Exam 3: Measurement of Cost Behavior

The application of cost measures to expected future activity levels to forecast future costs

Shakey Company, a producer of fine quality cuckoo clocks, produced 4,500 cuckoo clocks at a cost of $1,150,000 in November. In December the company produced 3,000 cuckoo clocks at a cost of $925,000. Required: a. Using these two data points, determine a cost function for Shakey Company. b. Determine the expected cost if Shakey Company produces 3,500 units.

In the mixed- cost function, Y = $59,000 + $7.70X, the $7.70 stands for:

An activity that can be graphed with a straight line because each cost is assumed to be either fixed or variable

Least- squares regression is a reliable method of cost estimation.

Managers use this to identify appropriate cost drivers and their effects on the costs of making a product or providing a service

The following three data points appear to be: Units Costs 100 \ 500 130 550 160 600

In a mixed- cost function, the slope is the:

Presented below is the production data for the first six months of the year for the mixed costs incurred by Strongsville Company. Month Cost Units January \ 7,500 4,000 February 11,250 6,500 March 10,500 8,000 April 12,700 10,500 M ay 13,500 12,000 June 10,850 9,000 Strongsville Company uses the high- low method to analyze mixed costs. The total cost at an operating level of 10,000 units is:

The cost of the maintenance department at Wildwood Manufacturing has always been charged to the production departments based upon number of employees. Recently, an activity analysis of possible cost drivers was performed which indicated that the square feet of space may also be a predictor of costs to be assigned to each department. Given the following data, prepare a report that contrasts the different amounts of maintenance department cost that would be allocated to each of the production departments if the cost driver used is (a) number of employees, and (b) the square feet of space. Dept. A Dept. B Dept. C Number of employees 300 250 Square feet of space 15,000 25,000 10,000 Total production department cost: $1,000,000

Measuring a cost function objectively by using statistics to fit a cost function to all the data

Nicklaus, Inc., currently produces 110,000 units at a cost of $440,000. Next year Nicklaus, Inc., expects to produce 120,000 units. Nicklaus' relevant range is 100,000 to 120,000 units. If the cost is variable and 120,000 units are produced, the cost:

Linear- cost behavior is graphed using a straight or curved line.

The Kojak Company used regression analysis to predict the annual cost of utilities. The results were as follows: Utilities Cost Explained by Direct Labor Hours Constant \ 2,500 Standard error of Y estimate \ 545.20 R - squared 0.650 No. of observations 30 Degrees of freedom 28 X coefficient (s) 2.037 Standard error of coefficient(s) 0.917 The total fixed cost is:

The understanding and quantification of how activities of an organization affect levels of costs

of approximating cost functions does not involve the analysis of past costs.

Activity analysis is used to identify appropriate cost drivers and their effects on the costs of making a product or providing a service.

Cost measurement is the estimating or predicting costs as a function of appropriate cost drivers.

Why are cost functions important?

Insomniac Hotel's cost function based on guest- days of occupancy for custodial cost is given as: Y = $50,000 + $10.00X. Insomniac Hotel expects an occupancy level of 12,000 guest days. Insomniac Hotel's expected total cost is: