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Exam 2: Cost Concepts, Behaviour and Estimation

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Question 21

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Scatter plots provide a visual technique for exploring cost behaviour.

A) True
B) False

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Question 22

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Simple regression analysis differs from multiple regression analysis based on the number of:

A) The interpretation of the Adjusted R Square statistic
B) Costs predicted
C) Data points incorporated
D) Cost drivers used

E) All of the above
F) B) and C)

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Question 23

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A relevant range is a span of activity for a given cost object where both total fixed costs and total variable costs per unit of activity remain constant.

Total fixed costs vary with small changes in activity levels.

Cost functions are a mathematical representation of the total cost of a cost object over a relevant range.

Regression analysis removes errors in cost estimation associated with changing cost patterns over time, unusual events and random fluctuations.

Engineered estimates of costs can only be used by manufacturing firms to estimate future costs.

Regression analysis produces the most accurate results when there is a strong linear relationship between the cost and cost driver.

An organisation's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labour hours and the other based upon machine hours. The results were: Total overhead = $150,000 + $4 x direct labour hours Adjusted R-square = 0.83 Total overhead = $130,000 + $5 x machine hours Adjusted R-square = 0.77 For the next period the accountant anticipates using 28,000 direct labour hours and 26,000 machine hours. Based upon this information, what is the best estimate for overhead for the next period?

When graphing a cost function the intercept represents the variable cost per unit.

Hifi Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: $\begin{array} { | l | l | l | } \hline \text { Manth } & \text { Machine Hours } & \begin{array} { l } \text { Maintenance Costs } \\\text { Incurred }\end{array} \\\hline \text { January } & \mathbf { 8 0 0 0 } & \$ \$ , 600 \\\hline \text { February } & 13000 & \$ 5,300 \\\hline \text { March } & 14000 & \$ 6,000 \\\hline \text { April } & 11000 & \$ 4,600 \\\hline\end{array}$ Using the high-low method, what is the cost function for maintenance costs?

Within the relevant range of activity the change in total cost is linear or close to linear.

The two point method uses the highest and lowest data points to estimate a mixed cost function.

Assuming that a cost is mixed and linear, and that past cost behaviour is expected to continue into the future, which of the following is mostly likely the best technique for estimating future costs?

Multiple methods of cost estimation techniques may be required to estimate total cost functions for a cost object.

Total costs that have both fixed and variable elements are call mixed costs.

Total fixed costs:

The marginal cost of an activity is not useful for decision making because managers only need to know the total cost.

Keep Smiling Dental Surgery is located in Christchurch. The company employs three dentists, four dental assistants and two receptionists who book appointments and keep records. The surgery provides a range of services including general dental care, paediatric dental care and teeth whitening. The clinic includes a small retail section that carries specialised products for home treatment. The clinic's relevant range of activity would best be measured in terms of:

Simple regression analysis produces an equation of the form: Y= α + βX + ε