Ch 10

Question 0

2 assumptions managers use to estimate cost functions?

Answer 0

1 variations in level of single activity/or cost driver
Explain variations in total costs

2 cost behavior is approximated by linear cost function
Within relevant range

Question 1

Cost function

Answer 1

Mathematical description of how cost changes with

Changes of level of activity relating to that cost

Question 2

Linear cost function, represented graphically?

Answer 2

Total cost vs. level of single activity related to cost

Is straight line within relevant range

Question 3

Slope coefficient

Answer 3

Amount by which total cost changes when

1-unit change occurs in level of activity

Question 4

Constant AKA intercept

Answer 4

Fixed cost

Intercepts with y-axis at its constant value

Question 5

Mixed cost AKA Semivariable cost

Answer 5

Cost has both fixed and variable elements

Question 6

In the equation y = $2x + $3000, what value is the intercept and what is the slope coefficient?

Answer 6

Intercept = $3,000

Slope coefficient = $2

Question 7

Cost estimation

Answer 7

Measures relationship based on data from past costs

And related level of activity

Question 8

Cost predictions

Answer 8

Forecasts of future costs

Question 9

3 ways a cause and effect relationship might arise?

Answer 9

1 physical relationship btw level of activity and costs

2 contractual arrangement

3 knowledge of operations

Question 10

Industrial engineering method AKA Work-measurement method estimates cost functions…

Answer 10

by analyzing relationship Btw/ inputs

and outputs in physical terms

Question 11

Conference method, Estimates cost functions…

Answer 11

on basis of analysis + opinion Of costs and their drivers

from various Company departments

Question 12

Account analysis method, estimates cost functions…

Answer 12

By classifying various cost accts. as variable, fixed

Or mixed with respect to identified level of activity

Question 13

6 steps in estimating cost function using quantitative analysis?

Answer 13

1 choose dependent variable
2 identify independent variable or cost driver
3 collect data on dependent variable and cost driver
4 plot data
5 estimate cost function
6 evaluate cost driver of estimated fct.

Question 14

Dependent variable

Answer 14

Cost to be predicted and managed

depends on cost fct. being estimated

Question 15

Independent variable

Answer 15

Level of activity or cost driver

is the factor used to predict the dependent variable (costs)

Question 16

High low method

Answer 16

Uses only highest and lowest values of cost driver w/in
The relevant range

and their respective costs to estimate the slope coefficient
And the constant of the cost function

Question 17

Slope coefficient calculation

Answer 17

Slope coefficient =
(cost of highest cost driver - cost of lowest cost driver)/
(highest - lowest cost driver)

Question 18

Regression analysis

Answer 18

Statistical method that measures avg. amt. of change
In dependent variable associated w/ unit change in 1
Or more independent variables

Question 19

Simple regression analysis

Answer 19

Estimates relationship btw dependent variable

And 1 independent variable

Question 20

Multiple regression analysis

Answer 20

Estimates relationship btw dependent variable

And 2 or more independent variables

Question 21

Residual term

Answer 21

Measures vertical difference

Measures distance btw actual cost and estimated cost
For each observation of cost driver

Question 22

3 criteria used in picking cost drivers?

Answer 22

1 economic plausibility

2 goodness of fit

3 significance of independent variable

Question 23

Nonlinear cost function (based on level of single activity)

Answer 23

Fct where graph of total costs is not straight line

W/in relevant range

Question 24

Step cost function, is a cost function in which the...

Answer 24

Cost remains the same over various ranges of activity level, But cost increases by discrete amounts (steps) as level Of activity increased from 1 range to the next

Question 25

Learning curve

Answer 25

Fct that measures how labor hours per unit decline as Units of production increase b/c workers learning and becoming better at their jobs

Question 26

Experience curve

Answer 26

Fct. Measures the decline in cost per unit in business Fcts.of value chain (marketing, distribution, etc.) as Amt of these activities increase

Question 27

Cumulative average time learning model

Answer 27

Cumulative avg. time per unit declines by constant % | Each time the cumulative quantity of units produced doubles

Question 28

Incremental unit-time learning model

Answer 28

Incremental time needed to produce the last unit declines By a constant percentage each time the cumulative Quantity of units produced doubles

Question 29

2 characteristics for ideal database of estimating cost functions ions quantitatively? The database should contain 2 things :

Answer 29

1 numerous reliably measured observations of cost driver And related costs 2 consider many values spanning wide range for cost driver

Question 30

Cost driver in quantitative cost functions? And related costs?

Answer 30

Independent variable (cost driver) Dependent variable (related costs)

Question 31

3 types of linear cost functions?

Answer 31

Fixed, mixed, variable

Question 32

What is the most important issue in estimating a cost function?

Answer 32

Determining whether a cause and effect relationship Exists btw level of activity and costs related to level Of activity

Question 33

What are 4 different methods used to estimate a cost function?

Answer 33

1 industrial engineering method 2 conference method 3 acct analysis method 4 quantitative analysis method

Question 34

What 3 things give rise to nonlinear costs?

Answer 34

1 quantity discounts 2 step cost functions 3 learning curve effects

Question 35

What are 4 common data problems a company must what for when estimating costs?

Answer 35

1 missing data 2 extreme values of observations 3 changes in technology 4 distortions resulting from inflation