Short Quiz (Based on Lecture 2 – Cost Estimation)

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

True False

2. Leighlow Company has observed that at an activity level of 4,000 units the cost for
maintenance is €30,000, and at 6,000 units the cost for maintenance is €40,000.
Using the high-low method, the cost formula for maintenance is:

(a) €10,000 plus €5.00 per unit

(b) €8,000 plus €4.00 per unit
(c) €4.67 per unit
(d) €5.50 per unit

Solution: (€40,000-€30,000)/(6,000-4,000) = €5 (Variable cost per unit)

To find fixed costs: €40,000-(€5,00 x 6,000) = €10,000

3. Which method of cost estimation does not use the company records as its primary
source of cost-activity data?
(a) Engineering estimates
(b) Regression analysis
(c) Account analysis
(d) High-low method

4. 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 R0.50 per account processed at an activity level of 32,000 accounts. When only
22,000 accounts are processed, the total cost of processing is R12,500. Given these
data, at a budgeted level of 25,000 accounts:
(a) Processing costs are expected to total R8,750
(b) Fixed processing costs are expected to be R10,400
(c) The variables processing costs are expected to be R0.35 per account processed
(d) Processing costs are expected to total R13,000
 Solution: Total cost to process 32,000 accounts: R0.50 x 32,000 = R16,000
Using high-low method to find variable cost per account: (R16,000-
R12,500)/(32,000-22,000) = R0.35
Fixed costs: R16,000 – (R0.35 x 32,000) = R4,800
Expected processing costs (budgeted level 25,000): R4,800+ R0.35x25,000 =
R13,550

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

True False

6. Which of the following statements best describes the account analysis approach to
cost estimation?
(a) Cost estimates are based on optimal or ideal operating conditions
(b) Discernible patterns of the past are used to predict the future behaviour
(c) Historical operating costs are plotted against some past operating activity
(d) Accounting personal must have adequate experience and good judgment

7. A cellular telephone plan that charges R45 per month for up to 1000 minutes per
month of airtime and then charges R0.50 per minute for each minute used over 1000
is an example of a step cost.

True False

8. The cost for a salesperson that is paid a flat salary of £2,000 per month plus a 3%
commission on all sales is an example of what type of cost?
(a) Fixed cost
(b) Variable cost
(c) Step cost
(d) Mixed cost
9. Which of the following would not be a reason that a company would use cost
estimation?
(a) Determining opportunities for reducing costs without reducing value to
customers
(b) Determining how much to pay an employee
(c ) Determining a pricing policy to discourage particular customers and attract
others
(d) All of the above

10. 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.

True False