B.
Semivariable cost:	$40,250
Variable cost (875 x $65)	56,875
Fixed cost ($840,000 ÷ 12 months)	70,000
Total cost	$167,125
C. 1. Step-fixed. 2. No. Notice that the bill will be $70,000 for Hogan’s tonnage, and the company could have Martinez haul up to 1,099 tons for the same cost. Ideally, Hogan should try to move to the right side of the step to get a better return on its investment. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Learning Objective: 06-05

T.L. Franklin Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semivariable. The company uses the high-low method and extracted the following data from its accounting records:
· At 180,000 hours of activity, Cost A totaled $2,610,000.
· At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point, Cost C’s fixed portion amounted to $1.75 per hour.
· At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.
Required:
A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.
B. Compute Cost C (total) at 160,000 hours of activity.
C. Compute Cost B (total) at 160,000 hours of activity.

Solution:

Cost C’s fixed portion will total the same amount, $350,000 (200,000 hours ´ $1.75), at both 200,000 hours and 140,000 hours. Thus, the variable portion of C at 140,000 hours will be $1,148,000 ($1,498,000 – $350,000).
B. The variable portion of Cost C is $8.20 per hour ($1,148,000 ¸ 140,000 hours). Cost C will therefore total $1,662,000 [(160,000 hours ´ $8.20) + $350,000].
C. At 160,000 hours, Cost A equals $2,320,000 [($2,610,000 ¸ 180,000 hours) ´ 160,000 hours]. Thus:

Total cost (A + B + C)		$8,162,000
Less: Cost A	$2,320,000
Cost C	1,662,000	3,982,000
Cost B		$4,180,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-02
Learning Objective: 06-05

Shortly after being hired as an analyst with Hidden Cove Rentals in Coastal North Carolina, Matt Loman was asked to prepare a report that focused on the company’s order processing costs—a cost driven largely by the number of rental invoices written. Matt knew that he could use several different tools to analyze cost behavior, including scatter diagrams, least-squares regression, and the high-low method. In addition, he knew that he could present the results of his analysis in the form of algebraic equations. Those equations follow.
Scatter diagram: OP = $56,000 + $6.80RI
Least-squares regression: OP = $59,000 + $6.75RI
High-low method: OP = $53,500 + $7.25RI
where OP = total order processing costs and RI = number of rental invoices written
Matt had analyzed data over the past 12 months and built equations based on these data, purposely including the slowest month of the year and the busiest month so that things would “tend to even out.” He observed that February was especially slow because of a paralyzing ice storm, one that forced the company to close for four days.
Required:
A. Will scatter diagrams, least-squares regression, and the high-low method normally result in the same equation? Why?
B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures represent.
C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Hidden Cove expects to write 2,500 rental invoices.
D. Did Matt err in constructing the equations on data of the past 12 months? Briefly discuss. If “yes,” determine which of the three tools is likely to be affected the most and explain why.

Solution:

No. The three methods produce equations by different means. Scatter diagrams and least-squares regression rely on an examination of all data points. The scatter diagram, however, requires an analyst to fit a line through the points by visual approximation, or “eyeballing.” In contrast, least-squares regression involves the use of statistical formulas to derive the best possible fit of the line through the points. Finally, the high-low method is based on an analysis of only two data points: the highest and the lowest.
B. These amounts represent the fixed and variable elements of the company’s order processing cost. Fixed cost totals $59,000, and Hidden Cove incurs $6.75 of variable cost for each invoice written.
C. OP = $56,000 + $6.80RI; OP = $56,000 + ($6.80 ´ 2,500); OP = $73,000
D. Yes, he did err by including February data. February is not representative because of the effects of the ice storm. The month is an outlier and should be eliminated from the data set.
The equation constructed by using the high-low method is likely to be affected the most since the equation is based on only two data points. One of those two points should have been excluded from the analysis.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05
Learning Objective: 06-07

Duke Corporation uses least-squares regression to analyze a variety of operating costs. A staff assistant determined that monthly machine hours (MH) have a strong cause-and-effect relationship with total maintenance costs, and generated the following statistics:
Intercept: $170,000
b coefficient: $3.80
Total machine hours for the year: 36,500
Required:
A. Construct the company’s regression equation.
B. Based on your answer in part “A,” identify Duke’s dependent variable and independent variable.
C. What does the b coefficient really represent?
D. Predict the company’s maintenance cost in a month when 3,200 machine hours are worked.

Solution:

Y = $170,000 + $3.80MH
B. Y (total maintenance cost) is the dependent variable; MH (machine hours) is the independent variable.
C. The b coefficient represents both the slope of the regression line and the variable maintenance cost per machine hour.
D. Y = $170,000 + $3.80MH
Y = $170,000 + ($3.80 ´ 3,200)
Y = $182,160

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

Learning Objective: 06-05

Townson Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year:
Direct material: $6,000,000
Direct labor: $2,100,000 (at $14 per hour)
Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost driver is direct labor hours, with the following results:
Computed values:
Fixed overhead cost: $3,200,000
Coefficient of independent variable: $2.25
Required:
A. Prepare the company’s regression equation (Y = a + bX) to estimate overhead.
B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.
C. What is Townson’s dependent variable in this case?

Solution:

Y = $3,200,000 + $2.25X
B. Direct labor:
For 6 million units, direct labor totals 150,000 hours ($2,100,000 ¸ $14).
For 1 unit, direct labor totals 0.025 hours (150,000 ¸ 6,000,000).
For 6,300,000 units, direct labor totals 157,500 hours (6,300,000 ´ 0.025).
Y = $3,200,000 + (157,500 ´ $2.25) = $3,554,375
C. The dependent variable is Y, or total overhead cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 06-05
Learning Objective: 06-08

Compare and contrast the following types of costs: (1) variable and step-variable and (2) fixed and step-fixed.

Solution:

(1) A variable cost changes in direct proportion to a change in an activity level or cost driver, with a typical example being direct material. A step-variable cost is nearly variable, but it increases in small steps rather than continuously (e.g., additional direct labor).
(2) A fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a step-fixed cost remains fixed over a sizable range of activity, but jumps to a different amount for activities outside that range (e.g., the salaries of new employees who are needed because of volume changes).

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-02

Define the term “relevant range” and explain its importance in understanding cost behavior.

Solution:

The relevant range is the range of activity within which management expects a company to operate. This can be based on past experience and/or sales projections.

This concept is important because management need not concern itself with extremely high or low levels of activity that are unlikely to occur. Also, observed cost relationships are typically valid within the relevant range and can therefore be used for purposes of estimation at other levels within that range.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy

Learning Objective: 06-03

Differentiate between committed costs and discretionary costs. Be sure to present two examples of each and explain which of the two cost types would likely be cut should a company encounter financial difficulties.

Solution:

A committed cost is a fixed amount that stems from an organization’s ownership or use of facilities, and its basic organizational structure. Property taxes, rent, and salaries of top management are examples of committed costs.
A discretionary cost, also a fixed amount, occurs as a result of a management decision to spend a particular amount of money for some purpose. Examples are advertising, training, promotion, and contributions to charitable organizations.
The distinction between committed and discretionary costs is that committed costs can be changed only by major decisions with long-term implications. Discretionary costs can be changed in the short run and, thus, are cost-cutting targets should an organization encounter financial difficulties.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 06-04

Both the visual-fit and high-low methods of cost estimation have inherent limitations. Briefly identify the major deficiency associated with each method.

Solution:

The visual-fit method suffers from a lack of objectivity. Given that the cost line is created by visual approximation or “eyeballing,” different cost analysts will likely produce different lines. The high-low method, on the other hand, is objective. However, it uses only two data points and ignores the rest, thus generalizing about cost behavior by relying on only a very small percentage of possible data observations.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05

Distinguish between least-squares regression and multiple regression as cost estimation methods.

Solution:

In the least-squares regression (LSR) method, the cost line is positioned to minimize the sum of the squared deviations between the cost line and the data points. The cost line fit to the data using LSR is called a regression line. The statistical equation for this line is represented by the formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the total cost (dependent variable).
The multiple-regression line has all the same properties of the simple LSR line, but more than one independent variable is taken into consideration. The use of more independent variables can better explain accompanying changes in cost.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 06-05
Learning Objective: 06-06

Managerial Accounting Creating Value in a Dynamic Business Environment Ronald Hilton 11e - Test Bank

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Managerial Accounting Creating Value in a Dynamic Business Environment Ronald Hilton 11e - Test Bank

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