CostEstimation 411

Required..

I. Plot the labor cost and units produced on a scattergraph. (Place cost on
the vertical axis and units produced on the horizontal axis.)

2. Plot the labor cost and number of workdays on a scattegraph. (Place cost
on the vertical axis and the number of workdays on the horizontal axis.)
3. Which measure of activity -number of units produced or workdays -
should be used as the activity base for explainingjanitorial labor cost?

IV : Multiple Choice

I. Cost behavior refers to

a. how costs react to a change ill the level of activity.
b. whether a cost is incurred in a manufacturiiig, merchandising. or
service company.
c. classifying costs as either iiiventoriable or period costs.
d. whether a particular expense has been ethically incurred.

2. An understanding oftlie underlying behavior of costs helps in all of

the following EXCEPT.
a. costs can be better estimated as volume expands and contracts.
b. true costs can be betterevaluated.
c. process inefficiencies can be better identified and as a result
improved.
d. sales volume can be betterestimated.

3. Fixedcostsdependon
a. the amountofresources used.
b. the amount of resources acquired.
c. the volume ofproductioii.
d. thevolumeofsales.

4. Which of the following is a fixed cost in an automobile

manufacturing plant?
a. Administrative salaries .
b. Electricity used b}' assembly-line machiiies
c. Salescommissions
d. Windows foreacll car produced
4]2 Chapterll

5. If each furnace required a hose that costs p20 and 2,000 furnaces are
produced for the month, the total cost for hoses is
• a. consideredto beadirectfixedcost.
b. considered to be a direct variable cost.
c. considered to be an indirect fixed cost.
d. consideredto be an indirect variable cost.

6. Which of the followingstatements is FALSE?

a. There is a cause-and-effect relationship between the cost driver
and the level of activity.
b. Fixed costs have cost driveroverthe short run.
c. Overthe long run all costs have cost dri\;ers.
d. Volume of production is a cost driver of direct manufactu+ing
costs.

7. Within the relevant range. if there is a change in the level of the cost
driver then
a. total fixed costs and total variable costs will change.
b. total fixed costs and total variable costs will remaiii the same.
c. total fixed costs will remain the same and total variable costs will
change.
d. total fixed costs will change and total variable costs will remain
tile same.

8. Within tile relevaiit range, if there is a change in the level ofl:he cost
driver then
a` fixed aiid variable costs pet. uiiit will change.
b. fixed and variable costs per unit will remain the same.
c. fixed costs per unit will remain the same and variable ct)sts per
unit will cliange.
d. fixed costs per unit will change and variable costs per unit will
remaiii the same.

9, When 10.000 units are produced, fixed costs are P14 per unit.
Therefore` wlien 20`000 units are produced, fixed costs
a. will increasetop28perunit.
b. will remain atp14perunit.
c. will decreaseto p7 per iiliit.
d. willtotal p280.000.
 Cost-Estimation 4]3

10. When 10,000 units are produced, variable costs are P6 per unit.
Therefore, when 20,000 units are produced
a. variable costs will total p120,000.
b. variable costs will total p60,000.
c. variable unitcosts will increase to p12 per unit.
d. variable unit costs will decreaseto p3 per unit.

1 I. Kirsten Manufacturing provided the following infomation for last

month.

Sales P I o,000
Variable costs 3,000
Fixed costs 5.000
Operating income .P_ 2.00-.0

If sales double next month, what is the projected operating income?

a. P4,000
b. P7,000
c. P9,000
d. P12,000

12. Gametoy Manufacturing curreiitly produces I,000 toys per moiith.

The following per unit data apply for sales to regular customers:

Direct materials [29 x 2,000] + [10 x 1,000]

Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total manufacturing costs

The plant has c`q.pacify for 3,000 toys and is coiisidering expanding
production to 2,000 toys. What is the total cost of producing 2,000
toys?
a. p39;000
b. P78,000
c. P68,000
d. P62,000
4]4 Chaplerll

The i;ollowing irforniation applies to questions 13 and 14.

Phoenix Manufacturing culTently produces I,000 pelicils per month. The

followi]ig per unit data apply for sales to regular customers:

Direct materials
Direct manufacturing labor
Variable manufacturing overliead
Fixed manufacturing overhead
Total manufactiirjng costs

13. The plant has capacity for 2`000 pencils and is considering expanding
production to 1.500 pencils. Wliat is the total cost of producing I,500
pencils?
a. P 85.000
b. P]70.000
c. P107,500
d. P102.500

14. What isthe per uliitcostofwhen producing 1,500 pencils?

a. P 7'.67
b. P107.50
c. P 85.00
d. pl70.00

15. Ill describing the cost formula equation, Y = a + bx, which of the
following is correct?
a. .`Y" is the indepeiident variable.
b. "a" isthevariablerate.
c. "a" and "b" are valid forall levels of activity.
d. in the high-low method, "b" equals the change in cost divided by
the change in`activity.

16. The contribution approach to tlie income statement:

a. organizes costs on a functional basis.
b. provides owners with more cash flows.
c. is particularly helpful to tlie managers in planning and decision
making.
d. provides a gross margin flgure from which selling and
administrative expenses are deducted.
 Cost Estimation 4]S

17. Which of the following is unlikely to be classified as a fixed cost with

respect to the number of units produced and sold?
a. Property taxes on a headquarters building.
b. Legal department salaries.
c. Cost of leasing the company's mainframe computer.
d. Production supplies.

18. Multiple regression analysis is used when:

a. there is more than one cost category to analyze.
b. there is more than one activity that drives the variable component
of a mixed cost.
c. the high-low method cannot be used because there is only one
observation.
d. . all of the points on .a scattergraph fall exactly on a regression
line.

19. Utility costs at Service, Inc. are a mixture of flxed and variable
components. Records indicate that utility costs are an average of
PO.40 per hour at an activity level of 9,000 machine hours and PO.25
per hour at an activity level of l8,000,machine hours. What is the
expected total utility cost if the company works 13,000 machine
hours?
a. P4,225
b. P5,200
c. P4,000
d. P3,250

20. Clerical costs in the building department of Craig Company are a

mixture of variable and fixed components. Records indicate that
average unit processing costs are PO.50 per account processedut an
activity level of 32,000 accounts. When only 22,000 accounts are
processed, the total cost of processing is P12,500. Given tli6se data,
at a budgeted level of 25,000 accounts:
a. processing costs are expected to total p8,750.
b. fixed processing costs are expected to be plo,400.
c. the variable processing costs are expected to be PO.35 per
account processed.
d. processing costs are expected to total p14,975.
 di6 Chapter ll

21. Shipping costs at Junk Food Imports is a mixed cost with variable and
fixed components. Past records indicate total shipping cost was
• P18,000 for 16,000 pounds shipped and P22,500 for 22,000 pounds

shipped. If the company plans to ship 18,000 pounds next month, the
expected shipping cost is:
a. ) P18'500. c. . P19'500.
b. P20'400. d. P24.000.

22. Erg Manufacturing Company has developed the following overhead

cost formulas:
Cost Formula
Depreciation P500
Set up P400 plus PO.20 per machine-ho`ur
Lubrication P 50 plus PO.25 per machine-hour
Utilities PO.40 per machine-hour

Based on these cost formulas, the total overhead cost expected if 200
machiile hours are worked is:
a. P 620.
b. P 900.

Questions 23 and 24 refer to the follouling:

Cosco, Inc. has acciimulated the following data for the cost of maintenance
on its machinery for the last four months:

Month Maintenance cost Machine Hours

September P26,020 21.000
VCU - 0.62 October P24,600 18,500
November P22,300 15,000
Decembei. P25,loo I 9,000

23. Assuming cosco company uses the high-low method ofamlysis, the
fixed cost of maintenance would be estimated to be:
a. P14,500. c. P,3`000.
b. P 5,020. d. P]2,320.

24. Assumi!ig Cosco Company uses tlie high-low method of aJialysis, if

macliine hours are budgeted to be 20,000 hours then the budgeted
total mailitenance cost would be expected to be:
. a. P25,400. c. P23,700.
b. P25,560. d. P24,720.
 Cost Estimation 4]1

25. Donner Company would like to estimate the variable and fixed
components of its maintenance costs and has compiled the following
data for the last five months of operations.

Labor Hours Maintenance cost

January 160 P6]7
February 130 P553
March 180 P596
April 190 P623
May Ilo P532

Using the high-low method of analysis, the estimated variable cost

per labor hour for maintenance is closest to:
a. PO.83. c. Pl.30.
b. Pl.84. d. P1.14.

Questions 26 through 30 refer to the following:

Amore C`ompany is accumulating data to be used in preparing its annual
profit plan for the coming year. The cost behavior pattern of the
maintenance costs must be determined. The accounting staff has suggested
hours and costs. Data regarding the maintenance hours and costs for the
last year and tlie results of tlie regression analysis follow:

Hours o Activi Maintenance Costs

January P 4,200
February 3,000
March 3,600
' 2;820
April
May 4,350
June 2,960
July 3,030
August 4,470
September 4,260
October 4,050
November 3,300
December 3. I 60
Sum P43,200
Avera 3,600
di8 Chapterll

Average cost per hour (43,200 / 4,800) = P9.00

c7 (intercept) 684.65
b coefficient 7.2884
Standard error of the estimate 34.469
R-squared 0.99724
. t-valueforb 60.105

26. If Amore Company uses the high-low method of analysis, the

equation for the relationship betweeh hours of activity and
maintenance cost would be:
a. y-400+9.Ox.
b. };=570+7.5x.
c. J,-3.600+400x.
d. J'-570+9.Ox.
e. Noneoftlieabove (CMA Adapted)

27. Based on the data derived from the regression analysis, 420
maintenance hours in a month would mean the maintenance costs
would be budgeted at
a. P3,780.
b. P3.461.
c. P3,797.
d. P3'746.
e. Noneoftheabove (CMA Adapted)

28. The coefficient of determination for Amore's regression eqiiation for

the maintenance activities is
a. 34.469/49.515.
b. 0.99724.
c. square r.ootofo.99724.
d. (0.99724)2
e. Noneoftheabove. (C MA Adapted)

29. The percent of` the total variance that can be explaine(I by the
regression equation is
a. 99.724%.
b. 69.613%.
c. 80.982%.
d. 99.862%.
e. Noneoftheabove. (CMA Adapted)
 Cost Estimation 4]9

30. At 400 hours of activity, Amore management`can be approximately

two-thirds confident that the maintenance costs will be in the range of
a. P3,550.50-P3,649.53.
b. P3,551.37-P3,648.51.
c. P3,586.18-P3,613.93.
d. P3,565.54-P3,634.47.
e. Noneoftheabove. (CMA Adapted)

31. The average labor cost per unit for the first batch produced by a new
process is P120. The cumulative average labor cost after the second
batch is P72 per proddct. Using a batch size of loo and assuming the
leaming curve continues,.the total labor cost of four batches will be
a. P4,320.
b. Plo,368.
c. P2,592.
d. P17'280.

32. A particular manufacturing job is subject ~to an estimated 80%

leaning curve. The first unit required 50 labor hours to complete.
What is the cumulative average time per unit after eight units are
completed?
a. 20.Ohours.
b. 25.6hours.
c. 32.Ohours.
d. 40.Ohours.

33. A particular manufacturing job is subject to an estimated 80%

16aming cilrve. The first unit required 50 labor hours to complete. If
the leaning curve is based 'on a cumulative average time per unit
assumption, what is the time required to complete the second unit?
a. 30.Ohours.
b. 40.Ohours.
c. 45.Ohours.
d. 50.Ohours.

34. A learning curve of 80% assumes that direct labor costs are reduced
by 20% for each doubling of.output. What is the cost of the sixteentii
uiiit produced as an approximate percentage of the first unit
produced?
a. 32% c. 51%
b. 40% d. 64%
4&0 Chapterll

35. A regression equation

a. estimates the dependent variables.
b. encompasses factors outside the relevant range.
c. Is based on objective and constraint functions.
d. estimates the independent variable.

36. Correlation is a term frequently used in conjunction with regression

analysis and is measured by the value of the coefficient of correlation,
r. The best explanation of the value r is that it
a. Isalways positive.
b. interprets variances in terms of the independent variable.
c. ranges in size from negative infinity to positive infinity. .
d. Is a measure of the relative relationship between two variables.

37. Awto Company is an automobile replacement parts dealer in a large

metropolitan community. Awto is prepar;ng its sales forecast for the
coming year. Data regarding both Awto's and industry sales of
replacement parts as well as both the used and new automobile sales
in the community for the last 10 years have been accumulated. If
Awto wants to determine if its sales of replacement parts are
patterned after the industry sales of replacement parts or to the sales
of used and new automobiles, the company would employ
a. simulatioii techniques.
b. correlation and regression analysis.
c. statisticalsampiing. .
d. timeseriesana!ysis.

38. ]n regres;ion analysis, which of the following correlation coefficients

represents the strongest relationship between the independent and
dependent varia`bles?
a. I.03
b. -0.02
c. -0.89
d. 0.75
 Cost Estimation 481

39. Jones Corp. wishes to determine the fixed portion of its maintenance
expense (a semivariable expense), as measured against direct labor
hours, for the first 3 months of the year. The inspection costs are
frxed; the adjustments necessitated by errors found during inspection
account for the variable portion of the maintenance costs.
Information for the flrst quarter is as follows:

Direct Labor Hours Maintenance Expense

January
February :i:::: 3:;:
March 34,000 P610

What is the flxed portion of Jones' maintenance expense, rounded to

the nearest peso?
a. P283
b. P327
c. .P258
d. P541

40. Awto Company is an automobile replacement parts dealer in a large

metropolitan community. Awto is preparing its sales forecast for the
coming year. Da.ta regarding both Awto's and industry sales of
replacement parts as well as both tlie used and new automobile sales
in the community for the last 10 years have.been accumulated. If
Awto wants to determine if there is a historical trend in the growth of
its sales as well as the growth of industry sales of replacement parts,
the company would employ
a. simulation techniques.
b. queuiiigtheory.
c. statistical sampling.
d. time series analysis.

41. An intemal auditor for a large automotive parts retailer wishes to

perform a risk analysis and wants to use an appropriate statistical tool
to help identify stores that would be out of line compared to the
majority of stores. The most appropriate statistical tool to use js
a. Iineartime series analysis.
b. cross-sectional regression analysis.
c. cross tabulations with chi-square analysis of significance.
d. time series multiple regression analysis to identify changes in
individual stores over time.
492 Chapterll

42. In determining cost behavior in business, the cost function is dfien

expressed as Y = a + bx. Which one of the follow:ng cost estimation
methods should not be used in estimating fixed and variable costs for
the equation?
a. Graphicmethod `
b. Simpler€gression .
c. High and lowpointmethod
d. Multiple regression
(CMA Adapted)

43. An assembly plant accumulates its variable and fixed manufacturing

overhead costs in a single cost pool, which is then applied to work in
process using a single application base. The assembly plant
management wants to estimate the magnitude of the total
manufacturing Overhead costs for different volume levels of the
application activity base Llsing a flexible budget formula. If there is
an increase in the application activity base that .is within the relevant
range of activity for the assembly plant, which one of the following
relationships regardiiig variable and `fixed costs is correct?
a. The variable cost per unit is constant` and the total fixed costs
decrease.
b. The variable cost per unit is constant, and the total fixed costs
•increase.
• c. The variable cost per unit and the total fixed costs remain
constant.
d. The variable cost per unit increases, and the total fixed costs
remain constant.
(CIA, Adapted)