## Cost Management A strategic Emphasis 7th Edition by Edward Blocher – Test Bank

Chapter 08

Cost Estimation

Multiple Choice Questions

1. Which of the four types of cost drivers-activity-based, volume-based, structural and executional-are often best related to linear cost estimation methods?

A. Activity-based only.

B. Activity-based and volume-based.

C. Structural and volume-based.

D. Executional and volume-based.

E. Structural and executional.

2. Which of the following five steps (out of six) of cost estimation is out of order?

A. Step 1: Define the cost object to be estimated.

B. Step 2: Determine the cost driver(s).

C. Step 3: Collect relevant data on the cost of the cost object and the cost driver.

D. Step 4: Evaluate the accuracy of the cost estimate.

E. Step 5: Graph the data.

3. The identification of cost drivers is perhaps the most important step in developing the cost estimate because:

A. It is the first step in cost estimation.

B. It is the final step in cost estimation.

C. There may be a number of relevant drivers, some not immediately obvious.

D. The other steps are easier to execute.

E. It requires much more time than the other steps.

4. Technology and complexity issues often lead management to simplify and to:

A. Use linear estimation methods.

B. Use volume-based costing and nonlinear estimation methods.

C. Use volume-based costing methods.

D. Use nonlinear estimation methods.

E. Use activity-based costing and volume-based costing methods.

5. Data collected on the cost objects and cost drivers for cost estimation must be:

A. Brief and limited.

B. Exhaustive.

C. Concrete.

D. Consistent and accurate.

E. Varied.

6. The objective of the fourth step in cost estimation, graphing the data, is intended to:

A. Identify unusual patterns.

B. Show data in two dimensions.

C. Enhance the cost estimation process.

D. Allow for subjectivity in cost estimation.

7. Selection and employment of the correct estimation method is:

A. Easy once the data is gathered.

B. Relatively easy because only two effective methods exist.

C. Dependent on the accuracy/cost tradeoff for the estimation objectives.

D. Primarily subjective in nature.

E. Difficult because so many effective methods are available.

8. Regression analysis is better than the high-low method of cost estimation because regression analysis:

A. Is mathematical.

B. Can provide greater precision and reliability.

C. Fits data into a mathematical equation.

D. Takes less time.

E. Is a statistical method.

9. When there are two or more cost drivers, regression is termed:

A. Simple.

B. Binary.

C. Multiple.

D. Curvilinear.

E. Synergistic.

10. The independent variable in regression analysis is:

A. The cost to be estimated.

B. The cost driver used to estimate the value of the dependent variable.

C. Hard to define because of its independence.

D. Usually expressed as a range of values.

E. Always a volume-based cost driver.

11. High-low and regression cost estimation methods are alike in that they both:

A. Have an intercept term and a slope term.

B. Have an intercept term but not a slope term.

C. Have a slope term but not an intercept term.

D. Use all data points.

E. Use only a few selected data points.

12. A data point that is outside the normal distribution of data is called an “outlier,” which is often removed from the data before analysis because it:

A. Leads to unbiased calculations.

B. Can distort the results of the data analysis.

C. Has an upward bias on the statistical measures in regression.

D. Will always add bias to the results of a high-low analysis.

13. A variable used in regression analysis that represents the presence or absence of a condition, e.g., seasonality, is called a(n):

A. Random variable.

B. Dummy variable.

C. Constant term variable.

D. Correlating variable.

E. Fixed term variable.

14. An R-squared value that approaches one (1.0) would indicate:

A. An average degree of explanatory power.

B. A low degree of explanatory power.

C. A high degree of explanatory power.

D. The presence of outliers.

E. The absence of outliers.

15. Extending the length of a time period in cost estimation will result in:

A. Fewer recording lags or cut-off errors.

B. Confounding data.

C. Increasing the explanatory power of the data.

D. Better results because more data is being used.

E. More recording lags or cut-off errors.

16. The learning curve in cost estimation is a good example of:

A. Non-linear cost behavior.

B. Machine-intensive production.

C. Simple regression.

D. A random variable.

E. Efficient labor.

17. Which one of the following cost estimation methods is the most accurate?

A. Regression analysis.

B. Visual fit.

C. Subjective forecasting.

D. The high-low method.

18. In least squares regression analysis, the cost to be estimated is the:

A. Independent variable.

B. Dependent variable.

C. Cost object

D. Outlier.

E. Dummy variable.

19. Which one the following is a variable that takes on values of 1, 2, 3, … for each period in sequence?

A. Dummy variable.

B. Price change index.

C. Trend variable.

D. Dependent variable.

E. Independent variable.

20. Felinas Inc. produces floor mats for cars and trucks. The owner, Kenneth Felinas, asked you to assist him in estimating his maintenance costs. Together, Mr. Felinas and you determined that the single best cost driver for maintenance costs was machine hours. Below are data from the previous fiscal year for maintenance expense and machine hours:

Month Maintenance Expense Machine Hours

1 $3,120 2,200

2 3,310 2,300

3 3,490 2,400

4 3,620 2,430

5 3,620 2,280

6 3,680 2,440

7 3,610 2,420

8 3,420 2,390

9 3,140 2,210

10 2,880 2,080

11 2,780 1,690

12 2,940 2,070

Using the high-low method, unit variable cost is calculated to be:

A. $1.31.

B. $1.59.

C. $1.36.

D. $1.14.

E. $1.20.

21. Felinas Inc. produces floor mats for cars and trucks. The owner, Kenneth Felinas, asked you to assist him in estimating his maintenance costs. Together, Mr. Felinas and you determined that the single best cost driver for maintenance costs was machine hours. Below are data from the previous fiscal year for maintenance expense and machine hours:

Month Maintenance Expense Machine Hours

1 $3,120 2,200

2 3,310 2,300

3 3,490 2,400

4 3,620 2,430

5 3,620 2,280

6 3,680 2,440

7 3,610 2,420

8 3,420 2,390

9 3,140 2,210

10 2,880 2,080

11 2,780 1,690

12 2,940 2,070

Using the high-low method, total monthly fixed cost is calculated to be:

A. $484.

B. $364.

C. $752.

D. $259.

E. $898.

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