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Exam 11: Cost Estimation

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Question 1

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An amusement park estimates average costs per day. Which of the following is true?

A) Average cost per day considers the relationship between labor costs and other variables such as temperature
B) Average cost per day can be useful in estimating labor costs
C) Average cost per day would include a component of variable labor costs but not fixed labor cost
D) All of the above

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Question 2

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Use the following to answer questions: (CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows: t-table for Single-Tailed Values of t -The percent of the change in the maintenance costs that can be explained by a change in the activity hours is:

A) 68.46%
B) 12.12%
C) 34.47%
D) 99.72%

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Question 3

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The correlation coefficient that indicates the strongest linear association between two variables is:

A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 40 labor hours to complete. What is the cumulative average time per unit after four units are completed?

A regression equation:

Multiple regression is a regression equation with more than one independent variable.

Use the following to answer questions: (CMA adapted) The following information has been accumulated to be used in preparing the 2008 annual budget for the Salem Corporation. The cost behavior pattern of the maintenance costs must be determined for this budget. The accounting staff has suggested that linear regression be employed to derive a cost estimation equation in the form of TC = F +VX for the total maintenance costs. Information regarding the maintenance hours and costs for 2007 and the partial results of the regression are as follows: t-table for Single-Tailed Values of t -Based upon the information from the regression analysis, the total maintenance costs budgeted for 420 hours of activity would be (rounded to the nearest whole dollar) :

A step or semifixed cost increases in a linear pattern as activity levels decrease.

The fixed cost per unit increases as the activity level increases within the relevant range.

Which of the following would not be a reason that a company would use cost estimation?

If the learning curve for a production process is 80 percent, the time required to produce each unit is 80 percent of the time to produce the first unit.

Mundy Missiles Corp. is negotiating with the government for the production of cruise missiles. The government is considering purchasing either eight missiles for $2,500,000 or sixteen missiles for $5,000,000. Mundy requires a margin of 30 percent to cover administrative costs, research and development, and to make a profit. Mundy has started a chart for this product assuming the production costs are subject to an 80 percent cumulative learning curve. 83. 1) Complete the chart (items a - f) by filling in the cost amounts for volumes 4, 8, and 16 units. 2) Should Mundy sell eight units? Sixteen units?

In the formula, "TC = F + VX", X is considered to be the cost driver.

A regression analysis of total labor costs (y) based upon the number of visitors (x) for the Wacky World Theme Park, yielded a coefficient of $2.75. The t statistic was t=6.141 and the R2=.921. Based upon those results, we can conclude

McNair School principal Dr. Ruth Gacoki wants to know whether the school recruitment program is successful. She used a spreadsheet to estimate the relationship between the number of advertisements and the number of phone inquiries received. Monthly data for the past two years were entered into the computer. Data includes months when no advertising was done through months with 1000 advertisements. Unfortunately, only part of the regression results printed before the computer froze. All Dr. Gacolki saw was "Intercept = 1200" R2 = .94. From that information she can conclude, with limited certainty, that:

The following graphs represent cost behaviors that a company might have: Required: For each of the following items, identify the graph that best illustrates the cost behavior: _____1. Supervisors' salaries where one supervisor is required for every 800 workers. _____2. Cost of direct materials used to produce bicycles is $2.40. _____3. Cost of inventory purchased which cost $2.00 per unit for the first 1,000 units purchased; the next 300 units can be purchased at a per unit price of $1.90; any units purchased above 1,3500 cost $2.07 per unit. _____4. Straight-line depreciation. ______5. Salaries of sales people where they receive a $1,000 flat fee per month plus a 4% commission of sales. ______6. Lease of factory equipment with a fixed minimum payment of $1,000 for up to 400 machine hours used, plus $3 per hour up to 400 additional hours used, then a flat fee of $2,200plus $1.50 per hour for above 800 hours. ______7. Cost for water where the fee is $50 for using up to 100 acre feet per month, and then a $2 per acre foot used thereafter. ______8. Wages of delivery drivers where each driver can make 30 deliveries in one eight hour shift.

Processing costs in the billing department of Alfaro Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Given these data, at a budgeted level of 25,000 accounts:

Which method of cost estimation does not use the company records as its primary source of cost-activity data?

Using the high-low method, which of the following could be used to calculate the intercept?

What is cost estimation, and what is its purpose? What are the problems involved in cost estimation?