Preparation for Examination 2 (Chapters 7, 8, 9, 10)

Exercises for students

 

Chapter  7

 

21) An unfavorable variance indicates that:

  1. A) actual costs are less than budgeted costs
  2. B) actual revenues exceed budgeted revenues
  3. C) the actual amount decreased operating income relative to the budgeted amount
  4. D) All of these answers are correct.

Answer:  C

 

22) The flexible budget contains:

  1. A) budgeted amounts for actual output
  2. B) budgeted amounts for planned output
  3. C) actual costs for actual output
  4. D) actual costs for planned output

Answer:  A

 

23) An unfavorable sales-volume variance could result from:

  1. A) decreased demand for the product
  2. B) competitors taking market share
  3. C) customer dissatisfaction with the product
  4. D) All of these answers are correct.

Answer:  D

 

24) A favorable price variance for direct materials indicates that:

  1. A) a lower price than planned was paid for materials
  2. B) a higher price than planned was paid for materials
  3. C) less material was used during production than planned for actual output
  4. D) more material was used during production than planned for actual output

Answer:  A

 

25) A variance is:

  1. A) the gap between an actual result and a benchmark amount
  2. B) the required number of inputs for one standard output
  3. C) the difference between an actual result and a budgeted amount
  4. D) the difference between a budgeted amount and a standard amount

Answer:  C

 

26) A favorable variance indicates that:

  1. A) budgeted costs are less than actual costs
  2. B) actual revenues exceed budgeted revenues
  3. C) the actual amount decreased operating income relative to the budgeted amount
  4. D) All of these answers are correct.

Answer:  B

 

27) A favorable efficiency variance for direct manufacturing labor indicates that:

  1. A) a lower wage rate than planned was paid for direct labor
  2. B) a higher wage rate than planned was paid for direct labor
  3. C) less direct manufacturing labor-hours were used during production than planned for actual output
  4. D) more direct manufacturing labor-hours were used during production than planned for actual output

Answer:  C

 

Answer the following questions using the information below:

 

Bowden Corporation used the following data to evaluate their current operating system. The company sells items for $20 each and used a budgeted selling price of $20 per unit.

 

Actual     Budgeted

Units sold        46,000 units    45,000 units

Variable costs $225,400         $216,000

Fixed costs      $47,500           $50,000

 

28) What is the static-budget variance of revenues?

  1. A) $20,000 favorable
  2. B) $20,000 unfavorable
  3. C) $2,000 favorable
  4. D) $2,000 unfavorable

Answer:  A

Explanation:  A) (46,000 units × $20) – (45,000 units × $20) = $20,000 F

 

Answer the following questions using the information below:

Brennen Incorporated planned to use $24 of material per unit but actually used $25 of material per unit, and planned to make 2,000 units but actually made 2,400 units.

 

29) The flexible-budget amount is:

  1. A) $48,000
  2. B) $50,000
  3. C) $57,600
  4. D) $60,000

Answer:  C

Explanation:  C) 2,400 units × $24 = $57,600

 

30) The flexible-budget variance is:

  1. A) $9,600 favorable
  2. B) $2,400 unfavorable
  3. C) $10,000 unfavorable
  4. D) $12,000 favorable

Answer:  B

Explanation:  B) ($25 – $24) × 2,400 = $2,400 U

 

31) The sales-volume variance is:

  1. A) $9,600 favorable
  2. B) $2,400 unfavorable
  3. C) $10,000 unfavorable
  4. D) $12,000 favorable

Answer:  A

Explanation:  A) (2,400 – 2,000) × $24 = $9,600 F

 

 

Answer the following questions using the information below:

 

Sawyer Industries, Inc. (SII), developed standard costs for direct material and direct labor. In 2011, SII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.

 

                                          Budgeted quantity     Budgeted price

Direct materials           0.20 pounds                $25 per pound

Direct labor                 0.10 hours                   $15 per hour

 

 

During July, SII produced and sold 5,000 containers using 1,100 pounds of direct materials at an average cost per pound of $24 and 525 direct manufacturing labor hours at an average wage of $14.75 per hour.

 

34) July’s direct material flexible-budget variance is:

  1. A) $1,400 unfavorable
  2. B) $21,100 favorable
  3. C) $2,500 unfavorable
  4. D) None of these answers are correct.

Answer:  A

Explanation:  A) (1,100 × $24) – (5,000 × 0.20 × $25) = $1,400 U

 

35) July’s direct material price variance is:

  1. A) $1,400 favorable
  2. B) $1,100 favorable
  3. C) $2,500 unfavorable
  4. D) None of these answers are correct.

Answer:  B

Explanation:  B) 1,100 × ($24 – $25) = $1,100 F

 

36) July’s direct material efficiency variance is:

  1. A) $1,400 unfavorable
  2. B) $1,100 favorable
  3. C) $2,500 unfavorable
  4. D) None of these answers are correct.

Answer:  C

Explanation:  C) $25 × [1,100 – (5,000 × 0.20)] = $2,500 U

 

37) July’s direct manufacturing labor flexible-budget variance is:

  1. A) $375.00 unfavorable
  2. B) $131.25 favorable
  3. C) $243.75 unfavorable
  4. D) None of these answers are correct.

Answer:  C

Explanation:  C) (525 × $14.75) – (5,000 × 0.10 × $15) = $243.75 U

 

38) July’s direct manufacturing labor price variance is:

  1. A) $375.00 unfavorable
  2. B) $131.25 favorable
  3. C) $243.75 favorable
  4. D) None of these answers are correct.

Answer:  B

Explanation:  B) 525 dlh × ($14.75 – $15.00) = $131.25 F

 

39) July’s direct manufacturing labor efficiency variance is:

  1. A) $375.00 unfavorable
  2. B) $131.25 favorable
  3. C) $243.75 favorable
  4. D) None of these answers are correct.

Answer:  A

Explanation:  A) [525 dlh – (5,000 × 0.10)] × $15 = $375 U

 

 

 

 

Chapter 8

 

 

Answer the following questions using the information below:

 

Christine Corporation manufactures baseball uniforms and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company’s manufacturing overhead data:

 

Budgeted output units                                                                       10,000 units

Budgeted machine-hours                                                                 15,000 hours

Budgeted variable manufacturing overhead costs for 15,000 hours      $180,000

 

Actual output units produced                                                              9,000 units

Actual machine-hours used                                                              14,000 hours

Actual variable manufacturing overhead costs                                      $171,000

 

1) What is the budgeted variable overhead cost rate per output unit?

  1. A) $12.00
  2. B) $12.21
  3. C) $18.00
  4. D) $19.00

Answer:  C

Explanation:  C) Budgeted rate = $180,000/15,000 = $12.00 per machine hour

Budgeted machine hours per unit = 15,000/10,000 = 1.5 hours per unit

Cost rate per output unit = $12.00 x 1.5 = $18.00

 

 

2) What is the flexible-budget amount for variable manufacturing overhead?

  1. A) $162,000
  2. B) $171,000
  3. C) $190,000
  4. D) None of these answers is correct.

Answer:  A

Explanation:  A) Budgeted rate = $180,000/15,000 = $12.00 per machine hour

Budgeted machine hours for 9000 units = 15,000 x (9000/10000) = 13,500 (or 9,000 x 15,000/10,000 = 9,000 units x 1,5 hours per unit = 13,500).

Flexible-budget amount = $12.00 x 13,500 = $162,000 (or 9,000 AQ x 1.5 BQ x 12 BR)

3) What is the flexible-budget variance for variable manufacturing overhead?

  1. A) $9,000 favorable
  2. B) $9,000 unfavorable
  3. C) zero
  4. D) None of these answers is correct.

Answer:  B

Explanation:  B) Budgeted rate = $180,000/15,000 = $12.00 per machine hour

Budgeted machine hours for 9000 units = 15,000 x (9000/10000) = 13,500 (or 9,000 x 1.5h/unit =13,300)

Flexible-budget amount = $12.00 x 13,500 = $162,000

Flexible-budget variance = $171,000 – $162,000 = $9,000 unfavorable      (A –F)

 

4) Variable-manufacturing overhead costs were ________ for actual output.

  1. A) higher than expected
  2. B) the same as expected
  3. C) lower than expected
  4. D) indeterminable

Answer:  A

 

Answer the following questions using the information below:

 

Patel Corporation manufactured 1,000 coolers during October. The following variable overhead data pertain to October:

 

Budgeted variable overhead cost per unit                                        $ 9.00

Actual variable manufacturing overhead cost                                 $8,400

Flexible-budget amount for variable manufacturing overhead       $9,000

Variable manufacturing overhead efficiency variance                    $180 unfavorable

 

5) What is the variable overhead flexible-budget variance?

  1. A) $600 favorable
  2. B) $420 unfavorable
  3. C) $780 favorable
  4. D) $600 unfavorable

Answer:  A

Explanation:  A) $8,400 – $9,000 = $600 (F)

 

6) What is the variable overhead spending variance?

  1. A) $420 unfavorable
  2. B) $600 favorable
  3. C) $600 unfavorable
  4. D) $780 favorable

Answer:  D

Explanation:  D) $600 (F) – $180 (U) = $780 (F)

 

 

Answer the following questions using the information below:

 

Roberson Corporation manufactured 30,000 ice chests during September. The overhead cost-allocation base is $11.25 per machine-hour. The following variable overhead data pertain to September:

Actual        Budgeted

Production                                                     30,000 units    24,000 units

Machine-hours                                             15,000 hours   10,800 hours

Variable overhead cost per machine-hour:            $11.00             $11.25

 

 

7) What is the actual variable overhead cost?

  1. A) $121,500
  2. B) $151,875
  3. C) $165,000
  4. D) $168,750

Answer:  C

Explanation:  C) 15,000 mh × $11.00 = $165,000

 

 

8) What is the flexible-budget amount?

  1. A) $121,500
  2. B) $151,875
  3. C) $165,000
  4. D) $168,750

Answer:  B

Explanation:  B) 30,000 × (10,800/24,000) × $11.25 = $151,875

 

 

9) What is the variable overhead spending variance?

  1. A) $3,750 favorable
  2. B) $16,875 unfavorable
  3. C) $13,125 unfavorable
  4. D) $30,375 unfavorable

Answer:  A

Explanation:  A) ($11.00 – $11.25) × 15,000 mh = $3,750 favorable

 

 

10) What is the variable overhead efficiency variance?

  1. A) $3,750 favorable
  2. B) $16,875 unfavorable
  3. C) $13,125 unfavorable
  4. D) $30,375 unfavorable

Answer:  B

Explanation:  B) [15,000 – (30,000 × 10,800/24,000) mh] × $11.25 = $16,875 unfavorable

 

 

 

 

 

11) Can the variable overhead efficiency variance

  1. be computed the same way as the efficiency variance for direct-cost items?

 

  1. be interpreted the same way as the efficiency variance for direct-cost items? Explain.

 

Answer:

  1. Yes, the variable overhead efficiency variance can be computed the same way as the efficiency variance for direct-cost items.

 

  1. No, the interpretations are different. The variable overhead efficiency variance focuses on the quantity of allocation-base used, while the efficiency variance for direct-cost items focuses on the quantity of materials and labor-hours used.

 

 

 

Answer the following questions using the information below:

 

Jenny’s Corporation manufactured 25,000 grooming kits for horses during March. The fixed-overhead cost-allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:

 

Actual       Static Budget

Production                                               25,000 units          24,000 units

Machine-hours                                         6,100 hours           6,000 hours

Fixed overhead costs for March                  $123,000               $120,000

 

12) What is the flexible-budget amount?

  1. A) $120,000
  2. B) $122,000
  3. C) $123,000
  4. D) $125,000

Answer:  A

Explanation:  A) $120,000, the same lump sum as the static budget

 

13) What is the amount of fixed overhead allocated to production?

  1. A) $120,000
  2. B) $122,000
  3. C) $123,000
  4. D) $125,000

Answer:  D

Explanation:  D) 25,000 × (6,000/24,000) × $20.00 = $125,000

 

 

 

 

 

 

 

 

 

 

Answer the following questions using the information below:

Gus Corporation manufactured 10,000 golf bags during April. The fixed overhead cost-allocation rate is $40.00 per machine-hour. The following fixed overhead data pertain to March:

 

Actual       Static Budget

Production                                               10,000 units          12,000 units

Machine-hours                                         5,100 hours           6,000 hours

Fixed overhead cost for March                    $244,000               $240,000

 

14) What is the flexible-budget amount?

  1. A) $200,000
  2. B) $204,000
  3. C) $240,000
  4. D) $244,000

Answer:  C

Explanation:  C) $240,000, the same lump sum as the static budget

 

 

 

15) What is the amount of fixed overhead allocated to production?

  1. A) $200,000
  2. B) $204,000
  3. C) $240,000
  4. D) $244,000

Answer:  A

Explanation:  A) 10,000 × (6,000/12,000) × $40.00 = $200,000

 

16) Fixed overhead is:

  1. A) overallocated by $4,000
  2. B) underallocated by $4,000
  3. C) overallocated by $44,000
  4. D) underallocated by $44,000

Answer:  D

Explanation:  D) $244,000 – [10,000 × (6,000/12,000) × $40.00] = $44,000 underallocated

 

17) What is the fixed overhead spending variance?

  1. A) $1,000 unfavorable
  2. B) $2,000 favorable
  3. C) $4,000 unfavorable
  4. D) $5,000 favorable

Answer:  C

Explanation:  C) $244,000 actual costs – $240,000 budgeted cost = $4,000 unfavorable

 

 

 

 

 

 

 

 

18) Brown Company makes watches. The fixed overhead costs for 2011 total $324,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 10,800 hours during the year for 540,000 units. An equal number of units are budgeted for each month.

 

During October, 48,000 watches were produced and $28,000 was spent on fixed overhead.

 

Required:

  1. Determine the fixed overhead rate for 2011 based on the units of input.

 

  1. Determine the fixed overhead static-budget variance for October.

 

  1. Determine the production-volume overhead variance for October.

Answer:

  1. Fixed overhead rate = $324,000/10,800 = $30.00 per hour

 

  1. Fixed overhead static budget variance = $28,000 – ($324,000/12) = $1,000 unfavorable

 

  1. Budgeted fixed overhead rate per output unit = $324,000/540,000 = $0.60

 

 

 

19) Teddy Company uses a standard cost system. In May, $234,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $240,000. Which of the following variable manufacturing overhead entries would have been recorded for May?

 

  1. A) Accounts Payable Control and other accounts 240,000

Work-in-Process Control                                                       240,000

 

  1. B) Work-in-Process Control 240,000

Variable Manufacturing Overhead Allocated                        240,000

 

  1. C) Work-in-Process Control 234,000

Accounts Payable Control and other accounts                      234,000

 

  1. D) Accounts Payable Control and other accounts 234,000

Variable Manufacturing Overhead Control                           234,000

Answer:  B

 

 

 

 

 

 

 

 

 

 

 

 

20) Lungren has budgeted construction overhead for August of $260,000 for variable costs and $435,000 for fixed costs. Actual costs for the month totaled $275,000 for variable and $445,000 for fixed. Allocated fixed overhead totaled $440,000. The company tracks each item in an overhead control account before allocations are made to individual jobs. Spending variances for August were $10,000 unfavorable for variable and $10,000 unfavorable for fixed. The production-volume overhead variance was $5,000 favorable.

 

Required:

  1. Make journal entries for the actual costs incurred.
  2. Make journal entries to record the variances for August.

Answer:

  1. Variable Overhead Control 275,000

Accounts Payable and other accounts                                   275,000

To record actual variable construction overhead

 

      Fixed Overhead Control                                      445,000

Accumulated Depreciation, etc.                                            445,000

To record actual fixed construction overhead

 

  1. Variable Overhead Allocated 260,000

Variable Overhead Spending Variance                 10,000

Variable Overhead Efficiency Variance*                5,000

Variable Overhead Control                                                    275,000

To record variances for the period

 

      *Arrived at this number by $275,000 – $260,000 – $5,000

 

Fixed Overhead Allocated                                   440,000

Fixed Overhead Spending Variance                      10,000

Fixed Overhead Production-Volume Variance                         5,000

Fixed Overhead Control                                                        445,000

To record variances for the period

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 9

 

1) Which of the following cost(s) are inventoried when using variable costing?

  1. A) direct manufacturing costs
  2. B) variable marketing costs
  3. C) fixed manufacturing costs
  4. D) Both A and B are correct.

Answer:  A

 

2) Which of the following cost(s) are inventoried when using absorption costing?

  1. A) direct manufacturing costs
  2. B) variable marketing costs
  3. C) fixed manufacturing costs
  4. D) Both A and C are correct.

Answer:  D

 

 

3) ________ method(s) include(s) fixed manufacturing overhead costs as inventoriable costs.

  1. A) Variable costing
  2. B) Absorption costing
  3. C) Throughput costing
  4. D) All of these answers are correct.

Answer:  B

 

4) ________ method(s) expense(s) direct material costs as cost of goods sold.

  1. A) Variable costing
  2. B) Absorption costing
  3. C) Throughput costing
  4. D) All of these answers are correct.

Answer:  D

 

Answer the following questions using the information below:

 

Gloria’s Decorating produces and sells a mantel clock for $80 per unit. In 2011, 50,000 clocks were produced and 40,000 were sold. Other information for the year includes:

 

Direct materials                                   $30.00 per unit

Direct manufacturing labor                 $  2.00 per unit

Variable manufacturing costs             $  3.00 per unit

Sales commissions                              $  5.00 per part

Fixed manufacturing costs                  $25.00 per unit

Administrative expenses, all fixed      $15.00 per unit

 

5) What is the inventoriable cost per unit using variable costing?

  1. A) $32
  2. B) $35
  3. C) $40
  4. D) $60

Answer:  B

Explanation:  B) $30.00 + $2.00 + $3.00 = $35.00

6) What is the inventoriable cost per unit using absorption costing?

  1. A) $32
  2. B) $35
  3. C) $60
  4. D) $80

Answer:  C

Explanation:  C) $30 + $2 + $3 + $25 = $60

 

 

7) For 2011, Nichols, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:

 

Direct manufacturing labor                    $187,500

Variable manufacturing overhead           100,000

Direct materials                                       150,000

Variable selling expenses                        100,000

Fixed administrative expenses                 100,000

Fixed manufacturing overhead                200,000

 

There was no beginning inventory.

 

Required:

  1. Compute the ending finished goods inventory under both absorption and variable costing.
  2. Compute the cost of goods sold under both absorption and variable costing.

Answer:

  1. Absorption Variable

      Direct materials                               $150,000         $150,000

Direct manufacturing labor                187,500           187,500

Variable manufacturing overhead     100,000           100,000

Fixed manufacturing overhead          200,000                      0

Total                                     $637,500         $437,500

 

Unit costs:

$637,500/200,000 units         $3.1875

$437,500/200,000 units                                 $2.1875

 

Ending inventory:

50,000 units × $3.1875        $159,375

50,000 units × $2.1875                                $109,375

 

  1. Cost of goods sold:

150,000 × $3.1875               $478,125

150,000 × $2.1875                                       $328,125

 

 

 

 

 

 

Answer the following questions using the information below:

 

Barry’s Hobbies produces and sells a luxury animal pillow for $80.00 per unit. In the first month of operation, 3,000 units were produced and 2,250 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

 

Variable manufacturing costs             $38 per unit

Variable marketing costs                    $  2 per unit

Fixed manufacturing costs                 $60,000 per month

Administrative expenses, all fixed     $12,000 per month

Ending inventories:

Direct materials                                -0-

WIP                                                 -0-

Finished goods                                750 units

 

8) What is cost of goods sold per unit when using absorption costing?

  1. A) $38
  2. B) $40
  3. C) $58
  4. D) $64

Answer:  C

Explanation:  C) $38 + ($60,000 / 3,000 units) = $58

 

9) What is gross margin when using absorption costing?

  1. A) $95,000
  2. B) $109,500
  3. C) $154,500
  4. D) $49,500

Answer:  D

Explanation:  D)  [$80 – $38 – ($60,000/3,000)] × 2,250 units = $49,500

 

10) What is operating income when using absorption costing?

  1. A) $8,000
  2. B) $33,000
  3. C) ($23,500)
  4. D) $37,500

Answer:  B

Explanation:  B) [$80 – $38 – ($60,000/3,000)] × 2,250 units = gross margin – ($2 × 2,250) – $12,000 = $33,000

 

 

 

 

 

 

 

 

 

 

11) Charlassier Corporation manufactures and sells laptop computers and uses standard costing.  For the month of September there was no beginning inventory, there were 3,000 units produced and 2,500 units sold.  The manufacturing variable cost per unit is $385 and the variable operating cost per unit was $312.50.  The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000.  The selling price per unit is $925.

 

Required:

Prepare the income statement for Charlassier Corporation for September under variable costing.

Answer:

Revenues (2,500 × $925)                                                                                      $2,312,500

Variable costs

Beginning inventory                                                  $               0

Variable manufacturing costs (3,000 × $385)              1,155,000

Cost of goods available                                                1,155,000

Deduct ending inventory ( 500 × $385)                        (192,500)

Variable cost of goods sold                                             962,500

Variable operating costs (2,500 × $312.50)                   781,250

Total variable costs                                                                                     1,743,750

Contribution margin                                                                                                  568,750

Fixed costs

Fixed manufacturing costs                                                450,000

Fixed operating costs                                                          75,000

Total fixed costs                                                                                            525,000

Operating income                                                                                                   $   43,750

 

Answer the following questions using the information below:

 

Greene Manufacturing incurred the following expenses during 2011:

 

Fixed manufacturing costs                       $45,000

Fixed nonmanufacturing costs                 $35,000

Unit selling price                                          $100

Total unit cost                                                 $40

Variable manufacturing cost rate                   $20

Units produced                                             1,340 units

 

12) What will be the breakeven point if variable costing is used?

  1. A) 1,334 units
  2. B) 1,125 units
  3. C) 1,000 units
  4. D) 563 units

Answer:  C

Explanation:  C) Breakeven units = ($45,000 + $35,000) / ($100 – $20) = 1,000 units

 

13) What will be the breakeven point in units if absorption costing is used?

  1. A) 1,330 units
  2. B) 1,000 units
  3. C) 887 units
  4. D) 563 units

Answer:  C

Explanation:  C) Breakeven units N =

 

N = ($80,000 + $20N – $26,800)/$80

$80N = $53,200 + $20N

N = 887 units

 

14) What is the breakeven point in units using absorption costing if the units produced are actually 2,250?

  1. A) 1,330 units
  2. B) 1,000 units
  3. C) 887 units
  4. D) 584 units

Answer:  D

Explanation:  D) Breakeven units N =

N = ($80,000 + $20N – $45,000)/$80

$80N = $35,000 + $20N

N = 584 units

 

 

 

 

Chapter10

 

1) The cause and- effect relationship might arise as a result of which of the following:

  1. A) a physical relationship between the level of activity and costs.
  2. B) a contractual arrangement.
  3. C) knowledge of operations.
  4. D) All of the above.

Answer:  D

 

2) The conference method estimates cost functions:

  1. A) using quantitative methods that can be very time consuming and costly
  2. B) based on analysis and opinions gathered from various departments
  3. C) using time-and-motion studies
  4. D) by mathematically analyzing the relationship between inputs and outputs in physical terms

Answer:  B

 

3) The account analysis method estimates cost functions:

  1. A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis
  2. B) using time-and-motion studies
  3. C) at a high cost, which renders it seldom used
  4. D) in a manner that cannot be usefully combined with any other cost estimation methods

Answer:  A

 

4) Quantitative analysis methods estimate cost functions:

  1. A) which depend on the experience and judgment of the analyst for accuracy
  2. B) based on analysis and opinions gathered from various departments
  3. C) using significant amounts of historical data
  4. D) using the pooling of knowledge from each value chain function

Answer:  C

 

5) Gathering cost information through observations and interviews from departments within an organization is known as the:

  1. A) account analysis method
  2. B) conference method
  3. C) industrial engineering method
  4. D) quantitative analysis method

Answer:  B

 

6) Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods?

  1. A) the account analysis method
  2. B) the conference method
  3. C) the industrial engineering method
  4. D) the quantitative analysis method

Answer:  A

 

7) Which cost estimation method uses a formal mathematical method to develop cost functions based on past data?

  1. A) the account analysis method
  2. B) the conference method
  3. C) the industrial engineering method
  4. D) the quantitative analysis method

Answer:  D

 

8) Which cost estimation method may use time-and-motion studies to analyze the relationship between inputs and outputs in physical terms?

  1. A) the account analysis method
  2. B) the conference method
  3. C) the industrial engineering method
  4. D) the quantitative analysis method

Answer:  C

 

9) A linear cost function can represent:

  1. A) mixed cost behaviors
  2. B) fixed cost behaviors
  3. C) variable cost behaviors
  4. D) All of these answers are correct.

Answer:  D

 

10) The cost function y = 150 + 10X:

  1. A) has a slope coefficient of 150
  2. B) has an intercept of 150
  3. C) is a nonlinear
  4. D) represents a fixed cost

Answer:  B

 

11) The cost function y = 10,000 + 3X:

  1. A) represents a mixed cost
  2. B) will intersect the y-axis at 3
  3. C) has a slope coefficient of 10,000
  4. D) is a curved line

Answer:  A

 

12) The cost function y = 90 + 8X:

  1. A) has a slope coefficient of -8
  2. B) will intersect the y-axis at 8
  3. C) has a slope coefficient of 8
  4. D) is a curved line

Answer:  C

 

13) Which of the following is an equation of a fixed cost function?

  1. A) y = bX + a
  2. B) y = a + bX
  3. C) y = bX
  4. D) y = a

Answer:  D

 

14) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.

 

  1. Direct manufacturing labor is $20 per hour.
  2. Direct materials cost $18.40 per cubic yard.
  3. Utilities have a minimum charge of $2,000, plus a charge of $0.10 per kilowatt-hour.
  4. Machine operating costs include $400,000 of machine depreciation per year, plus $150 of utility costs for each day the machinery is in operation.

Answer:

  1. y = $20X
  2. y = $18.40X
  3. y = $2,000 + $0.10X
  4. y = $400,000 + $150 X

25) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and x for activity of the cost driver.

 

  1. Direct materials cost is $1.50 per pound.
  2. Direct labor cost is $33.50 per hour.
  3. Auto rental has a fixed fee of $150.00 per day plus $1.00 per mile driven.
  4. Machine operating costs include $700 of maintenance per month, and $10.00 of coolant usage costs for each day the machinery is in operation.

Answer:

  1. y = $1.50X
  2. y = $33.50X
  3. y = $150 + $1.00X
  4. y = $700 + $10X

 

15) When using the high-low method, the two observations used are the high and low observations of the:

  1. A) cost driver
  2. B) dependent variables
  3. C) slope coefficient
  4. D) residual term

Answer:  A

 

16) When using the high-low method, the denominator of the equation that determines the slope is the:

  1. A) dependent variable
  2. B) independent variable
  3. C) difference between the high and low observations of the cost driver
  4. D) difference between the high and low observations of the dependent variables

Answer:  C

 

 

17) The high-low method:

  1. A) easily handles estimating the relationship between the dependent variable and two or more independent variables
  2. B) is more accurate than the regression method
  3. C) calculates the slope coefficient using only two observed values within the relevant range
  4. D) uses the residual term to measure goodness of fit

Answer:  C

 

18) Put the following steps in order for using the high-low method of estimating a cost function:

A = Identify the cost function

B = Calculate the constant

C = Calculate the slope coefficient

D = Identify the highest and lowest observed values

 

  1. A) D C A B
  2. B) C D A B
  3. C) A D C B
  4. D) D C B A

Answer:  D

 

19) Simple regression differs from multiple regression in that:

  1. A) multiple regression uses all available data to estimate the cost function, whereas simple regression only uses simple data
  2. B) simple regression is limited to the use of only the dependent variables and multiple regression can use both dependent and independent variables
  3. C) simple regression uses only one independent variable and multiple regression uses more than one independent variable
  4. D) simple regression uses only one dependent variable and multiple regression uses more than one dependent variable

Answer:  C

Answer the following questions using the information below:

 

The Delmonico Company uses the high-low method to estimate the cost function. The information for 2011 is provided below:

Machine-hours    Labor Costs

Highest observation of cost driver            400                 $20,000

Lowest observation of cost driver            240                $ 13,600

 

20) What is the slope coefficient per machine-hour?

  1. A) $56.66
  2. B) $0.10
  3. C) $40.00
  4. D) $50.00

Answer:  C

Explanation:  C) Slope = ($20,000 – $13,600) / (400 – 240) = $40

 

21) What is the constant for the estimating cost equation?

  1. A) $4,000
  2. B) $13,600
  3. C) $16,000
  4. D) $20,000

Answer:  A

Explanation:  A) EITHER: Constant = $20,000 – ($40.00 × 400 hours) = $4,000

OR: Constant = $13,600 – ($40.00 × 240 hours) = $4,000

22) What is the estimate of the total cost when 300 machine-hours are used?

  1. A) $4,000
  2. B) $8,000
  3. C) $12,000
  4. D) $16,000

Answer:  D

Explanation:  D) y = $4,000 + ($40 × 300) = $16,000

 

The Ranger Company uses the high-low method to estimate it’s cost function. The information for 2011 is provided below:

Machine-hours         Costs

Highest observation of cost driver         2,000               $450,000

Lowest observation of cost driver         1,000              $ 250,000

 

23) What is the slope coefficient per machine-hour?

  1. A) $250.00
  2. B) $25
  3. C) $20.00
  4. D) $200.00

Answer:  D

Explanation:  D) Slope = ($450,000 – $250,000) / (2,000 – 1,000) = $200

 

24) What is the constant for the estimating cost equation?

  1. A) $250,000
  2. B) $450,000
  3. C) $50,000
  4. D) $0

Answer:  C

Explanation:  C) EITHER: Constant = $450,000 – ($200.00 × 2,000 hours) = $50,000

 

25) What is the estimate of the total cost when 1,100 machine-hours are used?

  1. A) $250,000
  2. B) $270,000
  3. C) $300,000
  4. D) $400,000

Answer:  B

Explanation:  B) y = $50,000 + ($200 × 1,100) = $270,000

 

 

 

 

Answer the following questions using the information below:

 

For Alice Company, labor-hours are 25,000 and wages $94,000 at the high point of the relevant range, and labor-hours are 15,000 and wages $70,000 at the low point of the relevant range.

 

26) What is the slope coefficient per labor-hour?

  1. A) $4.67
  2. B) $3.76
  3. C) $2.40
  4. D) $0.42

Answer:  C

Explanation:  C) Slope = ($94,000 – $70,000) / (25,000 – 15,000) = $2.40 per labor-hour

 

27) What is the constant?

  1. A) $34,000
  2. B) $24,000
  3. C) $10,000
  4. D) $83,500

Answer:  A

Explanation:  A) Constant = $94,000 – ($2.40 × 25,000) = $34,000

OR: Constant = $70,000 – ($2.40 × 15,000) = $34,000

 

28) What is the estimate of total labor costs at Alice Company when 10,000 labor-hours are used?

  1. A) $17,000
  2. B) $41,000
  3. C) $21,167
  4. D) $27,000

Answer:  B

Explanation:  B) y = $34,000 + ($2.40 × 10,000) = $58,000

Answer the following questions using the information below:

 

The Gangwere Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Gangwere Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation.

 

                        Month                 Cost              Hours

January           $40,000               3,500

February           24,400               2,000

March               31,280               2,450

April                 36,400               3,000

May                  44,160               3,900

June                  42,400               3,740

 

29) How is the cost function stated?

  1. A) y = $26,672 + $1.84X
  2. B) y = $21,360 + $10.40
  3. C) y = $10,112 + $8.64X
  4. D) y = $3,600 + $10.40X

Answer:  D

Explanation:  D) b = ($44,160 – $24,400) / (3,900 – 2,000) = $10.40

$44,160 = a + $10.40 × 3,900

a = $3,600

Diff: 3

Terms:  cost function, high-low method

Objective:  4

AACSB:  Analytical skills

 

30) What is the estimated total cost at an operating level of 2,850 hours?

  1. A) $25,692
  2. B) $33,240
  3. C) $32,016
  4. D) $34,736

Answer:  B

Explanation:  B) b = ($44,160 – $24,400) / (3,900 – 2,000) = $10.40

$44,160 = a + $10.40 × 3,900

a = $3,600

 

y = $3,600 + $10.40 × 2,850 = $33,240

 

Answer the following questions using the information below:

 

Presented below are the production data for the first six months of the year for the mixed costs incurred by Gallup Company.

 

                        Month                 Cost         Units

January             $4,890         4,100

February             4,024         3,200

March                 6,480         5,300

April                   8,840         7,500

May                    5,800         4,800

June                    7,336         6,600

 

Gallup Company uses the high-low method to analyze mixed costs.

 

31) How would the cost function be stated?

  1. A) y = $440 + $1.12X
  2. B) y = $3,562.30 + $0.144X
  3. C) y = $107.20 + $1.12
  4. D) y = $7,850 + $0.132X

Answer:  A

Explanation:  A) b = ($8,840 – $4,024) / (7,500 – 3,200) = $1.12

$8,840 = a + $1.12 × 7,500

a = $440

Cost function is Y=$440 + $1.12X

 

32) What is the estimated total cost at an operating level of 5,000 units?

  1. A) $6,227.20
  2. B) $6,040.00
  3. C) $4,283.20
  4. D) $8,510.00

Answer:  B

Explanation:  B) b = ($8,840 – $4,024) / (7,500 – 3,200) = $1.12

$8,840 = a + $1.12 × 7,500

a = $440

 

y = $440 + $1.12 × 5,000 = $6,040