CHAPTER 10 - THEORY - TRUE OR FALSE

DETERMINING HOW COST BEHAVES

1. One assumption frequently made in cost behavior estimation is that changes in total costs can be
explained by changes in the level of a single activity.
2. A cost function is a mathematical description of how a cost changes with changes in the level of
an activity relating to that cost.
3. A cost function is a cost object that whose costs are mostly variable.
4. All cost functions are linear.
5. In a cost function y = 18,000, the slope coefficient is zero.
6. When estimating a cost function, cost behavior can be approximated by a linear cost function
within the relevant range.
7. If a cost item is fixed for one cost object, it will be fixed for all cost objects for which it is
associated.
8. All other things being equal, the longer the time horizon the more likely a cost will be fixed.
9. Outside of the relevant range, variable and fixed cost-behavior patterns change, causing costs to
become nonlinear.
10. A particular cost item could be variable for one cost object and fixed for another cost object.
11. A linear cost function can only represent fixed cost behavior.
12. In a graphical display of a cost function, the steepness of a line represents the total amount of
fixed costs.
13. It can be inferred that when there is a high correlation between two variables, one is the cause of
the other.
14. The high causality between two variables, is the most important factor in determining the cost
function of the related cost object.
15. An example of a physical cause-and-effect relationship is when additional units of production
increase total direct material costs.
16. Managers should use past data to create a cost function and then use the exact information
provided by that cost function to create the budgetary forecast for the next year.
17. A contractual agreement that specifies a fee per mile driven, such as with a rental of a truck, is
not considered a cause-and-effect relationship between an activity and a cost.
18. When management develops cost estimations, they must choose one method, such as industrial
engineering, conference, account analysis, or quantitative analysis, and stay consistently with that
method as each method is mutually exclusive of the others.
19. The account analysis method of cost estimation classifies account costs as fixed, mixed, or
variable using qualitative judgments.
20. The account analysis method estimates cost functions by classifying various cost accounts as
variable, fixed, or mixed with respect to the identified level of activity.
21. The quantitative analysis method uses a formal mathematical method to identify cause-and-effect
relationships among past data observations.
22. Because the cost driver is the same for the fringe benefits of life insurance and pension benefits
cost is the same, those costs can be aggregated into one homogeneous cost pool.
23. The first step in estimating a cost function using quantitative analysis is to plot the data.
24. In estimating a cost function using quantitative analysis, the dependent variable is the factor used
to predict the independent variable.
25. Cross-sectional data pertain to the same entity (organization, plant, activity, and so on) over
successive past periods.
26. Simple regression analysis estimates the relationship between the dependent variable and one
independent variable.
27. Two common forms of quantitative analysis methods of cost estimation are the high-low method
and regression analysis.
28. The high-low method relies on only two observations, the highest and lowest, to estimate a linear
cost function.
29. The dependent variable is a cost to be predicted and managed, whereas an independent variable or
cost driver is the factor used to predict the dependent variable.
30. The vertical difference, called the residual term, measures the distance between actual cost of one
period and estimated cost of the next period.
31. Regression analysis is a statistical method that measures the average amount of change in the
dependent variable associated with a unit change in one or more independent variables.
32. In using high-low method, the slope coefficient is calculated by dividing the difference between
highest and lowest observations of the cost driver by the difference between costs associated with
highest and lowest observations of the cost driver.
33. Simple regression analysis estimates the relationship between the dependent variable and one
independent variable.
34. The advantages of the high-low method to estimate a cost function is that it is easy and accurate.
35. Multiple regression analysis uses only independent variables and not dependent variables.
36. Regression analysis is a statistical technique that measures the average amount of change in the
independent variable associated with a unit change in one or more dependent variables.
37. In regression analysis, the term "goodness of fit" indicates the strength of the relationship
between the cost driver and the costs.
38. Multiple regression analysis estimates the relationship between the dependent variable and two or
more independent variables.
39. With a cost driver, cost accounts should be able to identify a relationship based on a physical
relationship, a contract, or knowledge of operations and makes economic sense to the operating
manager and the management accountant.
40. Machine-hours is a more economically plausible cost driver of machine maintenance than number
of direct manufacturing labor-hours.
41. The larger the vertical difference between actual costs and predicted costs the better the goodness
of fit.
42. The major advantages of quantitative methods are that they are objective, so managers can use
them to evaluate different cost drivers.
43. A flat or slightly sloped regression line indicates a strong relationship between the cost driver and
costs.
44. When choosing among cost drivers, managers trade off level of detail, accuracy, feasibility, and
costs of estimating functions.
45. Activity-based costing systems use the quantitative analysis method exclusively for cost
estimation because of its accuracy.
46. When estimating the cost function for each cost pool, the manager must pay careful attention to
the cost hierarchy because the cost pool may have more than one cost driver from different levels
of the cost hierarchy.
47. An "economy of scale" function is an example of a linear cost function.
48. A step cost function is an example of a linear cost function.
49. Step fixed-cost functions are variable over the long run.
50. An experience curve is a function that measures the decline in cost per unit in various business
functions of the value chain as the amount of these activities increases.
51. Nonlinear cost functions can result because of learning curves.
52. In the cumulative average-time learning model, cumulative average time per unit declines by a
constant percentage each time the cumulative quantity of units produced doubles.
53. When new products are introduced, learning-curve effects can have a major influence on
production scheduling.
54. It is appropriate to incorporate expected learning-curve efficiencies when evaluating
performance.
55. The cumulative average-time learning model with a 85% learning curve indicates that if it takes
200 minutes to manufacture the first unit of a new model, then the second unit will take only 170
minutes to manufacture.
56. The incremental unit-time learning model with a 80% learning curve indicates that if it takes 150
minutes to manufacture the first unit of a new model, then the second unit will take only 120
minutes to manufacture.
57. A learning curve is a function that measures how labor-hours per unit decrease, as units of
production decrease.
58. One of the most commonly used tools for building models in a world of "big data" is logistic
regression.
59. The essential difference between these two is that Logistic regression is used when the dependent
variable is binary in nature.
60. Logistic regression is another form of linear regression.
61. Data collection problems can arise when extreme values of observations occur.
62. Misinterpretation of data can arise when fixed costs are reported on a per unit basis.
63. Inflation can distort data that are compared over time so purely inflationary effects should be
removed.
64. Fixed costs are sometimes allocated to individual products as part of the standard costing system.
When this is the case, they should be treated as variable costs for purposes of future cost
estimation.
65. When building a database of cost driver activity and related costs, if necessary, costs should be
modified to assure that fixed costs are allocated as if they are variable.
66. The coefficient of determination (r2) measures the percentage of variation in X (the independent
variable) explained by Y (the dependent variable).
67. Generally a coefficient of determination (r2) of 0.30 or higher passes a goodness of fit test.
68. Goodness of fit has meaning only if the relationship between the cost drivers and costs is
economically plausible.
69. Multicollinearity exists in multiple regression when two or more independent variables are highly
correlated with each other.
70. A coefficient of correlation between independent variables of .85 indicates multicollinearity.
71. The t-value of a coefficient measures how large the value of the estimated coefficient is relative
to its standard error.
72. The standard error of the estimated coefficient indicates how much the estimated value, b, is
likely to be affected by random factors.