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DETERMINING HOW COSTS BEHAVE
TRUE/FALSE
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.
Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost estimation
2. All cost functions are linear.
Answer: False Difficulty: 1 Objective: 1 Terms to Learn: cost function
All cost functions are not linear, but for cost-behavior estimation we assume
some are linear within a relevant range.
3. When estimating a cost function, cost behavior can be approximated by a linear
cost function within the relevant range.
Answer: True Difficulty: 2 Objective: 1 Terms to Learn: cost estimation, cost function
4. y = a + bX represents the general form of the linear cost function.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: cost function, linear cost function
5. A linear cost function can only represent fixed cost behavior.
Answer: False Difficulty: 1 Objective: 2 Terms to Learn: cost function, linear cost function
A linear cost function can represent fixed, mixed, or variable cost behavior.
6. In a graphical display of a cost function, the steepness of the slope represents the
total amount of fixed costs.
Answer: False Difficulty: 1 Objective: 2 Terms to Learn: cost function, linear cost function
In a graphical display of a cost function, the constant or the y-intercept
represents the amount of fixed costs.
7. The longer the time horizon, the more likely that a cost will have a fixed cost
behavior.
Answer: False Difficulty: 2 Objective: 2 Terms to Learn: cost function, linear cost function
The longer the time horizon, the more likely a cost will be variable.
8. Outside of the relevant range, variable and fixed cost-behavior patterns may
change.
Answer: True Difficulty: 2 Objective: 2 Terms to Learn: cost function, linear cost function
9. Any linear cost function can be graphed by knowing only the slope coefficient.
Answer: False Difficulty: 1 Objective: 2 Terms to Learn: cost function, linear cost function
A linear function can be graphed if the slope coefficient and the intercept are
known.
10. Knowing the proper relevant range is essential to properly classify costs.
Answer: True Difficulty: 1 Objective: 2 Terms to Learn: cost function
11. It can be inferred that when there is a high correlation between two variables,
one is the cause of the other.
Answer: False Difficulty: 2 Objective: 2 Terms to Learn: cost function
It cannot be inferred that a high correlation between two variables indicates that one is the cause of the other. A high correlation simply indicates that the
variables move together.
12. An example of a physical cause-and-effect relationship is when additional units
of production increase total direct material costs.
Answer: True Difficulty: 2 Objective: 2 Terms to Learn: cost function
13. The industrial engineering method of cost estimation is based on opinions from
various departments and is quick and of low cost to apply.
Answer: False Difficulty: 1 Objective: 3