Test Bank For Cornerstones of Managerial Accounting 6e Maryanne M Mowen Don R Hansen Dan L Heitger

Chapter 3 - Cost Behavior 1. A cost that changes in total as output changes is a variable cost. ANSWER: True 2. The cost of raw materials used is usually a fixed a. b. 5. As output increases variable cost per unit will also increase. ANSWER: 6. The cost of advertising is usually a discretionary fixed cost. ANSWER: ANSWER: True a. b. True False cost. True False ANSWER: False RATIONALE: The cost of raw materials used is usually a variable cost. 3. Fixed costs are costs that in total remain constant within the relevant range as the level of output increases or decreases. ANSWER: True True False 4. As output decreases fixed costs per unit will increase. ANSWER: a. b. True False a. b. True False a. b. True False a. b. True False True 7. A discretionary fixed cost can be changed relatively easily at management discretion. a. b. True False 8. The relevant range is the range of output within which the assumed cost relationship is valid for the normal operations of the firm. ANSWER: True a. b. True False 9. Determining cost behavior is not essential to planning, controlling, and decision making. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero Page 1 Chapter 3 - Cost Behavior RATIONALE: Determining cost behavior is essential to planning, controlling, and decision making. 10. A variable cost increases in total when output increases but the per-unit costs remains the same. ANSWER: True True True ANSWER: a. b. True False 11. Cost relationships may change at output levels outside of the relevant range. a. b. True False 12. Computing unit fixed costs may result in misleading information. ANSWER: 13. Discretionary fixed costs often involve a long-term contract. a. True b. False a. b. True False ANSWER: False RATIONALE: Discretionary fixed costs can be changed at management’s discretion. 14. Total variable costs = Variable rate × amount of output. ANSWER: True True True True 15. A driver is a factor that causes or leads to a change in a cost. ANSWER: 16. Mixed costs have both a fixed and a variable component. ANSWER: ANSWER: a. b. True False a. b. True False a. b. True False 17. Managerial judgment is critically important in determining cost behavior. a. b. True False 18. The high-low method is an objective method to separate the cost behavior of a mixed cost. a. True b. False Cengage Learning Testing, Powered by Cognero Page 2 Chapter 3 - Cost Behavior ANSWER: True 19. "Outliers" are points that seem to fit the general pattern of behavior. a. True b. False ANSWER: False RATIONALE: "Outliers" are points that do not seem to fit the general pattern of behavior. 20. The slope of a mixed cost line is equal to the fixed element of the cost. ANSWER: ANSWER: False a. b. True False False 21. Using the high-low method, the calculation of the cost line uses the highest and lowest activity period. a. b. True False True 22. Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an outlier. ANSWER: a. b. True False 23. Using a linear regression program, the term 'Intercept' refers to the variable cost. a. True b. False ANSWER: False RATIONALE: Using a regression program, the term 'Intercept' refers to the fixed cost. 24. Using a regression program, the term 'X Variable 1' refers to the dependent variable. ANSWER: False True a. b. True False 25. Using regression, the value of 'X Variable 1' equals the slope of the line. ANSWER: a. b. True False 26. The ________________ is the range of output over which the assumed cost relationship is valid for the normal operations of a firm. ANSWER: relevant range 27. A cost __________ is a casual factor that measures the output of the activity that leads costs to change. ANSWER: driver 28. __________________ is the general term for describing whether a cost changes when the level of output changes. Cengage Learning Testing, Powered by Cognero Page 3 Chapter 3 - Cost Behavior ANSWER: Cost behavior 29. The fabric used to manufacture curtains is an example of a material or a ____________ cost. ANSWER: variable 30. Depreciation on factory equipment would be an example of a(n) _________ cost. ANSWER: fixed 31. A type of cost behavior where the true total cost function is increasing at a decreasing rate is called ______________. ANSWER: semi-variable. 32. Rental expense for a warehouse is an example of a ___________ cost. ANSWER: fixed 33. Fixed costs that cannot be easily changed and typically involve a long-term contract are known as ___________________. ANSWER: committed fixed costs. 34. A fixed cost that management can easily decide to increase or decrease is known as a _________________. ANSWER: discretionary fixed cost. 35. ___________________ are costs that in total vary in direct proportion to changes in output within the relevant range. ANSWER: Variable costs 36. A _______________ displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point. ANSWER: step cost 37. _______________________ are costs that have both a fixed and a variable component. ANSWER: Mixed costs 38. ______________________________ is a statistical way to find the best-fitting line through a set of data points. ANSWER: The method of least squares or regression analysis 39. __________________________ is critically important in determining cost behavior and is by far the most widely used method in practice. ANSWER: Managerial judgement 40. The _________________________ is a way to see the cost relationship by plotting the data points on a graph. ANSWER: scattergraph method 41. The ________________________ is a variable whose value depends on the value of another variable. ANSWER: dependent variable 42. Graphically, the ______________ is the point at which the cost line intercepts the cost (vertical) axis. ANSWER: intercept 43. An advantage of the high-low method is that it ___________. Cengage Learning Testing, Powered by Cognero Page 4 Chapter 3 - Cost Behavior ANSWER: is objective provides a quick overview is easy to use 44. The percentage of variability in the dependent variable explained by an independent variable is called the ____________________________________. ANSWER: coefficient of determination. 45. The spreadsheet regression program supplies more than the estimates of the coefficients; it also provides information that can be used to see how ________ the cost equation is which is a feature not available for the high-low method. ANSWER: 46. Knowing how costs change as output changes is essential to a. planning and controlling. b. controlling and decision making. c. planning, controlling and decision making. d. None of these are correct. ANSWER: 47. A fixed cost within the relevant range a. increases in total as output decreases. b. does not change in total as output changes. c. decreases in total as output increases. d. All of these are correct. ANSWER: 48. Which of the following would be an example of a fixed cost? a. wages for an assembly line worker b. electric bill c. depreciation on equipment d. materials used ANSWER: 49. Which of the following would not be an example of a fixed cost? a. glue used to put together tables b. insurance on factory building c. depreciation on factory building d. property taxes ANSWER: 50. Discretionary fixed costs a. cannot be easily changed. b. often involve a long-term contract. c. can be changed easily at management's discretion. d. increase as output increases. ANSWER: reliable Cengage Learning Testing, Powered by Cognero Page 5 c b c a c Chapter 3 - Cost Behavior 51. Which of the following is an example of a discretionary fixed cost? a. depreciation of equipment b. advertising costs c. rental of machinery d. insurance on automobiles ANSWER: 52. Which of the following is not an example of a discretionary fixed cost? a. research and development b. training costs c. advertising costs d. direct materials ANSWER: 53. A committed fixed cost a. can easily be changed. b. often involves a long-term contract. c. changes when the level of output changes. d. all of these are correct ANSWER: 54. Variable costs within the relevant range a. stay constant on a per unit basis as output changes. b. increase in total as output increases. c. decrease in total as output decreases. d. All of these are correct. ANSWER: 55. Which of the following would be a variable cost for a dentist's office? a. depreciation on equipment b. cost of renting office space c. cost of teeth cleaning material d. salary of dentist ANSWER: 56. Total variable costs a. increases as output increases. b. decreases as output decreases. c. equal a variable rate × amount of output. d. all of these are correct. ANSWER: 57. A factor that causes or leads to a change in a cost or activity is a(n) a. cost formula. b d b d c d Cengage Learning Testing, Powered by Cognero Page 6 Chapter 3 - Cost Behavior b. step cost. c. mixed cost. d. driver. ANSWER: 58. Which of the following would probably be a fixed cost in a fast-food restaurant? a. cost of hamburger b. cost of french fries c. shift manager's salary d. utility cost ANSWER: 59. Which of the following would probably be a variable cost at a college? a. salary of the head janitor b. cost of registration forms c. salary of the college president d. none of these options ANSWER: 60. The relevant range d c b d a b a. b. c. d. ANSWER: 61. Per-unit a. b. c. d. ANSWER: is the normal range of output. is the range of output where cost relationships are valid. may change from period to period. All of these are correct. fixed costs can be misleading and lead to poor decisions. stay the same as output changes. decrease as output decreases. increase as output increases. 62. Which of the following would probably be a discretionary fixed cost for a law firm? a. salary of receptionist b. advertising c. depreciation on furniture and equipment d. cost of legal forms ANSWER: 63. Which of the following would probably be a committed fixed cost for an accounting firm? a. lease of computers b. rent on the office building c. property taxes on building d. All of these are correct. Cengage Learning Testing, Powered by Cognero Page 7 Chapter 3 - Cost Behavior ANSWER: 64. Per-unit a. b. c. d. ANSWER: d variable costs can be misleading and lead to poor decisions. increase as output increases. decrease as output decreases. remain constant within the relevant range. 65. If output increases a. per-unit fixed cost will increase. b. total variable costs will increase. c. per-unit variable costs will increase. d. per-unit variable costs will decrease. ANSWER: 66. If output decreases d b a c a. b. c. d. ANSWER: 67. If output a. b. c. d. ANSWER: Figure 3-2. total fixed costs will remain the same. total variable costs will increase. per-unit fixed costs will decrease. All of these are correct. increases by 50% and is still within the relevant range total fixed costs will increase by 50%. per-unit fixed cost will remain the same. total variable costs will increase by 50%. net income will increase by 50%. No. of toys produced 100,000 200,000 300,000 Lassiter Toys, Inc. Cost of Materials Total cost of materials $20,000 40,000 60,000 68. Refer to Figure 3-2. The cost behavior of the materials cost is a. fixed b. variable c. committed d. discretionary ANSWER: 69. Refer to Figure 3-2. What is the materials cost per unit of output? a. $0.10 Cengage Learning Testing, Powered by Cognero b Page 8 Chapter 3 - Cost Behavior b. $0.20 c. $0.60 d. $0.40 ANSWER: b RATIONALE: SUPPORTING CALCULATIONS: $20,000 / 100,000 = $0.20 70. Refer to Figure 3-2. What should the total materials cost be at a production level of 220,000 toys? a. $44,000 ANSWER: RATIONALE: Figure 3-6. b. $88,000 c. $22,000 d. $132,000 a SUPPORTING CALCULATIONS: 220,000 × $0.20 Taran Company incurred the following costs for the months of January and February. Type of Cost Insurance Utilities 4,000 Depreciation 3,500 Materials 10,000 71. Refer to Figure 3-6. From the information above we can assume that a. insurance and depreciation are fixed costs. b. output decreased from January to February. c. output stayed the same from January to February. d. insurance is a mixed cost. ANSWER: February $ 5,000 5,000 3,500 20,000 January $ 5,000 72. Refer to Figure 3-6. Assume that output was 5,000 units in January and 10,000 units in February, utility cost is a mixed cost, and the fixed cost of utilities was $3,000. What was the variable rate per unit of output for utilities cost? ANSWER: RATIONALE: c a. b. c. d. $0.60 $0.40 $0.20 $0.30 SUPPORTING CALCULATIONS: Variable cost = $4,000 − $3,000 Variable rate: $1,000 / 5,000 = $0.20 73. Refer to Figure 3-6. If output was 5,000 units in January and 10,000 units in February we can assume that a. utilities and materials are variable costs. b. utilities, insurance, and depreciation are fixed costs. c. insurance and depreciation are mixed costs. d. materials are the only variable cost. ANSWER: Cengage Learning Testing, Powered by Cognero d a Page 9 Chapter 3 - Cost Behavior 74. The range of output over which the assumed cost relationship is valid for normal operations of a firm is called the a. mixed range. ANSWER: b c b. relevant range. c. linear range. d. dependent range. 75. Cost behavior analysis focuses on a. how costs react to increases in activity levels only. b. how costs will change in the future. c. how costs react to changes in activity level. d. None of these are correct. ANSWER: 76. Fixed cost per unit is $9 when 20,000 units are produced and $6 when 30,000 units are produced. What is the total fixed cost when nothing is produced? ANSWER: RATIONALE: a a. b. c. d. $180,000 $360,000 $150,000 $240,000 SUPPORTING CALCULATIONS: $9 × 20,000 or $6 × 30,000 77. If production volume increases from 8,000 to 10,000 units, a. total costs will increase by 20%. b. total costs will increase by 25%. c. total variable costs will increase by 25%. d. mixed and variable costs will increase by 25%. ANSWER: 78. When the volume of activity increases within the relevant range, the fixed cost per unit a. decreases. b. increases at first, then decreases. c. remains the same. d. increase. ANSWER: 79. The cost formula for monthly depreciation cost in a factory is Total cost = $10,000 This cost is a. strictly variable. c a Cengage Learning Testing, Powered by Cognero Page 10 Chapter 3 - Cost Behavior ANSWER: 80. A mixed cost b c c a b b a. b. c. d. ANSWER: 81. When a ANSWER: 82. When a a. b. c. d. ANSWER: remains constant when the output level increases. cannot be separated. contains both a fixed and variable component. All of these are correct. mixed a. b. c. d. mixed the the the the cost is graphed the Y-intercept corresponds to the step cost. variable rate. fixed cost. price of the units sold. cost is graphed the slope of the line equals variable cost per unit of the activity driver. total variable cost. sales price per unit. total fixed cost. b. strictly fixed. c. a mixed cost. d. a step cost. 83. Step costs a. remain the same within the relevant range. b. have an increased fixed component at specified intervals. c. increase in direct proportion to increases in output. d. None of these are correct. ANSWER: 84. The formula for a mixed cost is a. total cost = total variable cost + ( fixed rate × amount of output). b. total cost = total fixed cost + (variable rate × amount of output). c. total cost = variable rate × amount of output. d. None of these are correct. ANSWER: 85. Which of the following would probably be a mixed cost? a. rent on building b. raw materials c. repairs and maintenance d. depreciation Cengage Learning Testing, Powered by Cognero Page 11 Chapter 3 - Cost Behavior ANSWER: c 86. A mixed cost a. will vary in direct proportion to changes in output. b. stays the same regardless of output. c. has the same cost behavior as a step cost. d. will decrease in total when output decreases. ANSWER: 87. If a cost's step-cost behavior follows very narrow steps, the costs may be approximated using: a. straight variable cost assumptions. b. fixed costs assumptions. c. step-fixed cost assumptions. d. mixed cost assumptions. ANSWER: Figure 3-1. Total cost = 88. Refer to ANSWER: 89. Refer to ANSWER: 90. Refer to ANSWER: 91. Refer to ANSWER: d a Fixed cost + (Variable Rate × Output) Figure 3-1. In the cost formula above which element would be the dependent variable? a. variable rate b. fixed cost c. total cost d. output Figure 3-1. In the cost formula above which element would be the independent variable? a. fixed cost b. total cost c. output d. variable rate Figure 3-1. In the cost formula above which element would be the intercept? a. fixed cost b. total cost c. output d. variable rate Figure 3-1. In the cost formula above which element would be the slope? a. variable rate b. output c. fixed cost d. total cost c c a Cengage Learning Testing, Powered by Cognero Page 12 a Chapter 3 - Cost Behavior 92. The high-low method a. is the most accurate methods. b. is not affected by the presence of outliers. c. has the advantage of objectivity. d. has the advantage of subjectivity. ANSWER: 93. The scatter-graph method a. displays a constant level of cost for a range of output. b. has the advantage of subjectivity. c. may reveal the presence of outliers. d. all of these are correct ANSWER: 94. The method of least squares a. is a way to find the "best fitting" line through a set of data points. b. is a statistical way of separating a mixed cost. c. always produces the same cost formula when used on the same data set. d. all of these are correct c c ANSWER: d 95. Using the high-low method, the variable rate of a mixed cost equals a. b. c. d. ANSWER: 96. The method of least squares a. uses the results of regression analysis to construct a cost formula. b. is the least accurate method. c. analyzes a cost relationship by plotting the data points on a graph. d. can easily be calculated by hand. ANSWER: 97. Managerial judgment a. is the most accurate way to determine cost behavior. b. is the least used method in practice. c. is critically important in determining cost behavior. d. none of these are correct ANSWER: Cengage Learning Testing, Powered by Cognero total cost at high point − (variable rate × output at high point) total cost at high point − (variable rate × output at low point) d a c Page 13 Chapter 3 - Cost Behavior 98. The scatter-graph method a. allows a cost analyst to inspect data visually. b. is objective. c. only uses two data points. d. none of these are correct ANSWER: a 99. Ruskin Company had utilities cost of $95,000 at an output level of 30,000 units. The utilities cost was a mixed cost and the fixed portion was $50,000. What would the estimate of total utilities cost be at an output level of 40,000 units? ANSWER: RATIONALE: Figure 3-3. c a. b. c. d. $65,000 $95,000 $110,000 $125,000 SUPPORTING CALCULATIONS: Variable rate: $45,000 / 30,000 = $1.50 Total cost: (40,000 × $1.50) + $50,000 = $110,000 Okafor Company manufactures skis. The management accountant wants to calculate the fixed and variable costs associated with the leasing of machinery. Data for the past four months were collected. ANSWER: RATIONALE: b. $38.20 c. $61.50 d. $37.25 b SUPPORTING CALCULATIONS: Month April May June July Machine hours ($22,230 − $16,500) / (570 − 420) = $38.20 101. Refer to Figure 3-3. Using the high-low method calculate the fixed cost of leasing ANSWER: d Cengage Learning Testing, Powered by Cognero Page 14 a. b. c. d. $482 $516 $420 $456 Lease cost $21,000 550 16,,,230 570 100. Refer to Figure 3-3. Using the high-low method calculate the variable rate for the lease cost a. $38.18 Chapter 3 - Cost Behavior RATIONALE: 102. Refer to Figure 3-3. What relevant range? SUPPORTING CALCULATIONS: $22,230 − ($38.20 × 570) = $456.00 OR $16,500 – ($38.20 × 420) = $456.00 would Okafor Company's cost formula be to estimate the cost of leasing within the $456 + ($38.20 × machine hours) $516 + ($38.18 × machine hours) $420 + ($37.25 × machine hours) correct a would the estimate of Okafor Company's total lease cost be at a level of 500 machine $19,606 $19,556 $16,464 $18,546 a. b. c. d. ANSWER: 103. Refer to hours? total lease cost = total lease cost = total lease cost = none of these are Figure 3-3. What a. b. c. d. ANSWER: RATIONALE: Figure 3-4. b ANSWER: RATIONALE: c SUPPORTING CALCULATIONS: $19,556 = $456 + ($38.20 × 500) Botana Company constructed the following formula for monthly utility cost. Total utility cost = $1,200 + ($8.10 × labor hours) Assume that 775 labor hours are budgeted for the month of April. 104. Refer to Figure 3-4. Calculate the total variable utility cost for the month of April. a. b. c. d. $1,200.00 $7,477.50 $6,277.50 $5,077.50 SUPPORTING CALCULATIONS: ($8.10 × 775) 105. Refer to Figure 3-4. Calculate the total utility cost for the month of April. a. $7,477.50 ANSWER: RATIONALE: b. $6,277.50 c. $1,200.00 d. $5,077.50 SUPPORTING CALCULATIONS: $7,477.50 = $1,200 + ($8.10 × 775) a 106. Refer to Figure 3-4. If Botana Company incurs 9,600 labor hours for the year, what would be the estimate of total Cengage Learning Testing, Powered by Cognero Page 15 Chapter 3 - Cost Behavior utility cost? a. $76,560 b. $78,960 c. $92,160 d. none of these are correct c SUPPORTING CALCULATIONS: ($1,200 × 12) + ($8.10 × 9,600) Maxwell Company makes treadmills. The company controller wants to calculate the fixed and variable costs associated ANSWER: RATIONALE: Figure 3-5. with the janitorial costs incurred in the factory. Data for the past four months were collected. Janitorial Month September October November December Machine hours 107. Refer to Figure 3-5. Using the high-low method calculate the fixed cost of the janitorial services a. $4,080 ANSWER: RATIONALE: b. $7,320 c. $6,120 d. none of these are correct a SUPPORTING CALCULATIONS: ($11,400 − $10,200) / (610 − 510) = $12 $11,400 − ($12 × 610) = $4,080 OR $10,200 − ($12 × 510) = $4,080 108. Refer to Figure 3-5. What would Maxwell Company's estimate of total janitorial cost be at a level of 600 machine hours? ANSWER: RATIONALE: Figure 3-7. a. $11,280 b. $7,500 c. $4,080 d. $6,120 SUPPORTING CALCULATIONS: $4080 + ($12 × 600) a Margola Company produces hand-held calculators. The company controller wanted to calculate the fixed and variable costs associated with the maintenance cost incurred by the factory. Data for the past four months were collected. costs $11,000 575 11,,,725 550 Month June July Maintenance cost Machine hours Cengage Learning Testing, Powered by Cognero Page 16 $4,180 328 3,956 310 Chapter 3 - Cost Behavior August September Coefficients shown by a regression program are: Intercept X Variable 1 4,686 4,240 386 352 109. Refer to Figure 3-7. Using the results of regression, calculate the fixed cost of maintenance. a. $1,150.00 b. $978.37 c. $9.06 d. None of these are correct. ANSWER: 110. Refer to Figure 3-7. Using the results of regression, calculate the variable rate of maintenance cost. a. $1,150 per machine hour b. $12.74 per machine hour c. $9.06 per machine hour d. $12.14 per machine hour ANSWER: 111. Refer to Figure 3-7. Using the results of regression, the cost formula for maintenance cost was a. $1,150 × machine hours b. ($4,686 − $3,956) / (386 − 310) c. $9.06 × machine hours d. $1,150 + ($9.06 × machine hours) ANSWER: 112. Refer to Figure 3-7. Using the results of regression, what would be the budgeted cost for maintenance next month assuming that 340 machine hours are budgeted? (Round to the nearest dollar.) a. $4,230 b. $3,928 c. $1,150 d. $2,943 SUPPORTING CALCULATIONS: $1,150 + ($9.06 × 340) Martin Company makes cell phones. The company controller wanted to calculate the fixed and variable costs associated ANSWER: RATIONALE: a Figure 3-8. with electricity use in the factory. Data for the past four months were collected. Month January February March April Electricity cost Machine hours 1,150 9.06 a c d Cengage Learning Testing, Powered by Cognero Page 17 $7,560 570 8,220 625 7,480 546 7,186 518 Chapter 3 - Cost Behavior Coefficients shown by a regression program are: Intercept 2,255 X Variable 1 9.48 113. Refer to Figure 3-8. Using the results of regression, calculate the variable rate of the electricity cost. a. $9.67 per machine hour b. $9.48 per machine hour c. $2,255 per machine hour d. none of these are correct ANSWER: 114. Refer to Figure 3-8. Using the results of regression, calculate the fixed cost of electricity. a. $2,255 b. $9.48 c. $2,200 d. None of these are correct. ANSWER: 115. Refer to Figure 3-8. Using the results of regression, the cost formula for electricity cost was a. $9.48 × machine hours b. $2,255 × machine hours c. $2,255 + ($9.48 × machine hours) d. None of these are correct. ANSWER: 116. Refer to Figure 3-8. Using the results of regression, what would be the total budgeted cost for electricity next month assuming that 615 machine hours are budgeted? (Round to the nearest dollar.) a. $2,225 b. $8,240 c. $8,085 d. $4,015 SUPPORTING CALCULATIONS: $2,255 + ($9.48 × 615) The following cost formula was developed using monthly data for a retail clothing store. Total cost = $75,620 + ($242 × number of customers) 117. Refer to Figure 3-9. The term $75,620 a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: ANSWER: RATIONALE: c Figure 3-9. Cengage Learning Testing, Powered by Cognero Page 18 b a c c Chapter 3 - Cost Behavior 118. Refer to Figure 3-9. The term $242 a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: 119. Refer to Figure 3-9. The term "number of customers" a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: 120. Refer to Figure 3-9. The term "total cost" a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: Figure 3-10. The following cost formula was developed using the monthly data for an accounting firm. Total cost = $87,100 + ($210 × number of tax returns) 121. Refer to Figure 3-10. The term $87,100 a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: 122. Refer to Figure 3-10. The term "number of tax returns" a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: 123. Refer to Figure 3-10. The term $210 a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: d a b Cengage Learning Testing, Powered by Cognero Page 19 d c a Chapter 3 - Cost Behavior 124. Refer to Figure 3-10. The term "total cost" a. is the independent variable. b. is the dependent variable. c. is the intercept. d. is the variable rate. ANSWER: Figure 3-11. The following four months of data were collected on utility cost and the number of labor hours in a factory. Utility b Labor hours 3,975 5,430 4,400 3,200 a Month January February March April 125. Refer to Figure 3-11. Select the correct set of high and low months. a. high: February, low: April b. high: February, low: March c. high: January, low: March d. high: January, low: April ANSWER: 126. Refer to Figure 3-11. Using the high-low method, compute the variable rate for the utility cost. a. $1.02 ANSWER: RATIONALE: b. $2.80 c. $1.07 d. $2.00 d SUPPORTING CALCULATIONS: ($24,600 − $20,140) / (5,430 − 3,200) = $2.00 127. Refer to Figure 3-11. Using the high-low method, compute the fixed cost of electricity. a. $13,740 ANSWER: RATIONALE: b. $10,860 c. $6,400 d. None of these are correct. a SUPPORTING CALCULATIONS: $24,600 − ($2.00 × 5,430) = $13,740 OR $20,140 − ($2.00 × 3,200) = $13,470 128. Refer to Figure 3-11. What would be the estimate of electricity cost if the factory incurred 4,700 labor month? Cengage Learning Testing, Powered by Cognero hours next cost $22,100 24,600 23,500 20,140 Page 20 Chapter 3 - Cost Behavior a. $9,400 b. $20,260 c. $23,140 d. $19,560 SUPPORTING CALCULATIONS: $13,740 + ($2.00 × 4,700) The method of least squares was used to develop a cost equation to predict the cost of monthly equipment maintenance. ANSWER: RATIONALE: c Figure 3-12. The following computer output was received: Intercept Slope The driver used was the number of machine hours. 129. Refer to Figure 3-12. What was the cost formula for equipment maintenance? a. total maintenance cost = $25 × machine hours b. total maintenance cost = $32,000 c. total maintenance cost = $32,000 + ($25 × machine hours) d. None of these are correct. ANSWER: 32,000 25 130. Refer to Figure 3-12. Using the cost formula for the equipment maintenance cost, what is the predicted cost of equipment maintenance for April assuming that 5,000 machine hours will be incurred in April? ANSWER: RATIONALE: a. b. c. d. $32,000 $125,000 $157,000 None of these are correct. c SUPPORTING CALCULATIONS: $32,000 + ($25 × 5,000) 131. Refer to Figure 3-12. What is the independent variable of the cost formula for equipment maintenance? a. number of machine hours ANSWER: Figure 3-13. a b. the variable rate c. the fixed cost d. the total cost The following 6 months of data were collected on electricity cost and the number of machine hours in a factory. c Month June July August September Electricity Machine cost hours $25,160 4,500 26,170 4,810 27,250 5,120 26,680 5,010 Cengage Learning Testing, Powered by Cognero Page 21 Chapter 3 - Cost Behavior October November 132. Refer to Figure 3-13. Select the correct set of high and low months. a. high: June, low: July b. high: June, low: October c. high: October, low: September d. high: October, low: June ANSWER: 133. Refer to Figure 3-13. An independent variable value used in calculating the cost line using the high-low method is: a. $27,950 ANSWER: b ANSWER: c b. 5,430 c. $25,160 d. 4,000 134. Refer to Figure 3-13. A dependent variable value used in calculating the cost line using the high-low method is: a. $27,900 b. 5,430 c. $25,160 d. 4,500 135. Margolo Company makes cross-country skis. The company controller wants to calculate the fixed and variable costs associated with janitorial services incurred by the factory. Data for the past 6 months were collected. Janitorial Month cost January $9,200 Labor hours 10,120 9,500 10,500 11,100 8,660 10,650 27,950 27,500 5,430 5,190 d February March April May June Select the correct set of high and low months. a. high: June, low: April b. high: June, low: May c. high: January, low: February d. high: April, low: May ANSWER: 136. Advantages of the method of least squares over the high-low method include all of the following except a. a statistical method is used to mathematically derive the cost function. b. only two points are used to develop the cost function. c. the squared differences between actual observations and the line (cost function) are minimized. Cengage Learning Testing, Powered by Cognero Page 22 8,800 9,350 9,620 8,400 9,400 d Chapter 3 - Cost Behavior d. All the observations have an effect on the cost function. ANSWER: b 137. If an automobile manufacturer changes from skilled labor to computer-controlled assembly procedures, the past data a. b. c. d. ANSWER: 138. Which costs? are useful in predicting future costs. are of little or no value in predicting future costs. should be used without adjustments to predict future costs. are representative of future costs. b of the following is an advantage of using the scatter-graph method over the high-low method to estimate a. It is a statistical method to determine "best fit". b. Acostanalystcanreviewthedatavisuallyandeliminateoutliers. c. The quality of the cost formula relies on the objective judgment of the analysts. d. Thecostformulacanbedeterminedsimplybylookingattwopointsofdata. ANSWER: b 139. If at a given volume total costs and fixed costs are known, the variable costs per unit may be computed as follows: a. (total costs − fixed costs) / unit volume b. (total costs / unit volume) − fixed costs c. (total costs × unit volume) − (fixed costs / unit volume) d. total costs − (fixed costs / unit volume) ANSWER: Figure 3-14. a Blacken Company manufactures motorcycles. The company's management accountant wants to calculate the fixed and variable costs associated with utility cost incurred by the factory. Data for the past five months were collected. Utility Month cost March $30,255 April 32,750 May 34,712 June 31,850 July 30,720 Machine hours 2,200 2,525 2,710 2,410 2,290 to the nearest penny) is c 140. Refer to Figure 3-14. Using a a. b. c. d. ANSWER: 141. Refer to Figure 3-14. Using a a. b. regression program, the value of the intercept (rounded $0.99. $195.35. $10,630.80. $190,267.00. regression program, the value of the X Variable 1 (rounded to the nearest penny) is $0.99. $8.83. Cengage Learning Testing, Powered by Cognero Page 23 Chapter 3 - Cost Behavior c. d. ANSWER: 142. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,300 machine hours (rounded to the nearest dollar) is ANSWER: a ANSWER: b $195.35. $11,594.00. a. $30,940. b. $37,116. c. $25,945. d. $10,631. 143. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,600 machine hours (rounded to the nearest dollar) is a. $28,288. b. $33,589. c. $45,945. d. $10,631. 144. Refer to Figure 3-14. Using a regression program, the forecasted utility cost at 2,550 machine hours (rounded to the nearest dollar) is ANSWER: c a. $28,288. b. $37,116. c. $33,147. d. $10,631. 145. Refer to Figure 3-14. Using a regression program, the yearly utility cost equation (with all variables to the nearest penny) is a. total utility cost = $127,569.60 + ($8.83 × machine hours). b. total utility cost = $10,630.80 + ($8.83 × machine hours). c. total utility cost = $8.83 + ($10,630.80 × machine hours). d. total utility cost = $10,630.80 − ($8.83 × machine hours). ANSWER: b 146. Laconic Company manufactures ultra sound equipment. Based on past experience, Laconic has found that total annual repair and maintenance cost can be represented by the following formula: total annual repair and maintenance cost = $205,000 + $7.50x, where x = machine hours. Last year, Laconic incurred 145,000 machine hours. Required: A. What was the total repair and maintenance cost incurred by Laconic last year? B. What was the total fixed repair and maintenance cost incurred by Laconic last year? C. What was the total variable repair and maintenance cost incurred by Laconic last year? D. What was the repair and maintenance cost per machine hour last year? E. What was the fixed repair and maintenance cost per machine hour last year? F. What was the variable repair and maintenance cost per machine hour last year? Cengage Learning Testing, Powered by Cognero b Page 24 Chapter 3 - Cost Behavior ANSWER: A. $205,000 + ($7.50 × 145,000) = $1,292,500 B. $205,000 C. $7.50 × 145,000 = $1,087,500 D. $1,292,500 / 145,000 = $8.91 E. $205,000 / 145,000 = $1.41 F. $7.50 147. Harnow Company manufactures drill presses. Based on past experience, Harnow has found that its total overhead cost can be represented by the following formula: Total overhead cost = $35,500 + $1.25x, where x = number of machine hours. Last year Harnow incurred 120,000 machine hours. Required (round to the nearest cent): A. What was the total overhead cost incurred by Harnow last year? B. What was the total variable overhead cost incurred by Harnow last year? C. What was the total overhead cost per machine hour last year? D. What was the fixed overhead cost per machine hour last year? E. If Harnow incurs 140,000 machine hours next year, what will be the total overhead cost per machine hour? ANSWER: A. B. C. D. E. 148. The average unit 22,500 units is $2.10. Required: $185,500 = $35,500 + ($1.25 × 120,000) $1.25 × 120,000 = $150,000 $185,500 / 120,000 = $1.55 $35,500 / 120,000 = $.30 $210,500 = $35,500 + ($1.25 × 140,000) $210,500 / 140,000 = $1.50 cost at a monthly volume of 9,000 units is $3, and the average unit cost at a monthly volume of A. Develop an equation for total monthly costs. B. What are the total monthly costs if 15,000 units are produced? Cengage Learning Testing, Powered by Cognero Page 25 Chapter 3 - Cost Behavior ANSWER: A. (9,000 × $3) = $27,000 (22,500 × $2.10) = $47,250 Variable cost per unit = ($47,250 − $27,000) / (22,500 − 9,000) = $1.50 Fixed costs per month = $27,000 − ($1.50 × 9,000) = $13,500 Total monthly costs = $13,500 + $1.50(# of units) B. $13,500 + (15,000 × $1.50) = $13,500 + $22,500 = $36,000 149. Just Burn It! Manufactures blank CDs. The company incurs $22,000 in monthly depreciation costs on its manufacturing equipment as well as monthly advertising costs of $2,000 to place ads in newspapers and on the radio. Each CD requires materials and manufacturing overhead resources. On average the company uses 26,000 pounds of material to manufacture 12,000 CDs per month. Each pound of material costs $2.50. The manufacturing overhead is driven by machine hours and on average the company incurs $30,000 in manufacturing overhead to produce 12,000 CDs per month. Required: 1.) Create a formula for the monthly cost of the CDs for Just Burn It! 2.) If the company plans to manufacture 15,000 CDs next month, what is the expected fixed cost? What is the total variable cost? What is the total cost? ANSWER: Calculations: 1.) 26,000 pounds / 12,000 CDs = 2.17 pounds per CD Cost per pound = $2.50 × 2.17/CD = $5.43 per CD OR 26,000 × $2.50 = $65,000 $65,000 / 12,000 = $5.42 Cost of manufacturing overhead = $30,000 / 12,000 CDs = $2.50 per CD Total variable rate = $5.43 + 2.50 = $7.93 OR $5.42 + $2.50 = $7.92 Cost formula: Total cost of CDs = $24,000 + ($7.93 × number of CDs) OR $24,000 + ($7.92 × number of CDs) 2.) Total cost of CDs = $24,000 + (7.93 x 15,000) OR $24,000 + ($7.92 × 15,000) total cost of CDs = 24,000 + 118,950 OR $24,000 + $118,000 total cost of CDs = $142,950 OR $142,800 Fixed cost = $24,000 Variable cost = $118,950 OR $118,800 Cengage Learning Testing, Powered by Cognero Page 26 Chapter 3 - Cost Behavior 150. Boswan Company incurred the following costs and machine hours for the months of April and May. Type of cost April Insurance $10,000 Factory supplies 3,000 Direct labor 20,000 Maintenance 5,500 Machine hours 1,000 Required: May $10,000 4,500 30,000 5,750 1,500 A. Assuming that the driver for all costs is machine hours, determine the cost behavior of each of the four types of costs above (fixed, variable, or mixed). B. Assume that the following is the cost formula for maintenance cost. Total maintenance cost = $5,000 + ($0.50 × no. of machine hours) Construct a cost formula to be used to estimate total monthly costs within the relevant range. C. Estimate the total monthly costs to be incurred by Boswan Company at a level of 1,200 machine hours. ANSWER: C. $43,200 = $15,000 + ($23.50 × 1,200) 151. Consider each of the following independent situations. A. The salary of a legal secretary in a law firm. B. A lease contract for an automobile which requires a monthly payment of $300 plus $.05 per mile. C. The cost of lumber for a homebuilder. D. The cost of Internet service which is calculated based on hours of usage. E. F. The cost of telephone service which includes a fixed monthly charge of $50 plus $.10 a minute for long distance calls. The salary cost of seasonal tax preparers for a CPA firm. One tax preparer can prepare 100 tax returns per month. A. Insurance (Fixed) Factory Supplies (Variable) Direct Labor (Variable) Maintenance (Mixed) B. Total costs = Fixed costs ($10,000 + $5,000) + [Variable rate ($3.00 + $20.00 + $0.50) × no. of machine hours] G. A factory supervisor's salary. H. The cost of sugar in the production of soft drinks. Required: For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. ANSWER: A. Fixed B. Mixed C. Variable D. Variable E. Mixed F. Step Cengage Learning Testing, Powered by Cognero Page 27 Chapter 3 - Cost Behavior G. Fixed H. Variable 152. Ross Company has the following information Production volume Direct materials Direct labor Indirect materials Supervisors' salaries Depreciation on plant Maintenance Utilities Insurance on plant and equipment Property taxes on plant Total Required: available regarding costs at various levels of monthly production: A. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings: Fixed Costs Mixed Costs Develop an equation for total monthly production costs. Predict total costs for a monthly production volume of 8,000 units. B. C. ANSWER: B. C. C. What would be Olson Company's estimated electricity cost for next year if they have budgeted 229,000 labor hours? Variable Costs A. Variable Costs Direct materials Direct labor Indirect materials Fixed Costs Supervisors' salaries Depreciation Insurance Property taxes Mixed Costs Maintenance Utilities 7,000 units 10,000 units $100,000 80,000 30,000 12,000 10,000 44,000 21,000 1,600 2,000 $300,600 $ 2,000 $219,600 70,000 56,000 21,000 12,000 10,000 32,000 15,000 1,600 Variable costs = ($300,600 − $219,600) / ($10,000 − $7,000) = $27.00 Fixed costs = $300,600 − ($27.00 × 10,000) = $30,600 per month Total monthly production costs = $30,600 + [$27.00 × (# of units)] Total costs = $30,600 + ($27.00 × 8,000) = $246,600 153. Olson Company makes hearing aids. Olson has found that total electricity cost for the factory can be represented by the following formula: total annual electricity cost = $149,000 + $2.75x, where x = labor hours. Last year, Olson incurred 212,000 labor hours. Required: A. What is the independent variable in Olson's cost formula? B. What was the total electricity cost incurred by Olson last year? Cengage Learning Testing, Powered by Cognero Page 28 Chapter 3 - Cost Behavior ANSWER: A. B. $149,000 + ($2.75 × 212,000) = $732,000 C. $149,000 + ($2.75 × 229,000) = $778,750 154. Harnock Company constructed the following cost formula for its monthly janitorial cost. Total monthly janitorial cost = $5,000 + ($.48 × units of output) Required: A. Identify the independent variable. B. Identify the dependent variable. C. Identify the intercept. D. Identify the slope. E. Compute the total janitorial cost if Harnock produces 10,000 units of output next year. ANSWER: 155. Spangle Company constructed the following cost formula for its monthly maintenance cost. Total monthly maintenance cost = $9,000 + ($1.75 × no. machine hours) Required: A. Identify the independent variable. B. Identify the dependent variable. C. Identify the intercept. D. Identify the slope. E. Compute the total maintenance cost if Spangle uses 12,000 machine hours next year. ANSWER: A. machine hours B. Total monthly maintenance cost C. $9,000 D. $1.75 E. ($9,000 × 12) + ($1.75 × 12,000) = $129,000 156. Arcadia Company incurred the following costs and machine hours during the first three months of the current year. Assume that the driver for all costs is machine hours. labor hours A. units of output B. Total monthly janitorial cost C. $5,000 D. 0.48 E. ($5,000 × 12) + ($.48 × 10,000) = $64,800 (total yearly janitorial costs) Type of cost Electricity $20,000 Depreciation 15,000 February $15,000 15,000 5,600 12,000 700 March $18,000 15,000 7,600 12,000 950 January Factory supplies Property taxes Machine hours 9,600 12,000 1,200 Cengage Learning Testing, Powered by Cognero Page 29 Chapter 3 - Cost Behavior Required: A. Using the high-low method, construct a cost formula for electricity cost. B. If Arcadia had total costs in April of $53,000, how many machine hours did they incur during April? C. If Arcadia expects to incur 1,500 machine hours in May what would be the estimate of their total costs? ANSWER: A. ($20,000 − $15,000) / (1,200 − 700) = $10.00 per machine hour $20,000 − ($10.00 × 1,200) = $8,000 OR $15,000 – ($10.00 × 700) = $8,000 Total cost = $8,000 + ($10.00 × no. of machine hours) B. $53,000 − Fixed costs ($35,000) = $18,000 of variable costs Fixed Costs = Depreciation + Property Taxes + Fixed Portion of Electricity Variable rate (Factory Supplies; $8.00, Electricity; $10.00) × machine hours = $18,000 Machine hours = 1,000 Alternate solution method: Since all of the costs have the same driver, it is possible to do a high-low calculation on the summarized costs or ($56,600 – $47,600) / (1200 – 700) = $18 per MH $47,600 – ($18 × 700) = $35,000 OR $56,000 – ($18 × 1,200) = $35,000 Total cost = $18 per MH + $35,000 C. Fixed Costs ($8,000 + $15,000 + $12,000) + ($18.00 × 1,500) = $62,000 157. Graber and Johnson, Attorneys at Law, recently opened a law practice in the Northwest. Their goal is to generate a monthly net income of $10,000. They have initially set their billing rate at $150 per hour. Their billable hours in the first month of operations (January) were 150 and in the second month of operations (February), 175 billable hours. The costs incurred at these levels for January and February are given below. Salaries: Mr. Graber Ms. Johnson Legal secretary 150 billable hours $10,000.00 10,000.00 4,000.00 175 billable hours $10,000.00 10,000.00 4,000.00 500.00 525.00 1,000.00 449.50 $26,474.50 Depreciation (furniture) Supplies 450.00 Rent 1,000.00 Utilities 412.00 Total cost $26,362.00 Required: Cengage Learning Testing, Powered by Cognero 500.00 Page 30 Chapter 3 - Cost Behavior A. Classify each cost as fixed, variable, or mixed using billable hours as the driver. B. Use the high-low method to separate mixed costs into their fixed and variable components. C. Compute the net income/loss for January and February. D. If they expect to average 200 billable hours each month what do they need to set as a billing rate per hour to ANSWER: achieve their goal of generating $10,000 of monthly net income? Show your calculations. A. Fixed: Salaries Depreciation Rent Variable: Supplies Mixed: Utilities ($449.50 − $412) / (175 − 150) = $1.50 per billable hour $449.50 − ($1.50 × 175) = $187 fixed utility cost Revenues: (150 × $150; 175 × $150) Less: costs Net income Total costs at a 200 billable-hour level: Salaries Depreciation Rent Supplies (200 × $3.00) Utilities [$187 + ($1.50 × 200)] Add: desired net income Divide by 200 billable hours Necessary billing rate the overhead costs and labor hours for Smith & Co. Overhead Costs $ 9,640 12,680 11,080 11,720 13,000 10,120 8,840 6,600 B. C. D. January $ 22,500.00 26,362.00 $(3,862.00) February $26,250.00 26,474.50 $(224.50) $24,000 500 1, $26,587 10,000 $36,587 ÷ 200 $182.94 158. Below are Month January February March April May June July August Labor Hours 490 680 580 620 700 520 440 300 Cengage Learning Testing, Powered by Cognero Page 31 Chapter 3 - Cost Behavior Required: Using the high-low method: 1.) Calculate the fixed cost of overhead. 2.) Calculate the variable rate per labor hour. 3.) Construct the cost formula for total overhead cost. 4.) The company is estimating that in September the labor hours will be 600. How much should they estimate to have in total overhead cost for September? ANSWER: High point Fixed cost = total cost – (variable rate × labor hours) $13,000 – ($16 × 700) = $1,800 fixed cost Low point $6,600 – ($16 × 300) = $1,800 fixed cost Cost formula Total cost = $1,800 + ($16 × labor hours) 4.) September = 600 labor hours Total cost = $1,800 + ($16 × 600) Total cost = $11,400 159. The controller at Speedy Delivery wants to break-out the cost of deliveries into fixed and variable components so that they will be better able to predict costs for next year. Below are the delivery cost incurred each month and the number of deliveries. Month Delivery Cost January $2,176.00 February March April May June July August September October November December 2,272.00 1,926.40 1,696.00 1,600.00 2,752.00 3,616.00 1,849.60 1,676.80 3,808.00 3,961.60 4,000.00 Deliveries 105 110 92 80 75 135 180 88 79 190 198 200 deliveries will be 125. How much should they estimate to Page 32 Required: Using the high-low method: 1.) Calculate the fixed cost of overhead. 2.) Calculate the variable rate per labor hour. 3.) Construct the cost formula for total overhead cost. 4.) The company is estimating that in January the number of have in total delivery costs for January? Cengage Learning Testing, Powered by Cognero Chapter 3 - Cost Behavior ANSWER: ($4,000 – $1,600) / (200 – 75) = $19.20 variable rate High point: $4,000 – (200 × $19.20) = $160 fixed cost Low point: $1,600 – (75 × $19.20) = $160 fixed cost Cost formula: Total cost = $160 + ($19.20 × no. of deliveries) Total delivery cost for January: Total cost = $160 + ($19.20 × 125) Total cost = $2,560 160. The following six months of data were collected on electricity cost and the number of machine hours in a factory. Electricity Month cost June $25,160 July August September October November Required: A. Using the high-low method compute the variable rate for the electricity cost. B. Using the high-low method compute the fixed cost of electricity. C. Estimate the total electricity cost to be incurred in December if 5,300 machine hours are incurred. ANSWER: A. ($27,950 − $25,160) / (5,430 − 4,500) = $3.00 per machine hour B. $27,950 − ($3.00 × 5,430) = $11,660 OR $25,160 – ($3.00 × 4,500) = $11,660 C. $27,560 = $11,660 + ($3.00 × 5,300) 161. Margolo Company makes cross-country skis. The company controller wants to calculate the fixed and variable costs associated with janitorial services incurred by the factory. Data for the past six months were collected. Janitorial Month cost January $9,200 February March April May June Required: A. Using the high-low method compute the variable rate of the janitorial cost. Cengage Learning Testing, Powered by Cognero Labor hours 10,120 9,500 10,500 11,100 8,660 10,650 Page 33 26,170 27,250 26,680 27,950 27,500 Machine hours 4,500 4,810 5,120 5,010 5,430 5,190 8,800 9,350 9,620 8,400 9,400 Chapter 3 - Cost Behavior B. Using the high-low method compute the fixed cost of janitorial services. C. Compute the estimated janitorial cost to be incurred during the next six months assuming that 58,200 labor hours will be worked. ANSWER: A. ($9,620 − $8,400) / (11,100 − 8,660) = $0.50 per labor hour B. $9,620 − ($0.50 × 11,100) = $4,070 OR $8,400 − ($0.50 × 8,660) = $4,070 C. ($4,070 × 6) + ($0.50 × 58,200) = $53,520 162. Blacken Company manufactures motorcycles. The company's management accountant wants to calculate the fixed and variable costs associated with utility cost incurred by the factory. Data for the past six Utility Month cost March $30,255 April 32,750 May 34,712 June 31,850 July 30,720 August 29,980 Required: A. Using the high-low method calculate the variable rate per machine hour for the utility cost. B. Using the high-low method calculate the fixed cost of utilities. C. Construct a cost formula for total utility cost. D. Estimate the cost of utilities if 2,425 machine hours are used. ANSWER: 163. Coefficients shown by a regression program are: Intercept X Variable 1 Required: A. Using the results of regression calculate the fixed cost of maintenance and the variable rate per machine hour. B. Using the results of regression, construct the cost formula for the total maintenance cost. C. Calculate the budgeted cost for maintenance assuming that 610 hours are worked next month. Cengage Learning Testing, Powered by Cognero Page 34 months were collected. Machine hours 2,200 2,525 2,710 2,410 2,290 2,150 A. ($34,712 − $29,980) / (2,710 − 2,150) = $8.45 per machine hour B. $34,712 − ($8.45 × 2,710) = $11,812.50 OR $29,980 − ($8.45 × 2,150) = $11,812.50 C. Total utility cost = $11,812.50 + ($8.45 × no. of machine hours) D. Total utility cost = $11,812.50 + ($8.45 × 2,425) = $11,812.50 + $20,491.25 = $32,303.75 7,600 5.10 Chapter 3 - Cost Behavior ANSWER: A. Fixed cost = $7,600 Variable rate = $5.10 per machine hour B. Total maintenance cost = $7,600 + ($5.10 × no. of machine hours) C. $10,711 = $7,600 + ($5.10 × 610) 164. Andover Company makes weather balloons. The company controller wanted to calculate the fixed and variable costs associated with the maintenance costs incurred by the factory. Data for the past six months were collected. Maintenance Month cost Machine hours January $10,120 526 February 9,560 389 March 9,712 412 April 10,460 569 May 10,226 541 June 9,686 399 Required: A. Using the high-low method, calculate the fixed cost of maintenance and the variable rate per machine hour. B. Using the high-low method, construct the cost formula for the total maintenance cost. C. Calculate the budgeted cost for maintenance assuming that 485 hours are worked next month. ANSWER: A. ($10,460 − $9,560) / (569 − 389) = $5.00 per machine hour $10,460 − ($5.00 × 569) = $7,615 fixed cost OR $9,560 − ($5.00 × 389) = $7,615 fixed cost B. Total maintenance cost = $7,615 + ($5.00 × no. of machine hours) C. $10,040 = $7,615 + ($5.00 × 485) 165. Hipcuts Company operates a chain of trendy beauty salons. The company's chief executive officer is interested in accumulating some information on the overhead costs incurred by the company. You have been asked to analyze the following six months' worth of data. Overhead Month cost April $60,160 No. of Appointments 867 624 689 974 730 901 May June July August September A regression analysis produced the following coefficients. 56,500 58,900 63,500 59,325 62,400 Cengage Learning Testing, Powered by Cognero Page 35 Chapter 3 - Cost Behavior Intercept 42,900 X Variable 1 20.46 Required: A. Using the results of regression, construct a cost formula for the total overhead cost. The CEO would like to limit total overhead cost in future months to 16% of total revenues. Will that be possible B. if total revenues are expected to average $300,000 per month and total appointments per month are expected to average 825? Show all of your calculations. ANSWER: A. Total overhead costs = $42,900 + ($20.46 × no. of appointments) B. $59,779.50 = $42,900 + ($20.46 × 825) $59,779.50 / $300,000 = 0.199 or 19.9% No, it is not possible to meet the CEO’s goal. 166. Grindgood Company operates a chain of cozy coffee shops. The company's chief executive officer is interested in accumulating some information on the overhead costs incurred by the company. You have been asked to analyze the following six months worth of data. Overhead Month Cost April $60,160 May 56,500 June 58,900 July 63,500 August 59,325 September 62,400 Required: No. of Labor Hours 867 624 689 974 730 901 A. Using the high-low method, construct a cost formula for the total overhead cost. The CEO would like to limit total overhead cost in future months to 20% of total revenues. Will that be possible B. if total revenues are expected to average $300,000 per month and total labor hours per month are expected to average 780? Show all of your calculations. C. Compute the total cost of overhead assuming 925 labor hours are incurred in a given month. ANSWER: A. ($63,500 − $56,500) / (974 − 624) = $20.00 per labor hour $63,500 − ($20.00 × 974) = $44,020 fixed cost OR $56,500 − ($20.00 × 624) = $44,020 fixed cost Total overhead cost = $44,020 + ($20.00 × no. of labor hours) B. $59,620 = $44,020 + ($20.00 × 780) $59,620 / $300,000 = 0.199 or 19.9%. Yes it will be possible to meet the CEO’s goal. C. $44,020 + ($20 × 925) = $44,020 + $18,500 = $62,520 Cengage Learning Testing, Powered by Cognero Page 36 Chapter 3 - Cost Behavior 167. The cost accountant for Bolagio Company used an Excel spreadsheet program to run ordinary least squares on a set of cost data for its utility cost. Bolagio's cost driver for utility cost is machine hours. The following results were produced. Intercept 2,490 X Variable 4.89 Required: A. Construct the cost formula for Bolagio's utility cost using the results from the method of least squares. B. Using the formula computed in (A), what is the estimated cost of utilities for May assuming that Bolagio will incur 110,000 machine hours? ANSWER: 168. Machine hours and electricity costs for Wells Industries for last year were as follows: Machine A. Total utility cost = $2,490 + ($4.89 × no. of machine hours) B. $540,390 = $2,490 + ($4.89 × 110,000) Month January February March April May June July August September October November December Required: A. Using the high-low method, develop an estimate of variable electricity costs per machine hour. B. Using the high-low method, develop an estimate of fixed electricity costs per month. C. Using the high-low method, develop a cost function for monthly electricity costs. D. Estimate electricity costs for a month in which 3,000 machine hours are worked. ANSWER: A. ($15,500 − $6,750) / (3,760 – 1,520) = $3.91 B. $15,500 − ($3.91 × 3,760) = $798.40 OR $6,750 − ($3,91 × 1,520) = $812.50 C. Electricity costs = $798.40 + ($3.91 × Machine hours) D. $798.40 + ($3.91 × 3,000) = $12,528.40 Electricity Costs $ 9,200 10,500 6,750 11,500 14,125 11,000 12,375 11,375 7,750 13,000 15,500 13,875 169. Tamo Company used an Excel spreadsheet program to run ordinary least squares on a set of cost data for its utility cost. The cost driver for labor cost is employee hours. The following results were produced. Cengage Learning Testing, Powered by Cognero Page 37 Hours 2,000 2,320 1,520 2,480 3,040 2,640 3,280 2,800 1,600 2,960 3,760 3,360 Chapter 3 - Cost Behavior Intercept 1,145 X Variable 13.82 Required: A. Construct the cost formula for Tamo’s labor cost using the results from the method of least squares. B. Using the formula computed in (A), what is the estimated cost of utilities for October assuming that Tamo will incur 560 employee hours? ANSWER: A. Total labor cost = 1,145 + ($13.82 × no. of employee hours) B. $8,884.20 = $1,145 + ($13.82 × 560) 170. Explain the difference between a committed and a discretionary fixed cost. ANSWER: A committed fixed cost is normally unchangeable by management. A committed fixed cost usually is the result of a long-term contract. An example of a committed fixed cost is a lease agreement. If output decreases, the lease payments are generally still required. A discretionary fixed cost can easily be changed at management discretion. An example of a discretionary fixed cost is the cost of advertising. Management may make the decision to cut costs by reducing advertising costs. 171. Why is it necessary to separate a mixed cost into its variable and fixed components? ANSWER: For management to effectively plan, control, and make decisions, understanding how costs change as output changes is essential. Without the knowledge of the fixed and variable components of a mixed cost, it is difficult to estimate the total mixed cost at various levels of output. 172. Why would cost behavior change outside of the relevant range? ANSWER: The relevant range is the normal range of activity where cost relationships ordinarily remain valid. If an organization's output is outside of the relevant range, various fixed costs may increase or decrease. For example; the factory supervisor's salary is normally fixed, but if output increases beyond the relevant range, an additional supervisor may be needed. If output decreases dramatically outside of the relevant range, the factory supervisor may no longer be needed and the fixed cost would be eliminated. 173. Explain the differences between a variable, fixed, and a mixed cost. ANSWER: A variable cost changes in direct proportion to changes in the cost driver within the relevant range. A variable cost remains the same on a per-unit basis regardless of changes in output. A fixed cost stays the same in total at all levels within the relevant range. On a per-unit basis, a fixed cost will decrease when output increases and vice versa. A mixed cost has both a fixed and a variable component. 174. Why is managerial judgment essential to predicting cost behavior? ANSWER: Managerial judgment is important because estimated statistical results often require refinement. A manager has intimate knowledge of the various costs of his/her organization and may need to revise the statistical results by taking into consideration projected changes in cost structure or technology. You decide 175. The controller of Lamps Limited is concerned about the how much the company’s costs have risen over the past few months. Since the majority of the company’s costs are mixed, it is hard to tell if the increasing costs are due to variable costs or fixed costs. The controller asks that you research the different ways to separate mixed costs and then to present a report showing the advantages and disadvantages of each method. He would also like you to make a recommendation as to which method should be used. Cengage Learning Testing, Powered by Cognero Page 38 Chapter 3 - Cost Behavior ANSWER: There are three methods of separating a mixed cost into its fixed and variable components: 1. high-low method 2. scattergraph method 3. method of least squares The high-low method is the simplest, most inexpensive and quickest of the three. This method extracts two data points, the highest and the lowest, in order to construct a cost formula. This method is also objective, which is one of its biggest advantages. It is also easily communicated to other individuals, even those who are not comfortable with numerical analyses. The main disadvantage of the high-low method is that it only uses two data points. These data point could be outliers, which would cause the cost formula to not represent what usually takes place. The scattergraph method plots all the data points so that the relationship between costs and activity output can be seen. By plotting all the data points it is easy to see if there are outliers. If there are outliers they might be eliminated and perhaps lead to a better estimate of the underlying cost function. The disadvantage of using this method is that it lacks objectivity; two people might not fit the same line to the data plots and therefore each construct a different cost formula. The method of least squares is a statistical way to find the best-fitting line through a set of data points. For a given set of data, this method will always produce the same cost formula. This method also generates the smallest possible cost prediction errors. Although this calculation is complicated, the use of a spreadsheet program will perform the calculation by entering a simple formula. It would be my recommendation to use the method of least squares as it is the most accurate and the use of technology makes this method simple to use. Note to teacher: The students might have different answers regarding which method would be the best to use in this situation; the student should support his or her answer. Select the appropriate cost behavior for each of the costs listed below. a. variable b. fixed 176. factory supervisor's salary ANSWER: b 177. factory supplies ANSWER: a 178. direct labor ANSWER: a 179. factory insurance ANSWER: b 180. controller's salary ANSWER: b 181. depreciation ANSWER: b Cengage Learning Testing, Powered by Cognero Page 39 Chapter 3 - Cost Behavior 182. direct materials ANSWER: a 183. indirect materials ANSWER: a Select the appropriate type of fixed cost for ea