CH 10 (pearson)

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 cost 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 range charge for each copy. A nonlinear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of 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 unties purchased at a time. B) A linear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of a single activity related to that cost is a straight line. An example of a liner cost function is 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. A nonlinear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of a single activity related to that cost is not a straight line. Example 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. C) A linear cost function is a cost function where, within the relevant range, the graph of total cost 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 cost 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. D) None of the above are correct.

B) A linear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of a single activity related to that cost is a straight line. An example of a liner cost function is 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. A nonlinear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of a single activity related to that cost is not a straight line. Example 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.

Complete the definition of learning curve. Select two models that can be used when incorporating learning into the estimation of cost

A learning curve is 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. Two models that can be used when incorporating learning into the estimation of cost functions are: Cumulative average-time learning model Incremental unit-time learning model

"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. high correlation means there is no cause and effect relationship between variables. C) No you must also consider economic plausibility before determining there is a cause and effect relationship. D) NO. there must be a contractual arrangement to have a cause and effect relationship.

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

what assumption(s) are frequently made when estimating a cost function? a) cost behavior is approximated by a linear function within the relevant range. b) variations in the level of a single activity the variations in the related total costs. c) both of the above d) neither of the above

c) both of the above

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. Step 3 is typically the most difficult for the cost analyst.

Match the alternative linear cost function with the definition given. 1) A cost function in which total cost change in proportion to the changes in the level of activity in the relevant range. 2) A cost function in which total cost do not change with changes in the level of activity in the relevant range. 3) A cost function that has both fixed and variable elements. Total cost change but not in the proportion to the changes in the level of activity in the relevant range. A) Fixed Cost Function B) Mixed Cost Function C) Variable Cost Function

1) Variable Cost Function B) Fixed Cost Function C) Mixed Cost Function

What are the four key assumptions examined in specification analysis in the case of simple regression? A) 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. Indepence of residuals. 4. Normal distribution of residuals. B) 1. Independence of residuals. 2. Normal distribution of residuals. 3. Fixed cost are allocated as if they are variable. 4. The relationship between the cost driver and the cost is not stationary. C) 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. D) none of the above are correct.

A) 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. Indepence of residuals. 4. Normal distribution of residuals.

"Multicollinearity exists when the dependent variable and the independent variable are highly correlated." Do you agree? Explain. A) No. Multicollinearity exists when two or more independent variables are highly correlated with each other. B) No. Multicollinearity increases the standard errors of the coefficients of the dependent variables, leaving the independent variables highly correlated. C) 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. 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 then 0.70.

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

When using the high-low method, should you base the high and low observations on the dependent variable or on the cost driver? A) Dependent variable B) Cost driver

B) Cost driver

"All the independent variables in a cost function estimated with regression analysis are cost drivers." Do you agree? A) Yes B) No

B) No

Three criteria that are important when choosing among alternative cost functions 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

Describe the account method for estimating a cost function. A) The account analysis method estimates cost functions on the basis of analysis and opinions about cost and their drivers gathered from various departments of a company (purchasing, process engineering, employee relations, etc.) B) The account analysis method estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. C) 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, analysis when making these cost classification decisions. D) 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.

C) 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, analysis when making these cost classification decisions.

Describe the conference method for estimating a cost function. What are two advantages of this method? A) The conference method use a formal mathematical method to fit cost functions to past observations. Advantages of the conference method include 1) The speed with which cost estimates and be developed. 2) Easy to use. B) 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 C) The conference method estimates cost functions on the basis of analysis and opinions about cost and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations, etc.) 1) The speed with which cost estimates can be developed. 2) The pooling of knowledge from experts across functional areas. D) None of the above are correct.

C) The conference method estimates cost functions on the basis of analysis and opinions about cost and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations, etc.) 1) The speed with which cost estimates can be developed. 2) The pooling of knowledge from experts across functional areas.

Select the four approaches to estimating a cost function.

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

Which of following are frequently encountered problems when collecting cost data on variable 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 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 cost are delivered are allocated as if they are variable. D) All of the above are correct.

D) All of the above are correct.