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.

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.

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.

4. Which cost is most likely to be mixed for a manufacturer?

a. Raw materials.
b. Direct labor.
c. Manufacturing overhead.
d. Insurance.

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

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.

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.

8. Fixed costs that cannot be reduced within a short period of time are
a. committed.
b. variable.
c. avoidable.
d. unnecessary.

9. Which cost is most likely to be committed?

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a.
b.
c.
d.

Repairs and maintenance.

Sum-of-the-years'-digits depreciation on the factory building.
Fee for a consultant on the company's long-range planning.
Advertising.

a 10. RST's average cost per unit is the same at all levels of volume. Which of the
following is true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.
b 11. A mixed cost
a. increases in steps as volume increases.
b. contains a fixed component and a variable component.
c. varies with more than one measure of volume.
d. cannot be accurately predicted.
b 12. A non-value-adding activity
a. cannot be a cost driver.
b. should be eliminated.
c. usually drives only variable costs.
d. cannot usually be observed by managers.
d 13. A cost-predicting equation determined through regression analysis
a. always gives close predictions.
b. will not work any better than one obtained using the high-low method.
c. can be used only for costs that vary with sales or production.
d. could be severely affected by outliers.
b 14. Which of the following do JIT operations try to eliminate?
a. Discretionary fixed costs.
b. Non-value-adding costs.
c. Avoidable costs.
d. Direct costs.
d 15. ABC Company breaks even at $600,000 sales and earns $60,000 at $700,000 sales.
Which of the following is true?
a. Fixed costs are $40,000.
b. Profit at sales of $800,000 would be $160,000.
c. The selling price per unit is $6.
d. Contribution margin is 60% of sales.
b 16. A seasonal business that sets selling prices at 20% above average cost for the
preceding month will
a. be better off if it closed down during the off-season.
b. charge higher prices in the off-season than in the busy season.
c. always charge higher prices than its competitors.
d. make a consistent return on sales of 20%.
b 17. The components of manufacturing cost are
a. variable costs, fixed costs, and overhead costs.
b. materials, direct labor, and overhead.
c. purchases, wages, and manufacturing overhead.
d. wages and salaries, maintenance and repairs, utilities, and depreciation.
b 18. Which statement is true for a manufacturer?
a. It cannot use the contribution-margin format of the income statement.
b. Many costs vary with production activities, not with sales.
c. The concepts of fixed and variable costs do not apply.
d. Cost-volume-profit analysis is not appropriate.
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d 19. Fixed costs that managers can change on short notice are
a. value-adding costs.
b. variable costs.
c. unavoidable costs.
d. discretionary costs.
c 20. A(n) __________ relationship is one that appears to exist even though there is no
causal relationship.
a. Correlation.
b. Outlier.
c. Spurious.
d. Value-added.
c 21. Identifying cost drivers
a. is not necessary with regression analysis.
b. is the same as identifying cost pools.
c. is an important part of cost management.
d. is useful only with step-variable costs.
d 22. A cost
a. all
b. all
c. all
d. all
b 23. As
a.
b.
c.
d.

pool is
of the costs of a particular department.
costs in a group such as variable costs or discretionary fixed costs.
costs related to a product or product line.
costs that have the same driver.

volume increases,
total fixed costs
total fixed costs
total fixed costs
total fixed costs

remain constant and per-unit fixed costs increase.

remain constant and per-unit fixed costs decrease.
remain constant and per-unit fixed costs remain constant.
increase and per-unit fixed costs increase.

d 24. Which cost is NOT subtracted from selling price to

calculate contribution margin per unit?
a. Variable manufacturing overhead.
b. Variable selling expenses.
c. Direct labor.
d. Fixed manufacturing overhead.

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c 25. A committed fixed cost

a. can never be eliminated.
b. can be eliminated in the short-term and in the long-term.
c. can be eliminated in the long-term, but not in the short-term.
d. can be eliminated in the short-term, but not in the long-term.
c 26. Avoidable costs are usually
a. committed.
b. common.
c. direct.
d. fixed.
a 27. Direct costs are
a. associated with a specific activity.
b. always variable.
c. usually committed.
d. usually discretionary.
c 28. Discretionary costs
a. are usually unavoidable.
b. are not necessary for successful operations.
c. can be either direct or indirect.
d. should be the first ones cut in a cost-reduction program.
a 29. Ogden Company had $300,000 overhead cost at 20,000 machine hours, $320,000 overhead
cost at 25,000 hours. Variable overhead cost per machine hour is
a. $ 4.00.
b. $12.80.
c. $15.00.
d. some other number.
b 30. Sacramento Company had $400,000 overhead cost at 50,000 machine hours and $460,000
overhead cost at 60,000 hours. Total fixed overhead is
a. $ 60,000
b. $100,000
c. $120,000.
d. $320,000.
d 31. Which cost is LEAST likely to be discretionary?
a. Salaries of salespeople.
b. Advertising.
c. Building maintenance.
d. Insurance.
a 32. Which cost is LEAST likely to be direct to a particular product?
a. Salaries of salespeople who sell all of the company's products.
b. Advertising of the product.
c. License fees paid to the designer of the product.
d. Cost of materials used to make the product.
c 33. Which cost is most likely to be avoidable in deciding whether to shut down one of
the four assembly lines in a factory?
a. Depreciation on the factory building.
b. Salaries of maintenance workers who service all assembly lines.
c. Power used to operate equipment on the assembly line.
d. Heat and light for the building.
c 34. DSP Company earned $100,000 on sales of $1,000,000. It earned 130,000 on sales of
$1,100,000. Variable costs as a percentage of sales are
a. 30%.
b. 40%.
c. 70%.
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d. 90%.
b 35. DSP Company earned $100,000 on sales of $1,000,000.
$1,100,000. Total fixed costs are
a. $0.
b. $200,000.
c. $420,000.
d. $900,000.

It earned $130,000 on sales of

c 36. Predicting costs at activity levels that are outside the relevant range is called
a. association.
b. correlation.
c. extrapolation.
d. none of the above.
a 37. A non-value-adding cost
a. is driven by a non-value-adding activity.
b. is discretionary.
c. is direct to a product.
d. allows the company to charge a higher price for the product.
b 38. Looking at the following scatter diagrams we can conclude that
$
$
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* *
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*
* *
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** *
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* * * *
|
* *
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* *
| * *
|
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|
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|__________________
|__________________
activity
activity
Cost A
Cost B
a.
b.
c.
d.

cost
cost
cost
cost

A
B
A
B

will be easier to predict than cost B.

will be easier to predict than cost A.
is out-of-control.
has no fixed component.

b 39. MNO has a break-even point of 200,000 units and earns a $100,000 profit at sales of
250,000 units. Which of the following is true?
a. Fixed costs are $100,000.
b. Total contribution margin at 200,000 units is $400,000.
c. Profit at sales of 300,000 units is $120,000.
d. Selling price per unit is $2.

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a 40. The closeness of the relationship between the cost and the activity is called
a. correlation.
b. spurious.
c. regression analysis.
d. manufacturing overhead.
d 41. R-squared is a measure of
a. the spurious relationship between cost and activity.
b. the fixed cost component.
c. the variable cost per unit of activity.
d. how well the regression line accounts for the changes in the dependent variable.
c 42. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units.
What is the variable cost per unit?
a. $5.00
b. $6.25
c. $7.50
d. An amount that cannot be determined without more information.
b 43. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units.
What is the total fixed cost?
a. $125,000
b. $250,000
c. $400,000
d. An amount that cannot be determined without more information.
a 44. GMH Company had $200,000 overhead cost at 25,000 machine hours and $240,000
overhead cost at 60,000 hours. Variable overhead per machine hour is
a. $4.00.
b. $1.00.
c. $0.83.
d. some other number.
d 45. Elmwood Company had $300,000 overhead cost at 40,000 machine hours, and $360,000
overhead cost at 60,000 hours. Total fixed overhead is
a. $ 36,000
b. $ 40,000
c. $ 60,000.
d. $180,000.
b 46. Crookston Company breaks even at $300,000 sales and earns $40,000 at $400,000
sales. Which of the following is true?
a. Fixed costs are $120,000.
b. Profit at sales of $500,000 would be $50,000.
c. The selling price per unit is $4.
d. Contribution margin is 10% of sales.
a 47. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units.
What is the variable cost per unit?
a. $15
b. $20
c. $35
d. An amount that cannot be determined without more information.
b 48. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units.
What is the total fixed cost?
a. $400,000
b. $600,000
c. $900,000
d. An amount that cannot be determined without more information.
b 49. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of
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$450,000.
a. 30%.
b. 40%.
c. 60%.
d. 70%.

Contribution margin as a percentage of sales is

c 50. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of
$450,000. Total fixed costs are
a. $
0.
b. $ 50,000.
c. $110,000.
d. $180,000.
True-False
F

1. The major variable cost in a manufacturing company is factory overhead.

2. In interpreting regression results, the higher the correlation, the better cost
predictions are likely to be.

3. Discretionary costs are step-variable.

4. Discretionary fixed costs are not necessary to successful operation of the

business.

5. High-low, scatter diagram, and regression analysis are methods of developing

formulas to predict mixed costs.

6. As volume increases, the per-unit amount of a mixed cost increases.

7. In developing a cost-prediction equation using regression analysis, you might not

select the one with the highest correlation.

8. A company using activity-based costing need not do regression analysis or scatter

diagrams.

9. An r-squared of .91 with a regression equation means that predictions will be

accurate 91% of the time.

T 10. A multiple regression equation uses more than one driver to predict costs.

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Problems
1. Carlson Company incurred $170,000 in overhead costs making 12,000 units in March. It
made 15,000 units and incurred $188,000 in overhead costs in April.
a. Compute the variable component of overhead cost.
b. Find the fixed factor of overhead cost.
SOLUTION:
a. $6 [($188,000 - $170,000)/(15,000 - 12,000)]
b. $98,000

[$170,000 - (12,000 x $6), or $188,000 - (15,000 x $6)]

2. The statistician of RST, Inc. has developed the following cost-prediction equation,
using observations from 12,000 to 30,000 machine hours.
Y = $236,837 + $3.7625X,

r-squared = .81, standard error = $24,363

Y = total maintenance cost, X = machine hours

a. Find the predicted maintenance cost at 25,000 machine hours.
b. Will maintenance cost at zero machine hours be $236,837?
correct answer.

yes

no

Circle the

c. About 68% of the time, maintenance cost should be within what amount of the
predicted value?
SOLUTION:
a. $330,900

($236,837 + $3.7625 x 25,000)

b. No, zero is outside the relevant range.

c. $24,363, the standard error
3. Genner Company earned $125,000 on sales of $750,000.
$1,000,000.
a. Find the variable costs as a percentage of sales.
b. Find the total fixed costs.

30

It earned $225,000 on sales of

SOLUTION:
a. 60%

{1 - [($225,000 - $125,000)/($1,000,000 - $750,000)]}

b. $175,000

[$1,000,000 x (1 - 60%) - $225,000]

4. Danner has an average unit cost of $22.50 at a volume of 400,000 units. At 500,000
units the average unit cost is $20.50.
a. Compute the variable cost per unit.
b. Compute the total fixed cost.
SOLUTION:
a. $12.50

{[($20.50 x 500,000) - ($22.50 x 400,000)]/(500,000 - 400,000)}

b. $4,000,000

($9,000,000 - $12.50 x 400,000)

5. Tri-County Company incurred $175,000 in overhead costs making 40,000 units in April.
It made 24,000 units and incurred $147,000 in overhead costs in May.
a. Compute the variable component of overhead cost.
b. Find the fixed factor of overhead cost.
SOLUTION:
a. $1.75 [($175,000 - $147,000)/(40,000 - 24,000)]
b. $105,000

[$147,000 - (24,000 x $1.75), or $175,000 - (40,000 x $1.75)]

6. Bilbo Company incurred $374,000 in overhead costs making 11,000 units in November. It
made 7,500 units and incurred $325,000 in overhead costs in December.
a. Compute the variable component of overhead cost.
b. Find the fixed factor of overhead cost.
SOLUTION:
a. $14

[($374,000 - $325,000)/(11,000 - 7,500)]

b. $220,000

[$325,000 - (7,500 x $14), or $374,000 - (11,000 x $14)]

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7. The statistician of Comstock, Inc. has developed the following prediction equation for
costs, using observations from 25,000 to 60,000 machine hours.
Y = $146,374 + $4.892X,

r-squared = .86, standard error = $28,638

Y = total repair cost, X = machine hours

a. Find the predicted repair cost at 50,000 machine hours.
b. Will repair cost at zero machine hours be $146,374?
correct answer.

yes

no

Circle the

c. About 68% of the time, repair cost should be within what amount of the predicted
value?
SOLUTION:
a. $390,974

($146,374 + $4.892 x 50,000)

b. No, zero is outside the relevant range.

c. $28,638, the standard error
8. Scooter Company earned $150,000 on sales of $1,000,000.
of $1,400,000.

It earned $330,000 on sales

a. Find the contribution margin ratio.

b. Find the total fixed costs.
SOLUTION:
a. 45%
b. $300,000

($330,000 - $150,000)/($1,400,000 - $1,000,000)

[$1,000,000 x 45%) - $150,000]

9. Bennco has an average unit cost of $18.50 at a volume of 100,000 units. At 200,000
units the average unit cost is $14.25.
a. Compute the variable cost per unit.
b. Compute the total fixed cost.
SOLUTION:
a. $10.00
b. $850,000

{[($14.25 x 200,000) - ($18.50 x 100,000)]/(200,000 - 100,000)}

($2,850,000 - $10 x 200,000)

32

10. Parsons Company incurred $475,000 in overhead costs making 40,000 units in August. It
made 30,000 units and incurred $447,000 in overhead costs in September.
a. Compute the variable component of overhead cost.
b. Find the fixed factor of overhead cost.
SOLUTION:
a. $2.80

[($475,000 - $447,000)/(40,000 - 30,000)]

b. $363,000

[$447,000 - (30,000 x $2.80), or $475,000 - (40,000 x $2.80)]

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