46) A strength of the high-low method of cost estimation is that the high point and the low point are representative of all data points. Answer: FALSE
Explanation: A weakness of the high-low method of cost estimation is that the high point and the low point are not representative of all data points. Diff: 2
Terms: high-low method Objective: 4
AACSB: Reflective thinking
47) In regression analysis, the term \cost driver and the costs. Answer: TRUE Diff: 2
Terms: regression analysis Objective: 4
AACSB: Reflective thinking
48) Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables. Answer: TRUE Diff: 2
Terms: cost estimation, cost predictions Objective: 4
AACSB: Communication
49) The managers of the production department have decided to use the production levels of 2011 and 2014 as examples of the highest and lowest years of operating levels. Data for those years are as follows: Year Chemicals used Overhead Costs 2011 280,000 gallons $230,000 2014 240,000 gallons $200,000
Required:
What is the cost estimating equation for the department if gallons of chemicals are used as the cost driver? Answer:
Slope (variable cost) = ($230,000 - $200,000) / (280,000 - 240,000) = $0.75
Constant (fixed cost) = $200,000 - $0.75(240,000) = $20,000
Estimating equation = $20,000 + $0.75DM Diff: 1
Terms: cost estimation, slope coefficient, constant Objective: 4
AACSB: Analytical skills
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50) Wimmer's Storage ran its freezer in February, a slow month, for 360 hours for a total cost of $57,600. In July, a peak month, the freezer ran for 720 hours for a total cost of $82,080.
Required:
a. What is the cost estimating equation for the department if hours of freezer use are used as the cost driver?
b. What is the estimated total cost at an operating level of 500 hours? Answer:
a. Slope (variable costs) = ($82,080 - $57,600) / (720 - 360) = $68
Constant (fixed cost) = $82,080 - (720 × $68) = $33,120
Estimating equation = $33,120 + $68DLH
b. Total costs of 500 hours = $33,120 + $68 × 500 = $67,120 Diff: 2
Terms: cost estimation, cost function, cost predictions Objective: 4
AACSB: Analytical skills
51) The Wildcat Company has provided the following information:
Units of Output 30,000 Units 42,000 Units Direct materials $ 180,000 $ 252,000 Workers' wages 1,080,000 1,512,000 Supervisors' salaries 312,000 312,000 Equipment depreciation 151,200 151,200 Maintenance 81,600 110,400 Utilities 384,000 528,000 Total $2,188,800 $2,865,600
Using the high-low method and the information provided above, a. identify the linear cost function equation and b. estimate the total cost at 36,000 units of output. Answer:
a. Variable cost = ($2,865,600 - $2,188,800) / (42,000 - 30,000) = $56.40 Fixed cost = $2,865,600 - $56.40 × 42,000 = $496,800 Cost function is y = $496,800 + $56.40X
b. Output level of 36,000 units = $496,800 + $56.40 × 36,000 = = $2,527,200 total cost Diff: 2
Terms: linear cost function Objective: 4
AACSB: Analytical skills
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52) As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department: Observation Machine-hours Total Operating Costs January 4,000 $45,000 February 4,600 49,500 March 3,800 45,750 April 4,400 48,000 May 4,500 49,800
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. If June's estimated machine-hours total 4,200, what are the total estimated costs of the Machining Department? Answer:
a. Slope coefficient = ($49,500 - $45,750) / (4,600 - 3,800) = $4.6875 per machine-hour
Constant = $49,500 - ($4.6875 × 4,600) = $27,937.50 Estimating equation = $27,937.50 + $4.6875X
b. June's estimated costs = $27,937.50 + $4.6875 × 4,200 = $47,625 Diff: 2
Terms: high-low method, cost predictions Objective: 4
AACSB: Analytical skills
53) Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, Kansas. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected: Machine-hours Kilowatt-hoursTotal Overhead Costs January 3,800 4,520,000 $338,000 February 3,650 4,340,000 336,800 March 3,900 4,500,000 339,200 April 3,300 4,290,000 336,800 May 3,250 4,200,000 326,000 June 3,100 4,120,000 320,000
Required:
a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c. For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $314,000. Which cost driver was the best predictor for July?
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Answer:
a. Machine-hours:
Slope coefficient = ($339,200 - $320,000) / (3,900 - 3,100) = $24.00 per machine-hour Constant = $339,200 - ($24 × 3,900) = $245,600
Machine-hour estimating equation = $245,600 + $24X
b. Kilowatt-hours:
Slope coefficient = ($338,000 - $320,000) / (4,520,000 - 4,120,000) = $0.045 per kilowatt-hour Constant = $338,000 - ($0.045 × 4,520,000) = $134,600
Kilowatt-hour estimating equation =$134,600 + $0.045KWH
c. July's estimated costs:
with machine-hours = $245,600 + $24 × 3,000 = $317,600 with kilowatt-hours = $134,600 + $0.045 × 4,000,000 = $314,600 The best estimator for July was the kilowatt-hour cost driver. Diff: 3
Terms: high-low method, cost predictions Objective: 4
AACSB: Analytical skills
54) Patrick Ross, the president of Ross's Wild Game Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available:
Month Machine-hours Overhead Costs February 1,700 $20,500 March 2,800 22,250 April 1,000 19,950 May 2,500 21,500 June 3,500 23,950
Required:
Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver. Answer: High: June 3,500 $23,950 Low: April 1,000 19,950 Difference 2,500 $ 4,000
Variable cost per MH: $4,000/2,500 = $1.60 per MH
Fixed cost: $19,950 = a + $1.60 × 1,000 a = $18,350
Cost function is Y = $18,350 + $1.60X Diff: 2
Terms: high-low method, cost function Objective: 4
AACSB: Analytical skills
55) List and briefly describe the six steps in estimating a cost function under quantitative analysis.
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Answer: The first step is to select the dependent variable. Selection of which dependent variable to use will depend on the cost function being estimated. Once the dependent variable has been selected, it is necessary to identify the independent variable or cost driver. The cost driver is the factor that is used to predict the dependent variable costs. The cost driver should have an economically plausible relationship with the dependent variable and be measurable. The third step involves collecting data on the dependent variable and the cost driver. The data may be time-series data or they may be cross-sectional data. Once the data are collected, they need to be plotted, which is step four. Plotting the data allows for the
relationship between the cost driver and the dependent variable to be more readily observed. This also allows for the identification of extreme observations that should be further investigated. The fifth step is to estimate the cost function, using some form of quantitative analysis. The last step is to evaluate the cost driver of the estimated cost function to determine if the cost function provides a good estimation. Diff: 2
Terms: cost estimation Objective: 4
AACSB: Reflective thinking
Objective 10.5
1) An inaccurate cost function with a slope coefficient that is estimated too low may most likely result in: A) predicting total costs that are too high
B) initiating cost cutting measures when they are unnecessary C) evaluating a weak manager as having strong performance
D) promoting a product that is actually more profitable than budgeted Answer: B Diff: 3
Terms: cost function, slope coefficient Objective: 5
AACSB: Analytical skills
2) An inaccurate cost function with a constant that is estimated too high may most likely result in: A) evaluating a weak manager as providing strong performance B) promoting a product that is actually less profitable than budgeted C) predicting total costs that are too low
D) replicating processes that are truly cost saving Answer: A Diff: 3
Terms: cost function, cost estimation Objective: 5
AACSB: Analytical skills
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