Cost Ch. 10 Homework

List the six steps in estimating a cost function on the basis of an analysis of a past cost relationship in the correct order. Which step is typically the most difficult for the cost​ analyst?

1. Choose the dependent variable. 2. Identify the independent variable or cost driver. 3. Collect data on the dependent variable and driver. 4. Plot the data. 5. Estimate the cost function. 6. Evaluate the cost driver of the estimated cost function. Most difficult: Step 3

The business functions in the value chain​ include: A. Research and​ development, Design of products and​ processes, Production,​ Marketing, Distribution, and Customer service. B. Identifying the problem and​ uncertainties, Obtaining​ information, Making predictions about the​ future, Making decisions by choosing among​ alternatives, and Implementing the decision. C. Research and​ development, Making decisions by choosing among​ alternatives, Production,​ Distribution, and Customer service. D. Manufacturing, Packaging, and Distribution.

A. Research and​ development, Design of products and​ processes, Production,​ Marketing, Distribution, and Customer service.

A management accountant can help formulate a strategy by A. providing information about the sources of competitive​ advantage, such as the​ cost, productivity, or efficiency advantage of their company relative to competitors. B. providing information about the cost of a product which will help to determine which products to offer. C. measuring business transactions that are based on generally accepted accounting principles​ (GAAP), which will then determine financial figures that effect​ managers' compensation. D. providing information about historical financial results.

A. providing information about the sources of competitive​ advantage, such as the​ cost, productivity, or efficiency advantage of their company relative to competitors.

Describe the conference method for estimating a cost function. What are two advantages of this​ method? A.The conference method 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, etc.). Advantages of the conference method​ include: 1. The speed with which cost estimates can be developed. 2. The pooling of knowledge from experts across functional areas. B. The conference method estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. Advantages of the conference method​ include: 1. It is a thorough and detailed way to estimate a cost function when there is a physical relationship between inputs and outputs. 2. Some government contracts mandate its use. C. The conference method uses a formal mathematical method to fit cost functions to past data observations. Advantages of the conference method​ include: 1. The speed with which cost estimates can be developed. 2. Easy to use. D. The conference method estimates cost functions by classifying various cost accounts as​ variable, fixed, or mixed with respect to the identified level of activity. Advantages of the conference method​ include: 1. Reasonably accurate. 2. Easy to use.

A.The conference method 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, etc.). Advantages of the conference method​ include: 1. The speed with which cost estimates can be developed. 2. The pooling of knowledge from experts across functional areas.

What are the four key assumptions examined in specification analysis in the case of simple​ regression? A. Four key assumptions examined in specification analysis are 1. Linearity of relationship between the dependent variable and the independent variable within the relevant range. 2. Constant variance of residuals for all values of the independent variable. 3. Fixed costs are allocated as if they are variable. 4. The relationship between the cost driver and the cost is not stationary. B. Four key assumptions examined in specification analysis are 1. Linearity of relationship between the dependent variable and the independent variable within the relevant range. 2. Constant variance of residuals for all values of the independent variable. 3. Independence of residuals. 4. Normal distribution of residuals. C. Four key assumptions examined in specification analysis are 1. Independence of residuals. 2. Normal distribution of residuals. 3. Fixed costs are allocated as if they are variable. 4. The relationship between the cost driver and the cost is not stationary. D. None of the above are correct.

B. Four key assumptions examined in specification analysis are 1. Linearity of relationship between the dependent variable and the independent variable within the relevant range. 2. Constant variance of residuals for all values of the independent variable. 3. Independence of residuals. 4. Normal distribution of residuals.

Describe the account analysis method for estimating a cost function. A. The account analysis method estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. B. The account analysis method estimates cost functions by classifying cost accounts in the subsidiary ledger as​ variable, fixed, or mixed with respect to the identified level of activity.​ Typically, managers use​ qualitative, rather than​ quantitative, analysis when making these​ cost-classification decisions. C. The account analysis method uses a formal mathematical method to fit cost functions to past data observations. Excel is a useful tool for performing the account analysis method. D. The account analysis method 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, etc.).

B. The account analysis method estimates cost functions by classifying cost accounts in the subsidiary ledger as​ variable, fixed, or mixed with respect to the identified level of activity.​ Typically, managers use​ qualitative, rather than​ quantitative, analysis when making these​ cost-classification decisions.

What is the difference between a linear and a nonlinear cost​ function? Give an example of each type of cost function. A. A linear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. An example of a linear cost function is a cost function for use of a copier where the terms are a fixed lease payment of​ $1,000 per month plus a​ $0.01 per page charge for each copy. A nonlinear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is a straight line. Examples include quantity discounts for material purchases for each​ 1,000 units of material purchased. The cost per unit of material will fall for each​ 1,000 unites purchased at a time. B. A linear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is a straight line. Examples include economies of scale in advertising where an agency can double the number of advertisements for less than twice the​ costs, step-cost​ functions, and​ learning-curve-based costs. A nonlinear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. Examples include a cost function for use of a telephone line where the terms are a fixed charge of​ $10,000 per year plus a​ $2 per minute charge for phone use. C. A linear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a videoconferencing line where the terms are a fixed charge of​ $10,000 per year plus a​ $2 per minute charge for line use. A nonlinear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. Examples include economies of scale in advertising where an agency can double the number of advertisements for less than twice the​ costs, step-cost​ functions, and​ learning-curve-based costs. D. A linear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. Examples include economies of scale in advertising where an agency can double the number of advertisements for less than twice the​ costs, step-cost​ functions, and​ learning-curve-based costs. A nonlinear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a videoconferencing line where the terms are a fixed charge of​ $10,000 per year plus a​ $2 per minute charge for line use.

C. A linear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a videoconferencing line where the terms are a fixed charge of​ $10,000 per year plus a​ $2 per minute charge for line use. A nonlinear cost function is a cost function​ where, within the relevant​ range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. Examples include economies of scale in advertising where an agency can double the number of advertisements for less than twice the​ costs, step-cost​ functions, and​ learning-curve-based costs.

What​ assumption(s) are frequently made when estimating a cost​ function? A. Variations in the level of a single activity explain the variations in the related total costs. B. Cost behavior is approximated by a linear function within the relevant range. C. Both of the above. D. Neither of the above.

C. Both of the above.

Three criteria for evaluating cost functions and choosing cost drivers​ are: A. Goodness of​ fit, slope of regression​ line, the speed with which cost estimates can be determined B. Economic​ plausibility, goodness of​ fit, the speed with which cost estimates can be determined C. Economic​ plausibility, goodness of​ fit, slope of regression line D. None of the above

C. Economic​ plausibility, goodness of​ fit, slope of regression line

"High correlation between two variables means that one is the cause and the other is the​ effect." Do you​ agree? Explain. A. Yes, high correlation always means the variables have a cause and effect relationship. B. No, there must be a contractual arrangement to have a cause and effect relationship. C. No, you must also consider economic plausability before determining there is a cause and effect relationship. D. ​No, high correlation means there is no cause and effect relationship between variables.

C. No, you must also consider economic plausability before determining there is a cause and effect relationship.

"Multicollinearity exists when the dependent variable and the independent variable are highly​ correlated." Do you​ agree? Explain. A. Yes. Multicollinearity exists when the dependent variable and the independent variable are highly correlated with each​ other, resulting in a coefficient of correlation between variables greater than 0.70. B. No. Multicollinearity increases the standard errors of the coefficients of the dependent​ variables, leaving the independent variables highly correlated. C. No. Multicollinearity exists when two or more independent variables are highly correlated with each other. D. Yes. Multicollinearity exists when the dependent variable and the independent variable are highly correlated with each​ other, resulting in a coefficient of correlation between variables less than 0.70.

C. No. Multicollinearity exists when two or more independent variables are highly correlated with each other.

Two models that can be used when incorporating learning into the estimation of cost functions​

Cumulative average-time learning model Incremental unit-time learning model

Which of the following are frequently encountered problems when collecting cost data on variables included in a cost​ function? A. 1. A homogeneous relationship between the individual cost items in the dependent variable cost pool and the cost​ driver(s) does not exist. 2. The relationship between the cost and the cost driver is not stationary. B. 1. Data are either not available for all observations or are not uniformly reliable. 2. Extreme values of observations occur. C. 1. The time period used to measure the dependent variable is not properly matched with the time period used to measure the cost​ driver(s). 2. Fixed costs are allocated as if they are variable. D. All of the above are correct.

D. All of the above are correct.

"All the independent variables in a cost function estimated with regression analysis are cost​ drivers." Do you​ agree? Explain. A. No. A cost driver is any factor whose change will not cause a change in the total cost of a related cost object. A​ cause-and-effect relationship does not underlie selection of a cost driver. Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of​ fit, irrespective of the economic plausibility of the independent variables included. Some of the independent variables included may not be cost drivers. B. Yes. A cost driver is any factor whose change causes a change in the total cost of a related cost object. A​ cause-and-effect relationship underlies selection of a cost driver. Users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of​ fit, irrespective of the economic plausibility of the independent variables included. All of the independent variables included must be cost drivers. C. Yes. A cost driver is any factor whose change will not cause a change in the total cost of a related cost object. A​ cause-and-effect relationship does not underlie selection of a cost driver. Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of​ fit, irrespective of the economic plausibility of the independent variables included. All of the independent variables included must be cost drivers. D. No. A cost driver is any factor whose change causes a change in the total cost of a related cost object. A​ cause-and-effect relationship underlies selection of a cost driver. Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of​ fit, irrespective of the economic plausibility of the independent variables included. Some of the independent variables included may not be cost drivers.

D. No. A cost driver is any factor whose change causes a change in the total cost of a related cost object. A​ cause-and-effect relationship underlies selection of a cost driver. Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of​ fit, irrespective of the economic plausibility of the independent variables included. Some of the independent variables included may not be cost drivers.

A cost function in which total costs do not change with changes in the level of activity in the relevant range.

Fixed cost function

four approaches to estimating a cost function.

Industrial engineering method Conference method Account analysis method Quantitative analysis of current or past relationships

A cost function that has both fixed and variable elements. Total costs change but not in the proportion to the changes in the level of activity in the relevant range.

Mixed cost function

A cost function in which total costs change in proportion to the changes in the level of activity in the relevant range.

Variable cost function

When using the​ high-low method, should you base the high and low observations on the dependent variable or on the cost​ driver?

cost driver

a function that measures how​ labor-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs.

learning curve