Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 3 Measurement of Cost Behavior

3.1 Questions
1) Managers can influence the amount of fixed and variable costs in a firm through decisions about
________.
A) product attributes
B) capacity level
C) amount of high technology equipment used for manufacturing products
D) all of the above
Answer: D
2) The use of high technology equipment to manufacture products instead of highly skilled labor usually
results in ________.
A) higher discretionary fixed costs
B) higher discretionary variable costs
C) lower risk
D) higher operating leverage
Answer: D
3) Which of the following costs can be canceled in the short run?
A) salary of CEO of company
B) mortgage payment on factory building
C) lease payments on two-year lease for leased equipment in factory
D) management consulting services engaged to change company logo
Answer: D
4) A hospital adds a new addition and needs to acquire some new equipment for the addition. The cost
driver for the equipment is patient-days per month. The new addition increases the patient-days per
month outside the relevant range. What type of equipment costs will change as a result of the addition?
A) discretionary fixed costs
B) discretionary variable costs
C) committed fixed costs
D) committed variable costs
Answer: C
5) Managers can eliminate ________ costs entirely for a given year in dire times such as a major recession.
However, managers cannot eliminate ________ costs.
A) discretionary variable costs; committed variable costs
B) discretionary fixed costs; committed fixed costs
C) discretionary variable costs; committed fixed costs
D) committed fixed costs; committed variable costs
Answer: B
6) If a company eliminates all discretionary costs due to a severe recession, this could ________.
A) ensure that the company reports a net loss
B) ensure that the company reports a net profit
C) reestablish a company's competitive position in an industry
D) impair a company's competitive position in an industry
Answer: D
7) Many organizations use a linear relationship with a single cost driver to describe a cost even though
the cost may have multiple cost drivers. Why?
A) This approach is easier and less expensive.
B) The cost of developing a more complex function is greater than the benefit.
C) Cost estimates from the simple function are accurate enough for most decisions.
D) All of the above
Answer: D
8) It may be difficult to trace costs to products or services if the costs are ________.
A) volume-driven
B) driven by activities directly related to volume
C) driven by multiple cost drivers
D) none of the above
Answer: C
9) Simon Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Simon
Inc. expects to produce 115,000 units. Simon's relevant range for production is 100,000 to 120,000 units. If
115,000 units are produced next year, what is the expected variable cost?
A) $420,000
B) $430,000
C) $440,000
D) $460,000
Answer: D
10) Donahue currently produces 120,000 units at a cost of $400,000. Of the $400,000 cost, $200,000 is a
fixed cost. Next year Donahue expects to produce 145,000 units. Donahue's relevant range for production
activities is 100,000 to 150,000 units. If 145,000 units are produced next year, what is the expected fixed
cost for next year?
A) $200,000
B) $241,667
C) $441,667
D) $483,333
Answer: A
11) The following data points are available. This is an example of a ________ cost.

Units Costs
600 $560
650 $565
800 $580
900 $590
A) variable
B) fixed
C) mixed
D) none of the above
Answer: C
12) A car lease payment is computed based solely on the number of miles driven. This is an example of a
________.
A) variable cost
B) mixed cost
C) step cost
D) stair cost
Answer: A
13) Knowledge about the behavior of different costs in a service department such as maintenance can be
used to ________.
A) plan costs
B) provide feedback to managers
C) make decisions about the most efficient use of resources
D) all of the above
Answer: D
14) The fixed costs required to achieve a desired level of production or to provide a desired level of
service, while maintaining product or service attributes, are ________.
A) discretionary fixed costs
B) committed fixed costs
C) capacity costs
D) step costs
Answer: C
15) ________ arise as a result of strategic decisions about the scale and scope of an organization's
activities.
A) Capacity costs
B) Discretionary fixed costs
C) Mixed costs
D) Committed fixed costs
Answer: A
16) In a corporate setting, property taxes are an example of a(n) ________.
A) mixed cost
B) committed fixed cost
C) discretionary fixed cost
D) engineering cost
Answer: B
17) Costs arising from the possession of facilities, equipment and a basic organizational structure are
________.
A) capacity costs
B) discretionary costs
C) committed fixed costs
D) engineered costs
Answer: C
18) ________ have no obvious relationship to levels of output activity, but are determined as part of the
periodic planning process.
A) Discretionary fixed costs
B) Committed fixed costs
C) Capacity costs
D) Engineered costs
Answer: A
19) Due to the economic downturn, a company has reduced charitable donations to community groups.
This is an example of a ________.
A) variable cost
B) committed fixed cost
C) capacity cost
D) discretionary fixed cost
Answer: D
20) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________.
A) lease payment
B) salaries of key personnel
C) employee training program
D) insurance on corporate offices
Answer: C
21) In an economic downturn, a company could temporarily reduce or eliminate a(n) ________.
A) property taxes on factory building
B) insurance on factory building
C) lease payments on computers in corporate headquarters
D) public relations department
Answer: D
22) Only major changes in the scale or scope of operations can change ________ in future periods.
Managers can vary spending levels for ________ in the short run.
A) committed fixed costs; capacity costs
B) committed fixed costs; discretionary fixed costs
C) discretionary fixed costs; capacity costs
D) capacity costs; committed fixed costs
Answer: B
23) Costs that may be essential to the long-run achievement of the organization's goals, but that managers
can almost reduce to zero in the short-run, are called ________.
A) capacity costs
B) committed fixed costs
C) discretionary fixed costs
D) mixed costs
Answer: C
24) In a corporate setting, a mortgage payment would be identified as a ________.
A) purely variable cost
B) discretionary fixed cost
C) committed fixed cost
D) mixed cost
Answer: C
25) In an economic downturn, a company could temporarily reduce or eliminate ________.
A) depreciation expense on corporate building
B) bond interest payment
C) property taxes on corporate building
D) advertising and promotion
Answer: D
26) In an economic recession, a company could NOT eliminate ________.
A) employee training program
B) research and development projects
C) public relations department
D) depreciation expense on factory machines
Answer: D
27) Which statement regarding fixed costs is TRUE?
A) Discretionary fixed costs preserve management's flexibility.
B) Committed fixed costs preserve management's flexibility.
C) Both discretionary and committed fixed costs preserve management's flexibility.
D) Discretionary fixed costs limit management's flexibility.
Answer: A
28) Most companies make capacity decisions frequently.
Answer: FALSE
29) Capacity costs are variable costs related to a desired level of production or service.
Answer: FALSE
30) Committed fixed costs usually arise from the possession of facilities, equipment and a basic
organizational structure.
Answer: TRUE
31) Companies can reduce or eliminate committed fixed costs when demand falls during an economic
downturn.
Answer: FALSE
32) Volume-driven costs can be easily traced to products or services.
Answer: TRUE
33) Managers cannot eliminate discretionary fixed costs.
Answer: FALSE
34) The use of high-technology methods rather than labor in manufacturing products usually means a
much greater fixed-cost component to total costs.
Answer: TRUE
3.4 Questions
4) To estimate the monthly maintenance cost for the maintenance department in a hospital, the following
monthly costs are available:
Monthly Expense Costs
Supervisor Salary Expense $3,000
Depreciation ExpenseMaintenance Equipment $5,000
Repairs ExpenseMaintenance Equipment $5,000
Supplies Expense $7,000
Wages ExpenseMaintenance Workers $10,000
The Supervisor Salary Expense and the Depreciation Expense are fixed costs. The remaining expenses are
variable costs. There are 1,000 patient days in a month, which is the cost driver for maintenance costs.
Estimate the cost function where Y is the monthly maintenance cost and X is the variable cost per patient
day.
A) Y = $8 + $22X
B) Y = $8,000 + $22,000X
C) Y = $8,000 + $22X
D) Y = $30,000 + $22,000X
Answer: C
8) A disadvantage of the high-low method to estimate a cost function is ________.
A) historical data may hide past inefficiencies
B) historical data may be obsolete
C) historical data may not reflect changes made in the organization
D) all of the above
Answer: D
9) With the high-low method, the most accurate way to measure the intercept and slope for a cost
function is to ________.
A) plot the data points and draw a line
B) plot the data points, identify the high and low points and draw a line between the high and low points
C) plot the data points and draw a straight line through the points as close as possible to all the points
D) use algebra using the two data points with the highest and lowest activity levels
Answer: D
29) Which statement is TRUE regarding the high-low method to approximate a linear cost function?
A) The second step in the high-low method is to plot the historical data points on a graph.
B) Outliers should not be removed from the analysis.
C) Draw a line through all the data points using judgment to fit the line as close as possible to all the
plotted points.
D) The point at which the line intersects the Y-axis is the estimate of fixed costs.
Answer: D
30) Presented below is the production data for the first six months of the year showing the mixed costs
incurred by Eunice Company.
Month Cost Units
January $7,500 4,000
February 13,000 7,500
March 11,500 9,000
April 11,700 11,500
May 13,500 12,000
June 11,850 6,000
Eunice Company uses the high-low method to analyze mixed costs. The variable cost per unit is
________.
A) $0.625
B) $0.75
C) $1.25
D) $1.31
Answer: B
31) The following data has been assembled for Mildred Company. Use the high-low method.
Month Cost Hours
January $18,000 2,000
February $39,000 3,500
March $39,280 3,450
April $43,400 3,200
May $40,000 4,000
The variable cost per hour is ________.
A) $9.00
B) $10.00
C) $10.40
D) $11.00
Answer: D
32) Presented below is the production data for six months of the year showing the mixed costs incurred
by Kennedy Company.
Month Cost Units
July $6,000 4,000
August $10,250 6,500
September $10,500 8,000
October $12,700 10,500
November $14,000 12,000
December $10,850 9,000
Kennedy Company uses the high-low method to analyze mixed costs. The total fixed cost is ________.
A) $2,000
B) $4,500
C) $10,417
D) $10,500
Answer: A
33) The following data has been assembled for Arnold Company. Use the high-low method.
Month Cost Hours
January $24,000 2,000
February $39,000 2,200
March $35,280 2,750
April $36,400 3,500
May $40,000 4,000
The total fixed cost is ________.
A) $3,600
B) $8,000
C) $21,360
D) $26,672
Answer: B
34) The following data has been assembled for Robert Company. Use the high-low method.
Month Cost Hours
January $24,400 2,000
February $39,000 2,200
March $35,280 2,750
April $36,400 3,500
May $40,000 4,000
The cost function is ________ where Y = Total cost and X = Number of hours.
A) Y = $3,600 + $10.40X
B) Y = $8,800 + $7.80X
C) Y = $21,360 + $1.52X
D) Y = $26,672 + $1.84X
Answer: B
35) The following data has been assembled for John Company. Use the high-low method.
Month Cost Hours
January $24,400 2,000
February $39,000 2,200
March $35,280 2,750
April $36,400 3,500
May $40,000 4,000
The expected total cost at an operating level of 1,900 hours is ________.
A) $23,180
B) $23,620
C) $24,000
D) $24,400
Answer: B
36) Presented below is the production data for six months showing the mixed costs incurred by Anderson
Company.
Month Cost Units
July $5,890 4,100
August $4,012 3,200
September $7,480 6,300
October $9,000 7,500
November $5,800 5,800
December $7,336 6,600
Anderson Company uses the high-low method to analyze mixed costs. The cost function is ________
where Y= Total Cost and X= Number of units.
A) Y = $440 + $1.12X
B) Y = $300 + $1.16X
C) Y = $440 + $1.20X
D) Y = $7,850 + $0.132X
Answer: B
37) Presented below is the production data for six months of the year showing the mixed costs incurred
by Madeline Company.
Month Cost Units
July $6,000 4,000
August $11,250 9,500
September $11,500 9,000
October $11,700 10,500
November $14,000 12,000
December $12,850 10,000
Madeline Company uses the high-low method to analyze mixed costs. The predicted total cost at an
operating level of 10,000 units is ________.
A) $11,725
B) $11,800
C) $12,000
D) $12,850
Answer: C
38) The high-low method can be used to approximate a cost function. A disadvantage of this method is
______.
A) it is difficult to apply due to rigorous calculations
B) it is very costly to use
C) it takes a long time to measure a cost function
D) it makes inefficient use of information because it does not use all the available data
Answer: D
67) The Penquin Company has obtained the following data:

Month Indirect Production Costs Direct Labor Hours

July $92,095 4,900
August $105,056 5,480
September $80,000 3,000
October $99,400 4,400
November $110,000 6,000
December $97,404 3,900

Required:
A) Using the high-low method, determine the cost function for the above data. Round to two decimal
places.
B) If direct labor hours equal 10,000, what are the total expected indirect production costs?
Answer:
A) ($110,000 - $80,000) / (6,000 - 3,000) = $10.00 = Variable cost
Fixed cost = $110,000 - ($10.00 6,000) = $50,000
Cost Function: Y = $50,000 + $10.00X
Where: Y= Total indirect production cost and X = Number of direct labor hours
B) Y = $50,000 + $10.00(10,000) = $150,000
68) Jorgensen Company used least squares regression analysis to obtain the following output:

Maintenance Department Cost

Explained by Number of Labor Hours

Constant 8,200
Standard error of Y estimate 630
R2 0.94
No. of observations 20
Degrees of freedom 18
X coefficient 2.21
Standard error of coefficient 0.0966

Required:
A) What is the total fixed cost of the maintenance department?
B) What is the variable cost per labor hour for the maintenance department?
C) What is the linear cost function?
Answer:
A) $8,200
B) $2.21
C) Y = $8,200 + $2.21X
Where: Y = Total Maintenance Department Cost and X = Number of labor hours
Y = $3,400 + $0.80X
Where: Y = Total maintenance cost for a month
X = number of machine hours

69) Using activity analysis, Arnoldson Company has identified the appropriate cost driver for
maintenance costs in a factory as the number of machine hours. The maintenance costs have been
observed as follows within the relevant range of 5,000 to 8,000 machine-hours.

Month Maintenance Cost Machine Hours

January $7,900 5,600
February $8,500 7,100
March $7,400 5,000
April $8,200 6,500
May $9,100 7,300
June $9,800 8,000
July $7,800 6,200

Required:
1. Estimate the cost function using the high-low method.
2. If you were going to use the visual-fit method to estimate the cost function, what steps will you take?

Answer:
1. Variable cost per machine hour = ($9,800 - $7,400) / (8,000 - 5,000) = $0.80 per machine hour
Fixed cost = $9,800 - ($0.80 8,000) = $3,400
Y = $3,400 + $0.80X
Where: Y = Total maintenance cost for a month
X = number of machine hours