Ch 10

Question 1

Cost function

Answer 1

Is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost

Question 2

Managers often estimate cost functions on two assumptions

Answer 2

1. Variations in the level of a single activity (cost driver) explain the variations in the related total costs
2. Cost behavior is approximated by a linear cost function within the relevant range. For a linear cost function, total cost versus the level of a single activity related to that cost is a straight line within relevant range

Question 3

General form of this linear cost function is

Answer 3

Y = a + bX

Question 4

A particular cost item could be what?

Answer 4

Variable for one cost object and fixed for another cost object

Question 5

The longer the time horizon, all other things being equal, the more likely the cost will be?

Answer 5

Variable

Question 6

Variable and fixed cost behavior patterns are valid for linear cost functions only within the given

Answer 6

Relevant range

Question 7

Outside the relevant range, variable and fixed cost behavior patterns change, which causes what?

Answer 7

Costs to become nonlinear

Question 8

Cost functions are estimated from what kind of data?

Answer 8

Past cost data

Question 9

Cost estimation is used to

Answer 9

Measure a relationship based on data from past costs and the related level of activity

Question 10

Why are managers interest in estimating past cost functions?

Answer 10

Primarily because they can help them make more accurate cost predictions or forecasts of Future costs

Question 11

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

Answer 11

Determining whether a cause and effect relationship exists between the level of an activity and the costs related to it e

Question 12

Cause and effect relationship exists when?

Answer 12

A change in the level of an activity and a change in the level of total costs, we refer to the activity measure as a cost driver

Question 13

A cause and effect relationship might arise as a result of the following

Answer 13

1. A physical relationship between the level of activity and the costs
2. A contractual agreement
3. Knowledge of operations

Question 14

Managers should always use a long time horizon because

Answer 14

Costs may be fixed in the short run (during which time they have no cost driver) but usually variable and have a cost driver in the long run

Question 15

What are the 4 methods of cost estimation?

Answer 15

1. Industrial engineering method
2. Conference method
3. Account analysis method
4. Quantitative analysis method

Question 16

Industrial engineering method also called the work measurement method, estimates

Answer 16

Cost functions by analyzing the relationship between inputs and outputs in physical terms

Question 17

Advantages and challenges of the industrial engineering method include

Answer 17

Advantage

Very thorough and detailed to estimate cost function where there is a relationship between inputs and outputs

Challenges

Time consuming
Too costly or impractical

Question 18

Conference method

Answer 18

Estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations

Question 19

Conference method advantages and challenges

Answer 19

Advantages

Encourages interdepartmental cooperation

The pooling of knowledge from different business functions of value chain gives conference method credibility

Does not need detailed analysis of data cost functions and cost estimates can be developed quickly

Challenges
Bc opinions are used, the accuracy of cost estimates depends largely on care and skill of people providing output

Question 20

Account analysis method

Answer 20

Estimates cost functions by classifying various cost accounts as variable, fixed or mixed in regard to identified level of activity

Question 21

What do managers typically use when making cost classification decisions?

Answer 21

Qualitative analysis

Question 22

Advantages and challenges of account analysis method

Answer 22

Advantages

Widely used bc it is accurate, cost effective and easy to use.

Supplementing account analysis method with conference method improves credibility

The accuracy depends on the accuracy of qualitative judgments that managers and management accountants make about which costs are fixed and which are variable

Question 23

Quantitative analysis

Answer 23

Used a formal mathematical method to fit cost functions to past data observations.

Question 24

When estimating the cost function using quantitative analysis, we examine two techniques

Answer 24

1. The relatively simple high low method as well as the more common quantitative tool used to examine and understand data, regression analysis

Question 25

Advanatages and challenges of quantitative analysis

Answer 25

Challenges Most rigorous approach to estimate costs Advantages Computers have Have made performing quantitative analysis & regression analysis way easier

Question 26

What are the six steps in estimating a cost function using quantitative analysis of past data

Answer 26

1. Choose the dependent variable (Cost to be predicted & managed) 2. Identify the independent variable or cost driver (IV used to predict DV) When cost is indirect cost, the IV is also called a cost allocation base (or cost driver) 3. Collect data on the DV and cost driver Obtain data and it may be time series or cross sectional. Time series: pertain to same entity over successive past periods Cross sectional: pertain to different entities during the same period 4. Plot the data Plot provides insight into relevant range of cost functions. & reveals whether the relationship between driver and cost is approx. linear. 5. Estimate cost function - most two common methods: high low and regression analysis 6. Evaluate cost driver of estimated cost function

Question 27

High low method

Answer 27

- simplest form of quantitative analysis to fit a line to data points - uses highest and lowest observed values of cost driver within relevant range and their respective costs to estimate the slope coefficient & the constant of cost function

Question 28

Regression analysis

Answer 28

A statistical method that measures the avg amount of change in the DV associated with a unit change in one or more IV

Question 29

Regression analysis method is widely used because

Answer 29

It helps managers get behind the numbers so they can understand why costs behave the way they do and why managers can do to influence them

Question 30

Simple regression

Answer 30

Estimates relationship between DV & one IV

Question 31

Multiple regression

Answer 31

Estimates relationship between DV and two or more IV

Question 32

Residual term

Answer 32

Vertical difference Measures the distance between Actual costs & estimated cost for each observation of cost driver

Question 33

The smaller the residual term is the better it is for what?

Answer 33

Better the fit between actual costs observations and estimated costs

Question 34

Goodness of fit

Answer 34

Indicates strength of relationship between cost driver and costs

Question 35

Why is the regression method more accurate than high low method?

Answer 35

Regression equation estimates costs using info from all observations High low method uses info from only 2 observations

Question 36

How does a company determine best cost driver when estimating a cost function?

Answer 36

Managers must understand both operations and cost accounting

Question 37

What is the major advantage of quantitative method?

Answer 37

They are objective and managers can use them to evaluate different cost drivers

Question 38

There are 3 criteria when deciding which of two cost drivers you should use

Answer 38

1. Economic plausibility 2. Goodness of fit 3. Significance of IV

Question 39

Choosing the correct cost driver to estimAte indirect manufacturing labor is important because

Answer 39

If you identify the wrong driver or misestimating cost functions can lead management to incorrect and costly decisions along a variety of dimensions

Question 40

Activity based costing

Answer 40

Focuses on individual activities such as product design, machine setup, materials handling, distribution and customer service as fundamental cost objects

Question 41

How do you implement ABC systems?

Answer 41

Managers must identify a cost driver for each acitvity

Question 42

To choose a cost driver

Answer 42

The manager collects data on materials handling costs and quantities of 2 competing cost drivers over a reasonably long period

Question 43

Why in the long run?

Answer 43

Bc in the short run materials handling costs may be fixed and therefore will not vary with changes in the level of cost driver.

Question 44

Nonlinear cost function

Answer 44

Is a cost function for which the graph of total costs (based on level of single activity) is nog a straight line within a relevant range

Question 45

Step cost function

Answer 45

The cost remains the same over various ranges of level of activity but the cost increases by discrete amounts that is increases in steps as the level of activity increases from one range to the next -non linear cost function

Question 46

Non linear cost functions can also result from

Answer 46

Learning curves

Question 47

Learning curve

Answer 47

A function that measures how labor hours per unit decline as units of production increases because workers are learning and becoming better at their Jobs

Question 48

How do managers use learning curves?

Answer 48

To predict how labor hours of labor costs will increase as more units are produced

Question 49

Experience curve

Answer 49

Measures the decline in the cost per unit of these various business functions as the amount of activities increases

Question 50

Cumulative average time learning model

Answer 50

Cumulative avg time per unit declines by a constant % each time the cumulative quantity of units produced doubles

Question 51

Incremental unit time learning model

Answer 51

Incremental time needed to produce the last unit declines by a constant % each time the cumulative quantity of units produced doubles

Question 52

Many companies use the learning curve to evaluate what?

Answer 52

Performance levels

Question 53

Studies indicate that factors other than production output such as ______ contributes to learning that improves quality

Answer 53

Job rotation & organizing workers into teams

Question 54

The ideal database for estimating cost functions quantitatively had two functions

Answer 54

1. The database should contain numerous reliably measured observations of the cost driver (IV) and related costs (DV) 2. The database should consider many values spanning a wide range for the cost driver

Question 55

Pg. 394

Answer 55

:)