Week 2 – Lecture illustration questions

1. E3.28
Estimating cost behaviour using multiple methods: retailer LO 3.9
Quik Chek, a chain of convenience stores, has store hours that fluctuate from month to
month as the tourist trade varies. The electricity costs and hours of operation for the past
six months for one of the company’s stores follow:
Month Total hours of operation Total electricity cost
January 700 $3 800
Februar
y 600 3 400
March 550 3 240
April 500 3 200
May 400 2 600
June 450 2 700

Required:

1. Use the high–low method to estimate the cost behaviour of the store’s electricity
costs, assuming that the variable costs vary in proportion to the hours of operation.
Express the cost behaviour in formula form (Y = a + bX). What is the variable
electricity cost per hour of operation?
2. Use regression analysis to estimate the cost behaviour of the store’s electricity costs.
Express the cost behaviour in equation form. What is the variable electricity cost per
hour of operation?
3. During July, the store will be open 420 hours. Predict the store’s total electricity cost
for July using each of the cost estimation methods employed in requirements 1 and 2.

Semester 2, 2018 MST

Q4. Minty Manufacturing Company’s average electricity costs were $1 per machine hour at an
activity level of 10,000 machine hours in March and $0.80 at an activity level of 15,000 machine
hours in February. Assuming that this activity is within the relevant range, total expected electricity
costs for an estimated activity level of 11,000 machine hours would be

A. $11,000
B. $8,800
C. $10,400
D. None of the above

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 Q5. The following is an extract of a cost report for Big Whale Car Wash for the six months from
Jun to Nov. Management considers the activities in these six months as within the relevant range
for the purpose of cost estimation.
Car washing
Number of labour costs
Month cars washed ($)
Jun 500 8,000
Jul 520 8,000
Aug 480 7,000
Sep 510 8,000
Oct 400 7,000
Nov 600 9,000
The car washing labour cost is a:

A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semivariable cost.

Q6. The results of the regression analysis to estimate setup costs using the number of setups and
number of setup hours as activity cost drivers are as follows:

SUMMARY
OUTPUT

Regression Statistics
R Square 0.998212
Standard
Error 49.83698
Observations 9

ANOVA
Significance
  df SS MS F F
Regression 2 8321394 4160697 1675.185 5.71E-09
Residual 6 14902.34 2483.724
Total 8 8336296      

Standard
  Coefficients Error t Stat P-value Lower 95% Upper 95%
Intercept 1493.265 136.42 10.94608 3.45E-05 1159.457 1827.073
Setup hours 2.605579 0.045317 57.49626 1.86E-09 2.494691 2.716466
Number of
setups 13.7142 0.916289 14.96711 5.6E-06 11.47212 15.95628

Based on the multiple regression analysis output, what is the estimated cost function?

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A. Total Cost = $1,493.27 + ($2.61 x Setup hours)
B. Total Cost = $1,493.27 + ($2.61 x Setup hours) + ($13.71 x Number of setups)
C. Total Cost = $1,493.27 + ($13.71 x Number of setups)
D. Total Cost = $1,493.27 + ($2.61 x Number of setups) + ($13.71 x Setup hours)

Semester 1, 2018
5.  Technical Engineering presently leases a copying machine on a monthly basis. The lease
agreement requires a fixed fee each month in addition to a charge per copy. Technical made 2400
copies and paid a total of $162 in rent in September and in October they paid $195 for 3500 copies.
Determine the total amount that would be paid for 1800 copies. 

A. $120
B. $138
C. $144
D. $163

6. A manufacturer plans to increase production within the relevant range of activity. What
behaviour can the company expect for each of the following?

A. Fixed cost per unit Variable cost per unit

No change Increase

B. Fixed cost per unit Variable cost per unit

Increase No change

C. Fixed cost per unit Variable cost per unit

Decrease Increase

D. Fixed cost per unit Variable cost per unit

Decrease No change

Semester 2, 2019 MST:

Q4. If the independent variable is production volume and the dependent variable is total
manufacturing cost, a R square of 0.90 indicates

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 A. 90 percent of the change in manufacturing cost can be explained by the change in the production
volume.
B. 90 percent of the change in volume is caused by changes in manufacturing cost.
C. 10 percent of the change in volume is caused by changes in manufacturing cost
D. costs will change by 90 percent of the change in volume

Q5. Technical Engineering presently leases a copying machine on a monthly basis. The lease
agreement requires a fixed fee each month in addition to a charge per copy. Technical
Engineering made 2,400 copies and paid a total of $162 in rent in September and in October they
paid $195 for 3,500 copies. Determine Technical's monthly fixed fee.

A. $138
B. $90
C. $66
D. $55

Q6. The results of the regression analysis to estimate setup costs using the number of setups and
number of setup hours as activity cost drivers are as follows:
SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.9706
R Square 0.9421
Standard Error 1747.948
Observations 12

ANOVA
Significance
  df SS MS F F
Regression 3 397557422 132519140.7 43.373 0.00003
24442577.9
Residual 8 7 3055322.25
Total 11 422000000      

Standard
  Coefficients Error t Stat P-value Lower 95% Upper 95%
Intercept 11188.151 7391.604 1.514 0.169 -10221.329 32597.63
DLH 6.155 1.809 3.402 0.009 0.915 11.395
STS 0.216 0.128 1.684 0.131 -0.155 0.587
PL 32.169 23.526 1.367 0.209 -35.973 100.312
DLH – Direct Labor Hour
STS – Square metre of turf seeded
PL - Planting
Based on the multiple regression analysis output, what is the estimated cost function?
A. Total overhead= $11,188.15 + ($6.16 x DLH)
B. Total overhead = $11,188.15 + ($6.16 x DLH) + ($0.22 x STS)
C. Total overhead = $11,188.15
D. Total overhead = $11,188.15+ ($6.16 x DLH) + ($0.22 x STS) + ($32.17 x PL)

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Semester 1, 2019 MST:

4. Yang Manufacturing makes a product called Yin. The relevant range of operations is between
2,500 units and 10,000 units of Yin per month. Per unit costs at two activity levels are as
follows: 5,000 units at $17.00 per unit; 7,500 units at $13.00 per unit. Determine their total cost
if Yang produces 10,000 units.

A. $130,000
B. $125,000
C. $110,000
D. $100,000

Use the following information to answer questions 5 and 6

The results of the regression analysis to estimate setup costs using the number of setup hours are as
follows:

SUMMARY OUTPUT

Regression Statistics
R Square 0.931469
Standard Error 285.6803
Observations 9

ANOVA
df SS MS F Significance F
Regression 1 7765004 7765004 95.14395 2.52E-05
Degrees of Freedom 7 571292.5 81613.21
Total 8 8336296

Coefficients Std Error t Stat P-Value Lower Upper

95% 95%
Constant 2498.644 680.6304 3.671073 0.007953 889.2099 4108.078
X Coefficient 2.506915 0.257009 9.754176 2.52E-05 1.899185 3.114646

5.  What is the cost function to estimate setup costs? 

A. Setup costs = $2,498.64

B. Setup costs = $2.51x
C. Setup costs = $2,498.64 + $0.93x
D. Setup costs = $2,498.64 + $2.51x

6. If the estimated number of setups is 10,100, what is the estimated total setup cost (rounded to 2
decimal places)?

A. $ 2,498.64
B. $25,531.00
C. $27,849.64

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 D. $11,689.64

Semester 1, 2020 MST:

Q5. A retailer, in business for over 50 years, has developed the following regression model from
the past 60 months of operating data:

Monthly sales dollars = $50,000 + $4.70A + $30B - $1,000X

Where A = number of customers

B= advertising dollars in month
X = 1 if a winter month
X= 0 if other months

An appropriate interpretation of this model is that:

A. The business is seasonal, gathering higher sales in winter months than other months.
B. Advertising is not cost effective
C. Within the relevant range, each additional customers will make a purchase of $4.70 on
average
D. Sales are always expected to be at least $50,000

Q6. You are attempting to express sales as a function of advertising expenditures (X1), and per capita
income (X2) in our sales area. You have the following multiple linear regression equation:
Y = $10 + $0.51X1 + $0.42X2
Your coefficient of determination (R2) is 0.96. This coefficient of determination explains that:

A. 96% of sales variations are due to an error term

B. The dependent variable is not related to advertising expenditures and per capita income
C. 96% of sales variations are explained by the equation
D. Only 51% of the sales variations are explained by advertising expenditures

Semester 2, 2012 MST:

QUESTION 1

The Accountant of Sunny Electronics Company believes that the identification of the variable
and fixed components of the firm’s costs will enable the firm to make better planning and
control decisions. Among the costs, the accountant is concerned about the behaviour of
indirect materials cost. The accountant believes that machine hours are a cost driver for
indirect materials costs.

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You suggested that regression analysis be used to determine the cost behaviour of indirect
materials. The following regression equation was developed from 40 pairs of observations:

S= $200 + $4H

Where S = total monthly costs of indirect materials

H = machine hours per month.

REQUIRED:

1. Explain the meaning of ‘200’ and ‘4’ in the regression equation S=$200 + $4H to the
accountant. (6 marks)

2. Briefly discuss two criteria you would use to evaluate the regression line depicted by
the regression equation. (5 marks)

3. Calculate the estimated cost of indirect materials if 900 machine hours are to be used
during the month. (2 marks)

4. To determine the validity of the cost estimated calculated in requirement 2, what

questions would you ask the accountant about the data used in the regression?
(4 marks)

5. Consider three other activities that could be used as cost drivers to predict the total
monthly costs of indirect materials. (3 marks)

Total marks for this question: 20 marks

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