Horngren Ima16 Tif 03 GE

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
Diff: 1
LO: 3-1
AACSB: Reflective thinking skills
Learning Outcome: Define and distinguish between variable, fixed and mixed costs
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
Diff: 2
LO: 3-1
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
Diff: 2
LO: 3-1
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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
Diff: 2
LO: 3-1
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
Diff: 2
LO: 3-1
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
Diff: 2
LO: 3-1
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
Diff: 2
LO: 3-1
AACSB: Analytic skills
2
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
Diff: 2
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 2
LO: 3-1
3
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
Answer: C
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
4
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
5
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
6
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
Diff: 2
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
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
Diff: 1
LO: 3-1
7
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
Diff: 1
LO: 3-1
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
Diff: 2
LO: 3-1
28) Most companies make capacity decisions frequently.

Answer: FALSE
Diff: 2
LO: 3-1
29) Capacity costs are variable costs related to a desired level of production or service.
Answer: FALSE
Diff: 2
LO: 3-1
30) Committed fixed costs usually arise from the possession of facilities, equipment and a basic
organizational structure.
Answer: TRUE
Diff: 2
LO: 3-1
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31) Companies can reduce or eliminate committed fixed costs when demand falls during an economic
downturn.
Answer: FALSE
Diff: 1
LO: 3-1
32) Volume-driven costs can be easily traced to products or services.

Answer: TRUE
Diff: 1
LO: 3-1
33) Managers cannot eliminate discretionary fixed costs.

Answer: FALSE
Diff: 2
LO: 3-1
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
Diff: 2
LO: 3-1
3.2 Questions
1) A mixed-cost function is graphed as a ________.

A) nonlinear line
B) curved line
C) line with a break for fixed costs
D) straight-line
Answer: D
Diff: 2
LO: 3-2
9
2) In a linear cost function, the slope measures the ________.
A) total fixed cost
B) total variable cost
C) variable cost per unit of cost driver
D) fixed cost per unit of cost driver
Answer: C
Diff: 2
LO: 3-2
3) In a graph of a mixed cost function, the y-axis is ________ and the x-axis is ________.
A) fixed cost; cost driver activity
B) fixed cost; variable cost per unit
C) mixed cost; volume in units
D) cost; cost driver activity
Answer: D
Diff: 2
LO: 3-2
4) When estimating the cost of the maintenance department in a hospital for a month, what cost driver
should be used?
A) number of patients per month
B) number of nurses working per month
C) number of operations per month
D) number of patients per month times the length of stay per patient
Answer: D
Diff: 2
LO: 3-2
5) When estimating the total cost of a one-way flight from New York to Los Angeles, what cost driver
should be used?
A) number of miles on flight
B) number of passengers on flight
C) number of pounds of baggage on flight
D) number of passengers on flight times the number of miles on flight
Answer: D
Diff: 2
LO: 3-2
10
6) In a linear cost function, the fixed cost is ________.
A) dependent on the cost driver
B) dependent on the independent variable
C) independent of the cost driver
D) independent of the intercept
Answer: C
Diff: 2
LO: 3-2
7) When estimating a cost function, we assess reliability using ________.

A) visual inspection
B) plausible relationships
C) goodness of fit
D) intuition
Answer: C
Diff: 2
LO: 3-2
8) A linear cost function is estimated over the relevant range of 0 to 1,000 orders. The equation estimated
is: Y = $25,000 + $89X where Y equals the total order-processing cost and X equals the number of orders. If
the number of orders increases to 1,800, what is the predicted total order-processing cost?
A) $25,000
B) $160,200
C) $185,200
D) cannot be determined
Answer: D
Diff: 2
LO: 3-2
9) When estimating the cost of the laundry department in a hospital, which of the following cost drivers
should be used?
A) number of patients
B) number of patients times the length of stay per patient
C) number of patients in intensive care and critical care
D) number of pounds of laundry
Answer: D
Diff: 2
LO: 3-2
11
10) When managers graph a linear cost function with one cost driver, the intercept represents the
________ cost and the slope represents the ________ cost.
A) variable; fixed
B) fixed; variable
C) fixed; mixed
D) variable; mixed
Answer: B
Diff: 1
LO: 3-2
11) A cause and effect relationship between a ________ and a ________ is desirable in order to obtain
accurate and useful cost functions.
A) cost driver; cost function
B) cost function; resource cost
C) cost driver; resource cost
D) step cost; capacity cost
Answer: C
Diff: 1
LO: 3-2
12) When developing cost functions, which of the following statements is FALSE?
A) The cost function must be believable.
B) The cost function should explain past cost behavior.
C) Personal observations of costs and activities provide the best evidence of a plausible relationship
between a cost and its cost driver.
D) The cost function does not have to be plausible.
Answer: D
Diff: 2
LO: 3-2
12
13) Sunrise Motel's cost function is given as:
Y = $75,000 + $9.50X
Where:
Y = annual custodial cost
X = number of guest-days of occupancy
In the current year, Sunrise Motel has 8,000 guest days. In the next year, Sunrise Motel expects an
occupancy level of 10,000 guest days. (All costs next year will remain in the same relevant range as the
current year.) What is the expected fixed custodial cost for next year?
A) $7.50
B) $50,000
C) $62,500
D) $75,000
Answer: D
Diff: 2
LO: 3-2
14) Sunset Motel's cost function is given as:
Y = $75,000 + $9.50X
Where:
In the current year, Sunset Motel has 8,000 guest days. In the next year, Sunset Motel expects an
current year.) What is the expected total variable custodial cost for next year?
A) $60,000
B) $75,000
C) $95,000
D) $170,000
Answer: C
Diff: 2
LO: 3-2
13
15) Sheboygan Motel's cost function is given as:
Y = $120,000 + $2.50X
Where:
In the current year, Sheboygan Motel has 8,000 guest days. In the next year, Sheboygan Motel expects an
current year.) What is the expected total custodial cost for next year?
A) $37,000
B) $120,000
C) $125,000
D) $145,000
Answer: D
Diff: 2
LO: 3-2
16) In a mixed-cost linear function with one cost driver, the intercept is the ________ and the slope is the
________.
A) fixed cost; step cost
B) fixed cost; variable cost
C) variable cost; fixed cost
D) variable cost; step cost
Answer: B
Diff: 2
LO: 3-2
17) Consider the following linear mixed-cost function:
Y = $120,000 + $2.70X
Where: Y = total annual maintenance cost
X = number of patient-days
What does the $120,000 represent?

A) variable cost per patient-day
C) fixed cost per patient-day
D) total fixed cost
Answer: D
Diff: 2
LO: 3-2
14
18) Consider the following linear mixed-cost function:
Y = $110,000 + $5.50X
Where: Y = total annual custodial cost
X = number of patient-days
What does the $5.50 represent?

A) total fixed cost
C) fixed cost per patient-day
D) variable cost per patient-day
Answer: D
Diff: 2
LO: 3-2
19) Managers apply two criteria to obtain accurate and useful cost functions. These criteria are ________.
A) plausibility and believability
B) plausibility and reliability
C) reliability and validity
D) validity and plausibility
Answer: B
Diff: 1
LO: 3-2
20) In relation to a cost function, the term reliability means ________.

A) whether the costs and activities can be easily observed
B) whether the cost function conforms to a given mathematical model
C) how well the cost function predicts future costs
D) how well the cost function explains past cost behavior
Answer: D
Diff: 1
LO: 3-2
21) A cost function is an algebraic equation used to describe the relationship between a cost and its cost
driver(s).
Answer: TRUE
Diff: 1
LO: 3-2
15
22) Managers should apply plausibility and reliability to obtain accurate and useful cost functions.
Answer: TRUE
Diff: 2
LO: 3-2
23) When referring to a cost function, plausibility refers to whether you can rely upon the cost function
for predicting the future.
Answer: FALSE
Diff: 2
LO: 3-2
24) In a linear mixed cost function, the slope of the function is the fixed cost per unit of the cost driver.
Answer: FALSE
Diff: 2
LO: 3-2
25) Goodness of fit pertains to how well a cost function predicts cost behavior.
Answer: FALSE
Diff: 2
LO: 3-2
16
26) Atlanta Senior Center is planning its annual fundraiser. The event committee has developed the
following budget for the event.
Ballroom rental $3,000

Entertainment $2,500
Printing $600 plus $9 per person
Food $30 per person
Decorations $700 plus $5 per person
Required:
A) Determine the cost function.
B) If Atlanta Senior Center charges $100 per person, and 1,000 people attend, how much profit will be
derived by this event?
Answer: A) Fixed cost = $3,000 + $2,500 + $600 + $700 = $6,800
Variable cost = $9 + $30 + $5 = $44 per person
Y = $6,800 + $44X
Where: Y = Total cost of fundraiser
X = Number of attendees
B) ($100 × 1,000) - [$6,800 + ($44 × 1,000)] = $49,200
Diff: 2
LO: 3-2
3.3 Questions
1) An activity analysis has shown that the number of components added to Product X and Product Y is
the cost driver for support costs. Support costs are $20 per component. Product X has 4 components and
Product Y has 8 components. What amounts of support costs should be assigned to Product X and
Product Y?
Product X Product Y
A) $6.67 $13.33
B) $20 $20
C) $80 $160
D) $80 $320
Answer: C
Diff: 2
LO: 3-3
Learning Outcome: Discuss and use various methods to estimate the variable and fixed costs portions of
a mixed cost
17
2) Direct labor cost is the primary cost driver of support costs for two products. Product One has direct
labor costs of $8.50 per unit and Product Two has direct labor costs of $130 per unit. The support costs
assigned to each product is the direct labor cost times five. What is the support cost assigned to Product
One and Product Two?
Product One Product Two
A) $8.50 $130
B) $5.00 $76.47
C) $42.50 $650
D) $5.00 $26.00
Answer: C
Diff: 2
LO: 3-3
a mixed cost
3) The greatest benefit of activity analysis is that it directs management accountants to the ________.
A) relevant costs for decision making
B) most accurate product cost
C) appropriate cost driver for each cost
D) most accurate product price
Answer: C
Diff: 1
LO: 3-3
a mixed cost
4) The process of identifying appropriate cost drivers and their effects on the costs of making a product or
providing a service is called ________.
A) account analysis
B) activity analysis
C) cost analysis
D) product analysis
Answer: B
Diff: 1
LO: 3-3
a mixed cost
18
5) Account analysis is used to identify appropriate cost drivers and their effects on the costs of making a
product or providing a service.
Answer: FALSE
Diff: 2
LO: 3-3
a mixed cost
6) The cost of the Maintenance Department at Forest Manufacturing has always been charged to the
production departments based on the number of employees. Recently, an activity analysis of possible cost
drivers was performed which indicated that the square feet of space may also be a predictor of costs to be
assigned to each production department. The Maintenance Department cost is $500,000. The following
data is available:
Production Departments
Dept. A Dept. B Dept. C
Number of Employees 300 25 50
Square Feet of Space 5,000 10,000 25,000
Required:
1. Determine the amount of the maintenance department cost that should be allocated to Department A
and Department B if the cost driver used is: (A) number of employees and (B) square feet of space.
2. Does the choice of the cost driver affect the costs assigned to each department?
Answer:
1. Department A:
A) 300/375 × $500,000 = $400,000
B) 5/40 × $500,000 = $62,500
Department B:
A) 25/375 × $500,000 = $33,333
B) 10/40 × $500,000 = $125,000
2. Yes, the cost driver does change the cost assigned to each department.
Diff: 2
LO: 3-3
a mixed cost
19
3.4 Questions
1) When estimating cost functions, engineering analysis based on observations of employee behavior has
the following disadvantage: ________.
A) the employees may have altered their normal work habits because they are being observed
B) it is less expensive than account analysis
C) it does not use all of the data points
D) the coefficient of determination is not reliable
Answer: A
Diff: 2
LO: 3-4
a mixed cost
2) To approximate cost functions for a particular manufacturing process, engineering analysis relies on
________.
A) statistical analysis
B) mathematical analysis
C) graphs
D) actual observations of the ongoing process
Answer: D
Diff: 2
LO: 3-4
a mixed cost
3) To estimate cost functions using account analysis, each account is classified as a ________ cost or
________ cost with respect to ________.
A) mixed; fixed; sales volume in units
B) mixed; variable: sales volume in units
C) variable; fixed; a cost driver
D) mixed; fixed; production in units
Answer: C
Diff: 2
LO: 3-4
a mixed cost
20
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 Expense—Maintenance Equipment $5,000
Repairs Expense—Maintenance Equipment $5,000
Supplies Expense $7,000
Wages Expense—Maintenance 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
Diff: 2
LO: 3-4
a mixed cost
5) Three cost drivers are used to estimate the cost of processing insurance claims. The cost drivers are: (1)
claim amount, (2) age of vehicle in accident and (3) age of driver in accident. The percentages attributable
to the cost drivers are 50% for claim amount, and 15% for each of the other two cost drivers. What is the
cost to process Claim #101? The claim amount is $1,000. The age of the vehicle is 5 years. The age of the
driver is 20 years.
A) $3.00
B) $3.75
C) $500
D) $503.75
Answer: D
Diff: 2
LO: 3-4
a mixed cost
21
6) The high-low, visual-fit and least squares regression methods are more objective methods to estimate
cost functions than ________ and ________.
A) activity analysis; account analysis
B) activity analysis; engineering analysis
C) account analysis; engineering analysis
D) capacity analysis; activity analysis
Answer: C
Diff: 2
LO: 3-4
a mixed cost
7) Companies may be forced to use engineering analysis or account analysis to estimate cost functions
because ________.
A) engineering analysis is the least costly method
B) historical data are too subjective
C) the other estimation methods are too difficult to use
D) historical data are not available
Answer: D
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
22
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
Diff: 2
LO: 3-4
a mixed cost
10) When using the visual-fit method to estimate a cost function, we can estimate the fixed cost by
________.
A) the point where the sketched line (through all or most of the data points) intersects the x-axis
B) the point where the sketched line (through all or most of the data points) intersects the y-axis
C) calculating the variable cost per unit of the cost driver
D) subtracting the variable cost at any cost driver level from the total cost
Answer: B
Diff: 2
LO: 3-4
a mixed cost
11) When using the visual-fit method to estimate a cost function, the variable cost per unit of the cost
driver is equal to the ________.
A) the point where the sketched line (through all or most of the data points) intersects the x-axis
B) the point where the sketched line (through all or most of the data points) intersects the y-axis
C) slope of the sketched line (through all or most of the data points)
D) any point on the sketched line divided by the fixed cost
Answer: C
Diff: 2
LO: 3-4
a mixed cost
23
12) Due to the use of statistics, least squares regression analysis estimates a cost function more ________
than other cost measurement methods.
A) easily
B) rapidly
C) reliably
D) subjectively
Answer: C
Diff: 2
LO: 3-4
a mixed cost
13) When examining the output from regression analysis, the fixed cost measure is labeled the ________
by most computer programs.
A) coefficient of determination
B) X coefficient
C) standard error of estimate
D) constant or intercept
Answer: D
Diff: 2
LO: 3-4
a mixed cost
14) When examining the output from regression analysis, with one independent variable, the variable
cost measure is labeled the ________ by most computer programs.
A) coefficient of determination
B) X coefficient
D) constant or intercept
Answer: B
Diff: 2
LO: 3-4
a mixed cost
24
15) When examining the output from regression analysis, the goodness of fit measure is labeled ________
by most computer programs.
A) X coefficient
B) constant
D) R2
Answer: D
Diff: 2
LO: 3-4
a mixed cost
16) To assess the ________ of estimates from regression analysis, we use the ________.
A) plausibility; standard error of coefficient
B) objectivity; standard error of coefficient
C) reliability; coefficient of determination
D) plausibility; coefficient of determination
Answer: C
Diff: 2
LO: 3-4
a mixed cost
17) To assess the ________ of estimates from regression analysis, we use the ________.
A) objectivity; coefficient of determination
B) plausibility; sign on the intercept
C) reliability; sign on the coefficient of determination
D) plausibility; sign of the variable cost estimate
Answer: D
Diff: 2
LO: 3-4
a mixed cost
25
18) A cost function estimated with least squares regression has a coefficient of determination of 0.95. This
statistic indicates that the cost function is ________.
A) highly plausible
B) highly reliable
C) not predictable
D) not accurate
Answer: B
Diff: 2
LO: 3-4
a mixed cost
19) A cost function with one independent variable is estimated with least squares regression. The
coefficient of determination for the equation is 0.50. This statistic indicates that ________.
A) the independent variable does not explain changes in the dependent variable very well
B) the dependent variable does not explain changes in the independent variable very well
C) the cost estimates are correct 50 percent of the time
D) the cost estimates are not correct 50 percent of the time
Answer: A
Diff: 2
LO: 3-4
a mixed cost
20) A company has identified the appropriate cost driver for a resource cost. To estimate or approximate
the cost function, the company manager has a broad selection of methods that will NOT include
________.
A) least squares regression analysis
B) activity analysis
C) high-low method
D) engineering method
Answer: B
Diff: 1
LO: 3-4
a mixed cost
26
21) Which methods to approximate cost functions rely on a logical analysis of the cost environment
instead of an explicit analysis of prior cost data?
A) engineering analysis; account analysis
B) activity analysis; account analysis
C) visual fit method; high low method
D) least-squares regression analysis; activity analysis
Answer: A
Diff: 2
LO: 3-4
a mixed cost
22) The methods to approximate cost functions are not ________; managers frequently use two or more
together to avoid ________ in measuring cost behavior.
A) the same; duplication
B) mutually exclusive; errors
C) complementary; errors
D) similar; duplication
Answer: B
Diff: 2
LO: 3-4
a mixed cost
23) In engineering analysis, cost analysts estimate cost functions using ________.
A) past experience and experiments with prototypes
B) accounting and industrial engineering literature
C) advice of management consultants
D) all of the above
Answer: D
Diff: 1
LO: 3-4
a mixed cost
27
24) A disadvantage of engineering analysis which is used to estimate cost functions is ________.
A) it fails to produce a cost function
B) it is a costly process
C) it is not acceptable under Generally Accepted Accounting Principles
D) it cannot be used with mixed costs
Answer: B
Diff: 2
LO: 3-4
a mixed cost
25) In order to estimate cost functions using account analysis, users rely on the ________ for information
about cost behavior.
A) management audit
B) performance report
C) value chain
D) accounting system
Answer: D
Diff: 1
LO: 3-4
a mixed cost
26) Account analysis ________.

A) is less expensive than engineering analysis
B) is more expensive than engineering analysis
C) cannot be used for mixed costs
D) does not require accounts from the accounting system
Answer: A
Diff: 1
LO: 3-4
a mixed cost
27) Engineering analysis and account analysis are similar because ________.
A) both provide timely results
B) both do not develop a cost function
C) both provide more objective results than the high-low method
D) both require the subjective judgment of the analyst
Answer: D
Diff: 2
LO: 3-4
a mixed cost
28
28) Account analysis and engineering analysis will remain the ________ methods of measuring cost
behavior because the other methods ________.
A) unused; are more objective
B) unused; are more accurate
C) popular; require more past cost data
D) popular; are too difficult to work with
Answer: C
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
29
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
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
30
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
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
31
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
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
32
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
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
33
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
Diff: 2
LO: 3-4
a mixed cost
39) A disadvantage of the visual-fit method to approximate a cost function is ________.

A) it does not use all the available data
B) it is costly to apply
C) it does not capture the general tendency of the data
D) the placement of the line is subjective
Answer: D
Diff: 2
LO: 3-4
a mixed cost
40) The least-squares regression method can be used to approximate a cost function. A disadvantage of
this method is ________.
A) it does not use all the available data points
B) it requires a lot of prior cost data
C) it requires subjective placement of the line
D) it is more subjective than engineering analysis
Answer: B
Diff: 2
LO: 3-4
a mixed cost
34
41) A measure of how much of the fluctuation of a cost is explained by changes in the cost driver is
________.
A) least squares regression analysis
B) standard error of coefficient
C) standard error of constant
D) coefficient of determination
Answer: D
Diff: 1
LO: 3-4
a mixed cost
42) Regression analysis uses ________ to fit a cost function to all the historical data.
A) visual placement
B) engineering analysis
C) statistical analysis
D) activity analysis
Answer: C
Diff: 1
LO: 3-4
a mixed cost
43) The first step in regression analysis is to plot the cost data against each potential cost driver because
the plots may show ________.
A) nonlinear trends in the data only
B) outliers only
C) nonlinear trends in the data and outliers
D) missing cost data
Answer: C
Diff: 2
LO: 3-4
a mixed cost
35
44) In the linear cost function derived from regression analysis, the cost driver is the ________ variable
and the cost to be explained is the ________ variable.
A) dependent; independent
B) independent; dependent
C) intercept; dependent
D) constant; independent
Answer: B
Diff: 1
LO: 3-4
a mixed cost
45) The Rumler Company used regression analysis to predict the annual cost of utilities. The results were
as follows:
Utilities Cost
Explained by Direct Labor Hours
Constant 4,500
Standard error of Y estimate 595
R-Squared 0.87
No. of observations 30
Degrees of freedom 28
X Coefficient 5.04
Standard error of coefficient 0.92

A) $5.04 times number of direct labor hours
B) $595
C) $4,500
Answer: C
Diff: 2
LO: 3-4
a mixed cost
36
46) The Anthony Company used regression analysis to predict the annual cost of utilities. The results
were as follows:
Utilities Cost
Constant 4,500
R-Squared 0.87
X Coefficient 5.02
The variable cost per direct labor hour is ________.

A) $0.87
B) $0.92
C) $5.02
D) $4,500
Answer: C
Diff: 2
LO: 3-4
a mixed cost
47) The Lindsey Company used regression analysis to predict the annual cost of utilities. The results were
as follows:
Utilities Cost
Constant 5,000
R-Squared 0.87
X Coefficient 4.02
The linear cost function is ________ where Y = Total utilities cost and X = Number of direct labor hours.
A) Y = $5,000 + $0.87X
B) Y = $5,000 + $0.81X
C) Y = $595 + $0.81X
D) Y = $5,000 + $4.02X
Answer: D
Diff: 2
LO: 3-4
a mixed cost
37
48) The Joseph Company used regression analysis to predict the annual cost of utilities. The results were
as follows:
Utilities Cost
Constant 2,500
Standard error of Y estimate 0.7
R-Squared 0.85
X Coefficient 0.84
The coefficient of determination is ________.

A) 0.70
B) 0.84
C) 0.85
D) 0.92
Answer: C
Diff: 2
LO: 3-4
a mixed cost
49) The Dorkin Company used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost
Explained by Units Produced
Constant 4,200
Standard error of Y estimate 2,300
R-Squared 0.78
X Coefficient 250.25

A) $22.25
B) $250.25
C) $2,300
D) $4,200
Answer: D
Diff: 2
LO: 3-4
a mixed cost
38
50) Noonan Company used regression analysis to predict the annual cost of indirect materials. The results
were as follows:
Constant 4,200
R-Squared 0.84
X Coefficient 2.30
The variable cost per unit of product is ________.

A) $0.84
B) $1.00
C) $2.30
D) $2.70
Answer: C
Diff: 2
LO: 3-4
a mixed cost
51) Leno Company used regression analysis to predict the annual cost of indirect materials. The results
were as follows:
Constant 14,885
R-Squared 0.7832
X Coefficient 11.75
The linear cost function is ________ where Y = Total indirect materials cost and X = Number of units
produced.
A) Y = $2.1876 + $9,960X
B) Y = $11.75 + $14,885X
C) Y= $9,960 + $14,885X
D) Y = $14,885 + 11.75X
Answer: D
Diff: 2
LO: 3-4
a mixed cost
39
52) Jayson Company used regression analysis to predict the annual cost of indirect materials. The results
were as follows:
Constant 14,885
Standard error of Y estimate 0.90
R-Squared 0.60
X Coefficient 0.70
The coefficient of determination is ________.

A) 0.60
B) 0.70
C) 0.90
D) 1.10
Answer: A
Diff: 2
LO: 3-4
a mixed cost
53) When evaluating a cost function estimated by least squares regression, it is important to see if the
estimated cost function makes economic sense. This is assessed by ________.
A) examining the sign of the coefficient of determination
B) examining the sign of the fixed cost estimate
C) examining the sign of the variable cost estimate
D) examining the standard deviation of the cost driver
Answer: C
Diff: 2
LO: 3-4
a mixed cost
40
54) Sandler Company manufactures electronic devices. The company is considering three cost drivers for
measuring maintenance costs in the factory. The following cost functions have been estimated using each
cost driver:
Cost Driver Cost Function R2

1. X = number of parts Y = $20,000 + $5X R2 = 0.40
2. X = number of labor hours Y = $13,000 + $10X R2 = 0.95
3. X = number of machine hours Y = $15,000 + $7X R2 = 0.30
Which cost driver should be chosen?

A) number of parts
B) number of labor hours
C) number of machine hours
Answer: B
Diff: 2
LO: 3-4
a mixed cost
55) Biden Company manufactures small jewelry boxes. The company is considering three cost drivers for
measuring support costs in the factory. The following cost functions have been estimated using each cost
driver:
Cost Driver Cost Function R2

1. X = gluing time in hours Y = $20,000 + $5X R2 = 0.20
2. X = labor hours Y = $13,000 + $10X R2 = 0.55
3. X = machine hours Y = $15,000 + $7X R2 = 0.90
Which cost driver should be chosen?

A) gluing time in hours
B) labor hours
C) machine hours
D) labor hours x gluing time in hours
Answer: C
Diff: 2
LO: 3-4
a mixed cost
41
56) An engineering analysis is often not timely in measuring the cost function.
Answer: TRUE
Diff: 2
LO: 3-4
a mixed cost
57) During an engineering analysis, knowledge about new costs may be obtained from experiments with
prototypes.
Answer: TRUE
Diff: 2
LO: 3-4
a mixed cost
58) Account analysis is one method of approximating cost functions.

Answer: TRUE
Diff: 1
LO: 3-4
a mixed cost
59) When performing an engineering analysis, one must consider that the observed time period may be
abnormal.
Answer: TRUE
Diff: 2
LO: 3-4
a mixed cost
60) The account analysis method of measuring cost behavior does not rely on subjective assessments.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
42
61) The high-low method uses estimated cost data to approximate the cost function.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
62) Least-squares regression provides statistical information about the reliability of its cost estimates.
Answer: TRUE
Diff: 2
LO: 3-4
a mixed cost
63) In a regression analysis, the constant from the linear cost function is a measure of reliability.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
64) If regression analysis is used when measuring cost behavior, plotting the cost against each of the
potential cost drivers is not necessary.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
65) In a linear cost function estimated by regression analysis, the constant or intercept measures variable
cost per unit of the cost driver.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
43
66) In regression analysis, a lower coefficient of determination is better than a higher one.
Answer: FALSE
Diff: 2
LO: 3-4
a mixed cost
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
Diff: 2
LO: 3-4
a mixed cost
44
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
R2 0.94
X coefficient 2.21
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?
D) What is the coefficient of determination? Comment on the goodness of fit.
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
D) The coefficient of determination is 0.94. This is very close to one and indicates that 94% of the
fluctuation in the maintenance department cost can be explained by changes in the number of labor
hours. The cost estimates in the linear function are very reliable.
Diff: 2
LO: 3-4
a mixed cost
45
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
2. We plot all the data points on a graph. The y-axis is cost and the x-axis is number of machine hours. We
then draw a line through all the points, using judgment to fit the line as close as possible to all the plotted
points. We extend the line until it intersects the y-axis of the graph. The monthly fixed cost is equal to the
point where the line intersects the y-axis or cost axis. To find the variable cost per machine hour, select
any activity level and find the total cost at that activity level from the line. Then, subtract the fixed cost
from the total cost, to yield variable cost. Finally, divide the variable cost by the units of activity to get the
variable cost per unit of cost driver.
Diff: 2
LO: 3-4
a mixed cost
46
70) The facilities housekeeping department at St. Luke's Hospital has determined that the appropriate
cost driver for housekeeping costs is patient-days. There are 10,000 patient-days per month. The
department has collected the following accounts for the past month:
Monthly Housekeeping Expenses Amount

Supervisors' Salaries Expense $10,000
Depreciation Expense—Scrubbing Machines $5,000
Cleaning Supplies Expense $7,000
Hourly Workers' Wages Expense $100,000
Insurance Expense—Scrubbing Machines $2,000
Required:
Estimate the cost function using the account analysis method.
Answer: Fixed Costs:
Supervisors' Salaries Expense $10,000
Depreciation Expense—Scrubbing Machines $5,000
Insurance Expense—Scrubbing Machines $2,000
Total Fixed Costs $17,000
Variable Costs:
Cleaning Supplies Expense $7,000
Hourly Workers' Wages Expense $100,000
Total Variable Costs $107,000
Variable Cost per Patient-day is $107,000 / 10,000 = $10.70 per patient day
Cost function:
Y = $17,000 + $10.70X
Where:
Y= Total monthly housekeeping cost
X = Number of patient-days
Diff: 3
LO: 3-4
AACSB: Analytic skills, Reflective thinking skills
a mixed cost
47

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

Chapter 3 Measurement of Cost Behavior

3) Which of the following costs can be canceled in the short run?

16) In a corporate setting, property taxes are an example of a(n) ________.

24) In a corporate setting, a mortgage payment would be identified as a ________.

25) In an economic downturn, a company could temporarily reduce or eliminate ________.

27) Which statement regarding fixed costs is TRUE?

28) Most companies make capacity decisions frequently.

32) Volume-driven costs can be easily traced to products or services.

33) Managers cannot eliminate discretionary fixed costs.

1) A mixed-cost function is graphed as a ________.

7) When estimating a cost function, we assess reliability using ________.

14) Sunset Motel's cost function is given as:

17) Consider the following linear mixed-cost function:

What does the $120,000 represent?

What does the $5.50 represent?

20) In relation to a cost function, the term reliability means ________.

Ballroom rental $3,000

Monthly Expense Costs

8) A disadvantage of the high-low method to estimate a cost function is ________.

26) Account analysis ________.

Month Cost Units

Month Cost Hours

The variable cost per hour is ________.

Month Cost Units

Month Cost Hours

The total fixed cost is ________.

Month Cost Hours

Month Cost Hours

The expected total cost at an operating level of 1,900 hours is ________.

Month Cost Units

Month Cost Units

39) A disadvantage of the visual-fit method to approximate a cost function is ________.

The total fixed cost is ________.

The variable cost per direct labor hour is ________.

The coefficient of determination is ________.

The total fixed cost is ________.

The variable cost per unit of product is ________.

The coefficient of determination is ________.

Cost Driver Cost Function R2

Which cost driver should be chosen?

Cost Driver Cost Function R2

Which cost driver should be chosen?

58) Account analysis is one method of approximating cost functions.

67) The Penquin Company has obtained the following data:

Month Indirect Production Costs Direct Labor Hours

Maintenance Department Cost

Month Maintenance Cost Machine Hours

Monthly Housekeeping Expenses Amount

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