CHAPTER 3: COST ANALYSIS Multiple Choice b 1. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram method a. includes costs outside the relevant range. b. considers more than two points. c. can be used with more types of costs than the high-low method. d. gives a precise mathematical fit of the points to the line. a 2. The major objective of preparing a scatter-diagram is to a. derive an equation to predict future costs. b. perform regression analysis on the results. c. determine the relevant range. d. find the high and low points to use for the high-low method of estimating costs. d 3. The cost estimation method that gives the most mathematically precise cost prediction equation is a. the high-low method. b. the scatter-diagram method. c. the contribution margin method. d. regression analysis. c 4. Which cost is most likely to be mixed for a manufacturer? a. Raw materials. b. Direct labor. c. Manufacturing overhead. d. Insurance. b 5. Which combinations of object of cost and classification of cost is most reasonable? Object of Cost Classification of Cost -----------------------------------a. Materials used to make products Discretionary fixed cost b. Advertising cost Discretionary fixed cost c. Straight-line depreciation Variable cost d. President's salary Avoidable fixed cost c 6. A cost is variable if it varies with the a. number of units manufactured. b. number of units sold. c. level of some activity. d. selling price of the product. d 7. A non-value-adding cost is a. usually direct to a product. b. the same as a discretionary cost. c. unavoidable. d. not essential to manufacturing a product. a 8. Fixed costs that cannot be reduced within a short period of time are a. committed. b. variable. c. avoidable. d. unnecessary. b 9. Which cost is most likely to be committed? 23 c. c. increases in steps as volume increases. d. cannot usually be observed by managers. c. d. d. Fee for a consultant on the company's long-range planning. Discretionary fixed costs. Many costs vary with production activities. c. c. c. cannot be a cost driver. A non-value-adding activity a. b 17. d. RST's average cost per unit is the same at all levels of volume. contains a fixed component and a variable component. The concepts of fixed and variable costs do not apply. Fixed costs are $40. It cannot use the contribution-margin format of the income statement. Cost-volume-profit analysis is not appropriate. RST must have only fixed costs. materials. variable costs. can be used only for costs that vary with sales or production. d. b 14. charge higher prices in the off-season than in the busy season.000 would be $160. Sum-of-the-years'-digits depreciation on the factory building. Non-value-adding costs. be better off if it closed down during the off-season. and overhead costs. ABC Company breaks even at $600. could be severely affected by outliers. A cost-predicting equation determined through regression analysis a. d. c. A seasonal business that sets selling prices at 20% above average cost for the preceding month will a. fixed costs. b. wages and salaries. d 13. and depreciation. Which of the following is true? a. d. A mixed cost a. not with sales. The components of manufacturing cost are a. 24 .000. b. b. b. wages.000 at $700.000 sales and earns $60. always charge higher prices than its competitors.000 sales. The selling price per unit is $6. a 10. cannot be accurately predicted. d. Avoidable costs. b 12. b. Which of the following is true? a. Profit at sales of $800. d. c. Direct costs.a. and manufacturing overhead. varies with more than one measure of volume. maintenance and repairs. and overhead. b. should be eliminated. direct labor. will not work any better than one obtained using the high-low method. b. b 18. c.000. d 15. Repairs and maintenance. make a consistent return on sales of 20%. Which statement is true for a manufacturer? a. Contribution margin is 60% of sales. purchases. b. Advertising. b 16. RST must have some fixed costs and some variable costs. RST's cost structure cannot be determined from this information. usually drives only variable costs. b. b. c. b 11. RST must have only variable costs. Which of the following do JIT operations try to eliminate? a. utilities. always gives close predictions. d. c. A cost a. c. Variable selling expenses. d. pool is of the costs of a particular department. d. increase and per-unit fixed costs increase. all c. b. variable costs. d. Direct labor. c. b. remain constant and per-unit fixed costs remain constant. Outlier. d 24. d. c. total fixed costs total fixed costs total fixed costs total fixed costs remain constant and per-unit fixed costs increase. volume increases. Variable manufacturing overhead. Identifying cost drivers a. Value-added. unavoidable costs. is the same as identifying cost pools. is not necessary with regression analysis. Which cost is NOT subtracted from selling price to calculate contribution margin per unit? a. discretionary costs. Fixed manufacturing overhead. is an important part of cost management. all b 23. c 21.d 19. b. costs in a group such as variable costs or discretionary fixed costs. c. d 22. a. costs related to a product or product line. b. costs that have the same driver. all b. c 20. Fixed costs that managers can change on short notice are a. b. d. value-adding costs. A(n) __________ relationship is one that appears to exist even though there is no causal relationship. remain constant and per-unit fixed costs decrease. 25 . As a. is useful only with step-variable costs. all d. Spurious. Correlation. Direct costs are a. 40%. c.000 c. d. d. b 30.000 on sales of $1. can be eliminated in the short-term and in the long-term. c. b. d. d. can be eliminated in the short-term. d. usually committed. d. c 26. c. Advertising.000 machine hours. Which cost is LEAST likely to be direct to a particular product? a. c. are usually unavoidable.000. b. Power used to operate equipment on the assembly line. b. $320. 26 . can be eliminated in the long-term. 30%. a 32. but not in the short-term. Cost of materials used to make the product. c.000 on sales of $1. d 31. Total fixed overhead is a. associated with a specific activity. can be either direct or indirect.80. Variable overhead cost per machine hour is a. Heat and light for the building. can never be eliminated. common. are not necessary for successful operations. d. a 29.000 overhead cost at 60. $15. fixed.000. Variable costs as a percentage of sales are a. Which cost is LEAST likely to be discretionary? a. DSP Company earned $100. $ 4. b.000 overhead cost at 25. A committed fixed cost a. Discretionary costs a. c 33. c. d. Sacramento Company had $400.000. c 34. Salaries of maintenance workers who service all assembly lines.100. $100. 70%. c. b.000.00. Advertising of the product. some other number. always variable. Salaries of salespeople. c 28.000. a 27. b.000 overhead cost at 50. committed.00. d. Which cost is most likely to be avoidable in deciding whether to shut down one of the four assembly lines in a factory? a. Ogden Company had $300. usually discretionary. direct. c.000 overhead cost at 20.000 machine hours and $460.c 25. Salaries of salespeople who sell all of the company's products. Building maintenance.000 hours. c. $ 60.000 b. but not in the long-term. $12. b. Insurance. Depreciation on the factory building. Avoidable costs are usually a. should be the first ones cut in a cost-reduction program. b. $320. License fees paid to the designer of the product. $120. b. It earned 130.000 hours. b.000 on sales of c 36. Looking at the following scatter diagrams we can conclude that $ $ | * * | ** | * * * | ** * | * * * * | * * | * * | * * | | | | |__________________ |__________________ activity activity Cost A Cost B a.000.d. c. d. cost cost cost cost A B A B will be easier to predict than cost B. d.000. $1. will be easier to predict than cost A.000. 27 . is direct to a product. It earned $130. b. is driven by a non-value-adding activity. Selling price per unit is $2. d.000. c.100. $420. is out-of-control.000 on sales of $1. Total contribution margin at 200. b. $900. d. association.000.000 profit at sales of 250. Total fixed costs are a. correlation. c. DSP Company earned $100. $200. none of the above. d. b 38. MNO has a break-even point of 200. Profit at sales of 300. Which of the following is true? a. b. A non-value-adding cost a. has no fixed component.000. Predicting costs at activity levels that are outside the relevant range is called a. c. b 39. b 35. c.000 units.000 units is $120.000 units is $400.000 units and earns a $100. extrapolation. $0. Fixed costs are $100. b. is discretionary.000. a 37. allows the company to charge a higher price for the product.000.000. 90%. d 41.000 b. c. $ 40. $7.000 overhead cost at 60. Total fixed overhead is a.000 units. Which of the following is true? a.000. b 46. how well the regression line accounts for the changes in the dependent variable.000 overhead cost at 60.000 d. $400. $400.000 units and $13. $5. What is the variable cost per unit? a.75 at 40. Fixed costs are $120. $180. An amount that cannot be determined without more information.000 machine hours and $240.000 units and $25 at 60. $250. DJH has an average unit cost of $20 at 20.000 overhead cost at 25.00. the fixed cost component. c. $ 60. $125.000 hours. Elmwood Company had $300. d.000 machine hours. c 42. b 48. GMH Company had $200. An amount that cannot be determined without more information. b.000 overhead cost at 40. b. $20 c. What is the variable cost per unit? a. the spurious relationship between cost and activity. d. $ 36. $4.000.000 c. and $360. $15 b. regression analysis. Variable overhead per machine hour is a. $600. a 47. $6. b 49. Contribution margin is 10% of sales.000. d.000 would be $50. R-squared is a measure of a.000 units and $13. the variable cost per unit of activity.a 40.000 on sales of 28 . $900.000 units and $25 at 60.000 c.25 c. An amount that cannot be determined without more information.75 at 40.000 b. d.000 d. $35 d. d.000 on sales of $400. manufacturing overhead. What is the total fixed cost? a. Profit at sales of $500. It earned $70.000 sales. spurious. a 44. Glenwood has an average unit cost of $45 at 20.000 units.50 d. The selling price per unit is $4.000 hours. DJH has an average unit cost of $20 at 20.000 units.000. d 45. The closeness of the relationship between the cost and the activity is called a. Glenwood has an average unit cost of $45 at 20. b.000 at $400. c. correlation. c. Crookston Company breaks even at $300.000. some other number.000 sales and earns $40. $1.00.00 b. Osceola Company earned $50. What is the total fixed cost? a.000 b. $0. An amount that cannot be determined without more information.000 c. b.000 units. b 43.83. 91 with a regression equation means that predictions will be accurate 91% of the time. T 10.000. 30%.000 on sales of $400.000. As volume increases. T 5. Total fixed costs are a. F 8. F 9.000 on sales of $450. Discretionary fixed costs are not necessary to successful operation of the business. 40%. A multiple regression equation uses more than one driver to predict costs. $180. the per-unit amount of a mixed cost increases. $ 0.000. scatter diagram. 70%.000. c. and regression analysis are methods of developing formulas to predict mixed costs. Contribution margin as a percentage of sales is c 50. F 6. d. F 4. Discretionary costs are step-variable. In developing a cost-prediction equation using regression analysis. b. c.000. you might not select the one with the highest correlation. the higher the correlation. Osceola Company earned $50. F 3. True-False F 1. The major variable cost in a manufacturing company is factory overhead. d. A company using activity-based costing need not do regression analysis or scatter diagrams.$450. the better cost predictions are likely to be. $110. T 7. High-low. 60%. 29 . In interpreting regression results. T 2. It earned $70. $ 50. An r-squared of . b.000. a. 900 ($236.000 . No. Genner Company earned $125. maintenance cost should be within what amount of the predicted value? SOLUTION: a.363 Y = total maintenance cost. $98. The statistician of RST. using observations from 12. Will maintenance cost at zero machine hours be $236.837? correct answer.(12. b. has developed the following cost-prediction equation.837 + $3.000 x $6). zero is outside the relevant range. About 68% of the time. 30 It earned $225. r-squared = . X = machine hours a.000 machine hours. Find the variable costs as a percentage of sales.000.000 on sales of $750.000 [$170. Inc.000 units and incurred $188.$170. Find the predicted maintenance cost at 25. It made 15.000 .363. Compute the variable component of overhead cost. Carlson Company incurred $170.000 . b.000 on sales of . Y = $236.000)] b.000 . SOLUTION: a. $6 [($188. yes no Circle the c.000) b.000 in overhead costs in April. the standard error 3.7625 x 25.000 x $6)] 2. or $188. $330.000 to 30. a. c. $24.000 in overhead costs making 12.000 machine hours.837 + $3.Problems 1.12.000)/(15.81.7625X.000.(15. standard error = $24. $1.000 units in March.000. b. Find the fixed factor of overhead cost. a. Find the total fixed costs. (11. At 500.000)]/(500.$225. or $175. or $374.000 [$1.000)/(11. b.$125. a. $14 [($374.000 . a.000 units and incurred $147.000 [$325.000)} b. It made 24.000 x (1 .000 in overhead costs in May.000 x $1.000 .000) 5. Tri-County Company incurred $175.000 .000 in overhead costs making 11.50 x 500. $105. SOLUTION: a.(7. It made 7.000.000 units in November. Compute the variable component of overhead cost.50 x 400. Compute the variable component of overhead cost.000 x $1. $220. a.000 units in April.SOLUTION: a.75). Find the fixed factor of overhead cost.500 x $14).000 .000.400.000 .000 [$147.000)/(40.000 .000 . $1.7.000] 4.[($225.000 in overhead costs making 40.000 .$325.000) .75)] 6. Compute the total fixed cost. Bilbo Company incurred $374.50 at a volume of 400. $12. SOLUTION: a.($22.60%) . b.24. Find the fixed factor of overhead cost.$147.000 .000.000 units. Compute the variable cost per unit.000)] b.000)]} b.50 {[($20.000 x $14)] 31 .000 in overhead costs in December. SOLUTION: a.000 .75 [($175.50 x 400.500 units and incurred $325. Danner has an average unit cost of $22.000 . $175.$12.000 .500)] b.000 ($9.(24. $4.000. b.000)/($1.$750.50.000 units the average unit cost is $20. 60% {1 .(40. $150. 45% b.892X. Inc.000 on sales a.000)/($1.$10 x 200. a. SOLUTION: a. $28.000 on sales of $1.000) 32 .850.000 x 45%) . No.000.25 x 200.974 ($146. Find the total fixed costs.000) b.000)} ($2. using observations from 25.00 b.($18. Compute the total fixed cost.100.$150.000 machine hours.000. the standard error 8. SOLUTION: a.000.50 x 100.50 at a volume of 100.25. Will repair cost at zero machine hours be $146.892 x 50. $390.000)]/(200. yes no Circle the c. $850. About 68% of the time.400. Scooter Company earned $150.7. zero is outside the relevant range.$1.000] 9.374 + $4. Y = $146.374 + $4. $10.86. of $1. Find the contribution margin ratio. repair cost should be within what amount of the predicted value? SOLUTION: a.000 .000 ($330.000) . The statistician of Comstock. b.000 . X = machine hours a. Bennco has an average unit cost of $18.000 machine hours. c. b.000 . b.000 units. standard error = $28. At 200.000) [$1.000 units the average unit cost is $14. has developed the following prediction equation for costs.374? correct answer.000.000.638 Y = total repair cost. Compute the variable cost per unit.000 . Find the predicted repair cost at 50. $300. It earned $330.000 {[($14.400.638.000 to 60. r-squared = . 80 [($475.(40. $363.000 .000 units in August.000 in overhead costs making 40.000 x $2.10.000 in overhead costs in September.000 .000)] b.30. b. Compute the variable component of overhead cost.000 . It made 30.(30. $2.80).000 [$447.000 x $2. Find the fixed factor of overhead cost. SOLUTION: a. or $475. a.80)] 33 .$447.000)/(40. Parsons Company incurred $475.000 units and incurred $447.000 .