Chapter 8: Cost estimation

Question 1

What is cost estimation?

Answer 1

development of well-defined relationships between const object and its cost drivers for purpose of predicting the cost.

Question 2

Name three benefits of cost estimation for strategic management?

Answer 2

1. Helps predict future costs using previously identified cost drivers
2. Helps identify key cost drivers for a cost object
3. Cost drivers and cost-estimating relationships are useful in planning and decision making.

Question 3

Name 4 applications of cost estimation for strategic management?

Answer 3

1. Facilitating strategy development and implementation
2. Facilitate planning and decision making
3. Facilitate target costing and pricing.
4. Facilitating effective performance measurement, evaluation and compensation

Question 4

Name the six steps of cost estimation?

Answer 4

1. Define cost object
2. Determine cost drivers
3. Collect consistent and accurate data
   - Consistent: each period of data is calculated with the same method
4. Graph the data:
5. Select and employ estimation method
6. Assess accuracy of cost estimate

Question 5

Name two cost estimation methods?

Answer 5

1. High-low method
2. Regression analysis

Question 6

What is the high-low cost estimation method?

Answer 6

method using algebra to determine a unique cost estimation line between representative high and low data points in a given data set.

Question 7

What are the two objectives of the high-low method?

Answer 7

• It is based on a unique cost line rather than a rough estimate
• Allows adding information useful for the cost object regarding cost behavior

Question 8

What is regression analysis?

Answer 8

statistical method for obtaining unique cost-estimating equation that best fits a set of data points

Question 9

What is least squares regression?

Answer 9

cost-estimation method in which variable and fixed cost coefficients are found by minimizing sum of squares of estimation error

Question 10

What is simple linear regression vs multiple linear regression?

Answer 10

• Simple linear regression: regression applications with one independent variable
• Multiple linear regression: regression applications with two or more independent variables

Question 11

What are dependent and independent variables?

Answer 11

• Dependent variable: cost to be estimated
• Independent variable: cost driver used to estimate value of dependent variable

Question 12

What are outliers?

Answer 12

• Outliers: unusual data points that strongly influence regression analyses

Question 13

What are dummy variables?

Answer 13

• Dummy variables: used in regression model to represent presence or absence of a condition

Question 14

What is R-squared?

Answer 14

number used to measure explanatory power of the regression.

Question 15

What is T-value?

Answer 15

measure of reliability of each of the independent variables

Question 16

What is multicollinearity?

Answer 16

condition when two or more independent variables are highly correlated with each other

Question 17

What is correlation?

Answer 17

present when variables change predictably in same or opposite direction for a given change in the other, correlated variable

Question 17

What is the p-value?

Answer 17

measures risk that particular independent variable has only a change relationship to the dependent variable

Question 18

What is time-series regression?

Answer 18

pplication of regression analysis to predict future amounts, using a prior’s period data

Question 19

What is cross-sectional regression?

Answer 19

cost estimation for cost object based on information on other cost objects and variables, where the information for all variables is taken from the same period of time