Practice Set 1: Basic Concepts 1

MULTIPLE CHOICE

Costs classification
1. The term relevant cost applies to all the following decision situations except the
A. Acceptance of a special order. .
B. Determination of a product price.
C. Replacement of equipment.
D. Addition or deletion of a product line.

2. A decision-making concept, described as “the contribution to income that is foregone by not using a limited
source for its best alternative use,” is called
A. Marginal Cost. C. Potential Cost.
B. Incremental Cost. D. Opportunity Cost.

3. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component?
A. Labor C. Depreciation
B. Overhead D. Selling.

4. The term that refers to costs incurred in the past that are not relevant to a future decision is
A. Full absorption cost. C. Sunk Cost.
B. Under-allocated indirect cost. D. Incurred marginal cost.

Questions 5 to 7 are based on the following information. Management accountants are frequently asked to
analyze various decision situations including the following:
I. The cost of a special device that is necessary if a special order is accepted.
II. The cost proposed annually for the plant service for the grounds at corporate headquarters.
III. Joint production cost incurred, to be considered in a sell-at-split versus a process-further decision.
IV. The cost of alternative use of plant space to be considered in a make-or-buy decision.
V. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal
decision.

5. The costs described in situations I and IV are

A. Prime costs. C. Relevant costs.
B. Discretionary costs. D. Differential costs.

6. The costs described in situations III and V are

A. Prime costs. C. Discretionary costs.
B. Sunk costs. D. Relevant costs.

7. The cost described in situation II is a

A. Prime costs. C. Relevant costs.
B. Discretionary costs. D. Differential costs.

8. Management accountants are concerned with incremental unit costs. These costs are similar to the following,
except
A. The economic marginal cost. C. The cost to produce an additional unit.
B. The variable cost. D. The manufacturing unit cost.

9. Opportunity costs are

A. Costs irrevocably incurred by past actions
B. The difference between actual and standard costs
A. Not recorded in the accounting records
B. Partly fixed costs and partly variable costs

10. Cost of goods sold is a component of the income statement. In a merchandising establishment, this refers to
purchases adjusted for changes in inventory. In a manufacturing company, what replaced purchases to arrive
at cost of good sold?
A. Finished goods. C. Work in process inventory.
B. Fixed manufacturing overhead. D. Cost of good manufactured.

11. The salaries you could be earning by working rather than attending college is an example of
A. Outlay costs. C. Sunk costs.
B. Misplaced costs. D. Opportunity costs

12. In analyzing whether to build another regional service office, the salary of the Chief Executive Officer (CEO)
at the corporate headquarters is
Practice Set 1: Basic Concepts 2

A. Relevant because salaries are always relevant.

B. Relevant because this will probably change if the regional service office is built.
C. Irrelevant because it is future cost that will not differ between the alternatives under consideration.
D. Irrelevant since another imputed costs for the same will be considered.

13. Sunk costs

A. Are substitutes for opportunity costs.
B. Are relevant to long-term decisions but not to short-term decisions.
C. Are relevant to decision making.
D. In themselves are not relevant to decision making.

14. When all manufacturing cost used in production are attached to the products, whether direct, or indirect,
variable of fixed, this is called
A. Process costing . C. Variable costing.
B. Absorption costing. D. Job order costing.

High-low method
15. Mine and Yours Company uses a regression equation to analyze the behavior of its transportation costs (T)
as a function of travel time (H). They developed the following equation using two years’ observation with a
related coefficient of determination of .85:
T = 100,000 + P50H
If 500 hours of travel time were logged in one period, the related point estimate of total transportation costs
would be
A. P110,000 C. P106,250
B. P121,250 D. P125,000

16. These are among the methods of segregating fixed cost and variable costs except
A. Breakeven method. C. Scattergraph method.
B. Simple regression analysis. D. High-low method.

17. Jackson, Inc, is preparing a flexible budget for next year and requires a breakdown of the cost of steam used
in its factory into the fixed and variable elements. The following data on the cost of steam used and direct
labor hours worked are available for the last 6 months of this year.
Direct
Month Cost of Steam Labor Hours
July P 15,850 3,000
August 13,400 2,050
September 16,370 2,900
October 19,800 3,650
November 17,600 2,670
December 18,500 2,650
Total P101,520 16,920

Assuming that Jackson uses the high-low method of analysis. The estimated variable cost of steam per direct
labor hour is.
A. P4.00 C. P5.82
B. P5.42 D. P6.00

18. In the Timbugan County, Inc., a maintenance cost is partly fixed and partly variable in nature. At the low level
of activity (150 direct labor hours), maintenance costs total P2,100. At high level of activity (270 direct labor
hours), maintenance costs are P3,000. Using the high-low method, what is the variable maintenance cost per
unit and the total fixed maintenance cost?
Variable Fixed
maintenance cost maintenance cost
A. P 7.50 P 975
B. P 7.50 P2,100
C. P10.00 P 600
D. P10.00 P2,100

19. Mat Company estimates its material handling costs at two activity levels as follows:
Kilos handled Cost
80,000 P 160,000
60,000 132,000
What is Mat’s estimated cost of handling 75,000 kilos?
A. P 150,000 C. P 157,500
B. P153,000 D. P132,000

20. The total production cost for 20,000 units was P21,000 and the total production cost for making 50,000 units
was P34,000. Once production exceeds 25,000 units, additional fixed costs of P4,000 were incurred. The full
production cost per unit for making 30,000 units is:
Practice Set 1: Basic Concepts 3

A. P 0.30 C. P 0.84
B. P 0.68 D. P 0.93

21. Hungarian Sausage wishes to analyze the fixed and variable components of the semi-variable cost. The
following information is available:
Output Output
Month (Units) Costs Month (Units) Costs
1 1,000 P 12,000 4 800 P11,000
2 700 10,000 5 1,400 18,750
3 1,100 14,000 6 1,200 15,000
Using the high-low method, which one of the following is correct?
A. Variable costs are P15 per unit. C. Fixed costs are P1,250 per month.
B. Variable costs are P10 per unit. D. Fixed costs are P1,000 per month.

22. The controller of James Company has requested a quick estimate of the manufacturing supplies needed for
the Morton Plant for the month of July when production is expected to be 470,000 units to meet the ending
inventory requirements and sales of 475,000 units. James Company’s budget analyst has the following
actual data for the last 3 months:

Production Manufacturing
Month in units supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560

Using these data and the high-low method to develop a cost accounting equation, the estimate of needed
manufacturing supplies for July would be
A. P652,500 C. P749,180
B. P681,500 D. P752,060

23. For the six months of the year, the highest level of activity for LQP Corporation was for 18,000 full units of
production with maintenance cost at P114,000 and its lowest level of activity for the same period was at
14,000 full units of production with maintenance cost at P94,000. What amount of maintenance cost should
LPQ expect in a month in which it was scheduled 16,000 equivalent full units of production?
A. P 24,000 C. P 80,000
B. P104,000 D. P114,000

Regression analysis
24. Simple regression analysis provides the means to evaluate a line of regression, which is fitted to a plot of data
and represents
A. The way costs change with respect to the dependent variable.
B. The way costs change with respect to both independent and dependent variables.
C. The variability expense with pesos of production.
D. The way costs change with respect to the independent variable.

25. The slope of the line of regression is

A. The rate at which the independent variable varies.
B. The rate at which the dependent variable varies.
C. The level of the fixed costs.
D. The level of the total variable costs.

26. Regression analysis

A. Estimates the independent cost variable.
B. Uses probability assumptions to determine total project costs.
C. Estimates the dependent cost variable.
D. Ignores the coefficient of determination.

27. The segregation of fixed costs and variable costs is key to proper cost analysis. Regression analysis is a
technique used for this purpose. Identify the appropriate statements below on regression analysis:
1. It assumes that a change in value of a dependent variable is related to the change in the value of an
independent variable.
2. A linear relationship between direct cost and production volume can cause a problem when using
accounting data for regression analysis.
3. It attempts to find an equation for the linear relationship among variable.
4. It establishes a cause and affect relationship.

A. All four statements are appropriate. C. Statements 1 and 3 only.

B. Statements 1, 3 and 4 only. D. Statements 2 and 4 only.
Practice Set 1: Basic Concepts 4

28. Simple regression differs from multiple regression in that

A. Multiple regression uses all available data to estimate the cost function whereas simple regression only
uses simple data.
B. Simple regression uses only one dependent variable and multiple regression uses more than one
dependent variable.
C. Simple regression is limited to the use of only the independent variables and multiple regression can use
both dependent and independent variables.
D. Simple regression uses only one independent variable and multiple regression use more than one
independent variable.

29. For the month just ended, the cost components to make Product FX was 50 per unit plus fixed costs of
P250,000. One thousand units were produced. For the current month, the cost to make the product will be
P55 per unit plus fixed cost of P250,000. Fifteen hundred units are expected to be produced. The estimates of
the underlying, but unknown intercept and slope coefficient for the current month are
A. P250,000 and P50. C. P50 and P250,000.
B. P55 and P250,000. D. P250,000 and P55.

30. Simple regression analysis involves the use of

Dependent Independent Dependent Independent
Variables Variables Variables Variables
A. One None C. One Two
B. One One D. None Two

31. Multiple regression analysis involves the use of

Dependent Independent Dependent Independent
Variables Variables Variables Variables
A. One More than one C. More than one One
B. More than one More than one D. One One

32. Multiple regression analysis

A. Establishes a cause and effect relationship.
B. Is not a sampling technique.
C. Involves the use of independent variable only.
D. Produces measures of probable error.

33. Which of the following may be used to estimate how both the number of shipments and the weight of
materials handled affect inventory warehouse costs?
A. Economic order quantity analysis. C. Correlation analysis.
B. Probability analysis. D. Multiple regression analysis.

34. A non-linear cost function

A. Does not effectively describe the behavior of costs all the time.
B. Never describes the behavior of costs in relation to the cost driver.
C. Has two constants and single slope.
D. Always describes the behavior of costs in relation to the driver.

35. Pyramid Company has data relating total production costs to volume for each quarter during the past five
years. During this period, production volume has varied substantially. The method of production has been
relatively unchanged and the cost behavior has been complex. What is the most appropriate method for
estimating future production cost?
A. Linear programming. C. Time-series or trend regression analysis.
B. Cost-volume-earnings approach. D. Program evaluation review technique.

36. In the standard regression equation Y = a + bx, the letter b is best described as a(n):
A. Independent variable. C. Constant coefficient.
B. Dependent variable. D. Variable coefficient.

37. The letter “x” in the standard regression equation is best described as a (an)
A. Independent variable. C. Constant coefficient.
B. Dependent variable. D. Coefficient of determination.

38. Based upon the data described from the regression analysis, 420 maintenance hours in a month would mean
the maintenance costs (rounded to the nearest peso) would be budgeted at
A. P3,780 C. P3,790
B. P3,600 D. P3,746
Practice Set 1: Basic Concepts 5

39. Marina Company has developed a regression equation to analyze the behavior of its maintenance costs (Q)
as a function of machine hours (Z). The following equation was developed by using 30 monthly observations
with a related coefficient of determination of 0.90:
Q = P6,000 + P5.25 Z
If 1,000 machine hours are worked in one month, the related point of estimate of total maintenance costs
would be
A. P11,250 C. P 5,250
B. P10,125 D. P 4,725

40. Premised on past experience, Harry Corporation adopted the following budget formula for estimating its
shipment expenses. The company’s shipments average is 12 kilos per shipment.
Shipments costs = P 8,000 + (P0.25 x kgs. Shipped)
Pertinent data for the current month are given below:
Planned Actual
Sales 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales P240,000 P288,000
Total pound shipped 9,400 12,800
Kgs. shipped 4,364 5,591
The actual shipping costs for the month amounted to P10,500. The appropriate monthly flexible budget
allowance for shipping costs for purposes of performance evaluation would be
A. P9,397.75 C. P10,340
B. P11,075 D. P10,460

41. Kwing Company uses regression analysis to develop model for predicting overhead costs. Two different cost
drivers (machine hours and direct materials weight) are under considerations as the independent variable.
Relevant data were run on a computer using one of the standard regression programs, with the following
results:
Machine hours Coefficient Direct materials weight Coefficient
Y intercept 2,500 Y Intercept 4,600
B 5.0 B 2.6
r2=.70 r2= .50
Which regression equation should be used?
A. Y = 2,500 + 5.0x. C. Y = 4,600 + 2.6x.
B. Y = 2,500 + 3.5x. D. Y = 4,600 + 1.3x.

42. The manager of the assembly department of a company would like to estimate the fixed and variable
components of the department’s cost. To do so, the manager has collected information on total cost and
output for the past 24 months. To estimate the fixed and variable components of total cost, the manager
should use
A. Regression analysis. C. Sensitivity analysis.
B. Game theory. D. Queuing theory.

43. In determining cost behavior in business, the cost function is often expressed as Y = a + bx. Which one of
the following cost estimation methods should not used in estimating fixed and variable costs for the equation?
A. Graphic method. C. High-and-low point method.
B. Simple regression. D. Multiple regression.

44. Y = P575,000 + P8.50x represents the behavior of maintenance costs (Y) as a function of machine hours (x).
Thirty (30) monthly observations were used to develop the foregoing regression equation. The related
coefficient of determination was .90. If 2,500 machines hours were worked in one month, the related point
estimate of total variable maintenance costs would be:
A. P23,000 C. P25,250
B. P21,250 D. P19,125

45. All of the following are assumptions underlying the validity of linear regression output except
A. The errors are normally distributed and their mean is zero.
B. Certainty.
C. The variance of the errors is constant.
D. The independent variables are not correlated with each other.

46. When the relationship between the independent and dependent variable is not expected to remain constant,
an appropriate method of analysis is
A. Cluster analysis. C. Curvilinear regression
B. Simple linear regression. D. Simplex linear programming.
Practice Set 1: Basic Concepts 6

47. An auditor used regression analysis to evaluate the relationship between utility costs and machine hours. The
following information was developed using a computer software program:
Intercept 2,050
Regression .825
Correlation coefficient .800
Standard error of the estimate 200
Numbers of observations 36
What is the expected utility cost if the company’s 10 machines will use 2,400 hours next month?
A. P4,050 C. P3,970
B. P4,030 D. P3,830

48. A division uses a regression in which monthly advertising expenditures are used to predict monthly product
sales (both in millions of pesos). The results show a regression coefficient for the independent variable equal
to 0.8. This coefficient value indicates that
A. The average monthly advertising expenditure in the sample is P800,000.
B. When monthly advertising is at its average level, product sales will be P800,000.
C. On average, for every additional peso in advertising, sales increase by P.80.
D. Advertising is not good predictor of sales because the coefficient is so small.

49. Rovic Company is in the process of preparing its budget for the next fiscal year. The company has had
problems controlling costs in prior years and has decided to adopt a flexible budgeting system this year.
Many of its costs contain both fixed and variable cost components. A method that can be used to separate
costs into fixed and variable components is
A. Trend analysis. C. Dynamic programming
B. Monte Carlo simulation. D. Regression analysis.

50. Dencio’s estimated variable manufacturing overhead cost for a month in which scheduled overhead is 5,000
cases will be
A. P 80,000 C. P240,000
B. P320,000 D. P360,000

51. Dencio’s predetermined fixed manufacturing overhead rate would be

A. P1.60 per machine hour. C. P4,00 per machine hour.
B. P1.20 per machine hour. D. P4.80 per machine hour.

52. To facilitate planning and budgeting, management of a travel service company wants to develop forecasts of
monthly sales for the next 24 months. Based on past data, management has observed an upward trend in
level of sales. There are also seasonal variations with high sales in June, July, and August, and low sales in
January, February, and March. An appropriate technique for forecasting the company’s sales is
A. Time series analysis. C. Linear programming
B. Queuing Theory. D. Sensitivity analysis.

53. What are the four components of a time series?

A. Trend, cyclical, seasonal, and irregular. C. Alpha, cyclical, seasonal, and repetitive.
B. Alpha, cyclical, seasonal, and irregular. D. Trend, cyclical, seasonal, and repetitive.

54. The four components of time series data are secular trend, cyclical variation, seasonally, and random
variation. The seasonality in the data can be removed by
A. Multiplying the data by a seasonality factor
B. Ignoring it.
C. Taking the weighted average over four time periods
D. Subtracting a seasonally factor from the data.

55. An internal auditor for a large automotive parts retailer wishes to perform a risk analysis and wants to use an
appropriate statistical tool to help identify stores that are at variance with the majority of stores. The most
appropriate statistical tool to use would be
A. Linear time series analysis.
B. Cross-sectional regression analysis.
C. Cross tabulation with chi square analysis of significance.
D. Time series multiple regression analysis to identify changes in individual stores over time.

56. The moving-average method of forecasting

A. Is a cross-sectional forecasting method.
B. Regresses the variable of interest on a related variable to develop a forecast.
C. Derives final forecasts by adjusting the initial forecasts based on the smoothing constant.
D. Includes each new observation in the average as it becomes available and discard the oldest
observation.
Practice Set 1: Basic Concepts 7

57. As a part of a risk analysis, an auditor wishes to forecast the percentage growth in next month’s sales for a
particular plant using the past 30 months sales results. Significant changes in the organization affecting sales
volumes were made within the last 9 months. The most effective analysis technique to use would be
A. Unweighted moving average. C. Queuing theory.
B. Exponential smoothing. D. Linear regression analysis.

Scattergraph
58. Quality control program employs many tools for problem definition and analysis. A scatter diagram is one of
these tools. The objective of a scatter diagram is to
A. Display a population of items for analysis.
B. Show frequency distribution in graphic form.
C. Divide a universe of data into homogeneous groups.
D. Show the vital trend and separate trivial items.

59. The management of an airline is interested in the relationship between maintenance cost and the level of
operations of its aircraft. Using regression analysis on cost activity data collected over 12 months, the
relationship below was estimated.
Monthly Maintenance Cost (million of Pesos)

1.30

0.70

0.50
1,000 2,000 3,000 4,000

The estimated increase in the monthly maintenance cost each additional hour of operation is
A. P150 per hour. C. P450 per hour.
B. P300 per hour. D. P850 per hour.

Least-squares method
Questions 60 through 63 are based on the following information. Below is an examination of last year’s
financial statements of Mackenzie Park Co., which manufactures and cells trivets. Labor hours and production
cost for the last 4 months of the years, which are representative for the year, were as follows:
Total
Month Labor Hours Production Costs
September 2,500 P 20,000
October 3,500 25,000
November 4,500 30,000
December 3,500 25,000
Totals 14,000 P100,000
Based upon the information given using the least squares method of computation with letters listed below,
select the best answer for each question.
IF: a = Fixed variable cost per month
b = Variable production cost per labor hour
n = Number of months
x = Labor hours per month
y = Total monthly production costs
 = Summation

60. The equation(s) required for applying the least squares method of computation of fixed and variable
production costs can be expressed as
A. xy = a x + b x2 C. Y = a + bx2
Y = na + bx2
B. y = na + b x D. XY = ax + bx2
Y = na + bx

61. The cost function derived by the simple least squares method
A. Is linear.
B. Must be tested for minima and maxima.
C. Is parabolic.
D. Indicates maximum costs at the function’s point of inflection.

62. Monthly production cost can be expressed

A. y = ax + b. C. y = b +ax
B. y = a + bx. D. y = a + bx.
Practice Set 1: Basic Concepts 8

63. Using the least squares method of computation the fixed monthly production cost of trivets is approximately
A. P100,000 C. P 7,500
B. P 25,000 D. P 20,000

Correlation
64. If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables
appear?
A. Random points.
B. A least squares line that slopes up to the right.
C. A least squares line that slopes down to the right.
D. Under these conditions, a scatter diagram could not be plotted on a graph.

65. In regression analysis, the coefficient of determination is a measure of

A. The amount of variation in the dependent variable explained by the independent variables.
B. The amount of variation in the dependent variable unexplained by the independent variables.
C. The slope of the regression line.
D. The predicted value of the independent variable.

66. Using regression analysis, Fairfields Co. graphed the following relationship of its cheapest product line’s sales
with its customers’ income levels:
Sales
(P)

0 Income levels increasing

If there is a strong statistical relationship between the sales and customers’ income levels, which of the
following numbers best represent the correlation coefficient for this relationship?
A. -9.00 C. +0.93
B. -0.93 D. +9.00

67. Using the graph below, the coefficient of correlation between direct materials cost and units produced is
nearest

Direct
Materials

0 Units of production

A. -0.75 C. 0.0
B. 0.50 D. 1.00

68. Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of
the coefficient of correlation, “r”. The best explanation of the value “r” is that it
A. Interprets variances in terms of the independent variable.
B. Ranges in size from negative infinity to positive infinity.
C. Is a measure of the relative relationship between two variables.
D. Is positive only for downward-sloping regression lines.

69. In regression analysis, which of the following correlation coefficients represents the strongest relationship
between the independent and dependent variable?
A. 1.03 C. -.89
B. -.02 D. .75

70. The auditor of a bank has developed a multiple regression model that has been used for a number of years to
estimate the amount of interest income from commercial loans. During the current year, the auditor applies
the model and discovers that the r2 value has decreased dramatically, but the model otherwise seems to be
working well. Which conclusion is justified by the change?
A. Changing to a cross-sectional regression analysis should cause r2 to increase.
B. Regression analysis is no longer an appropriate technique to estimate interest.
C. Some new factors, not included in the model are causing interest income to change.
Practice Set 1: Basic Concepts 9

D. A linear regression analysis would increase the model’s reliability.

71. An auditor asks accounting personnel how they determine the value of the organization’s real estate holdings.
They say that valuations are based on a regression model that uses 17 different characteristics of the
properties (square footage, proximity to downtown, age, etc.) to predict value. The coefficients of this model
were estimated using a random sample of 20 company properties, for which the model produced an r 2 value
of 0.92. Based on this information, which one of the following should the auditor conclude.
A. The model’s high r2 probably is due in large part to random chance.
B. 92% of the variable that determine value is in the model.
C. The model is very reliable.
D. This sample of properties is probably representative of the overall population of company holdings.

72. A firm regressed overhead on units produced over the past year and found a coefficient of determination
equal to 0.85 with a U-shaped residual error pattern, it is reasonable to conclude that the relationship between
overhead and units produced is
A. Weak. C. Nonlinear
B. Causal. . D. Linear.

 done 