Exam 2: Cost Concepts, Behaviour, and Estimation

Which of the following statements is false?

Cosby Company is attempting to develop the cost function for repair costs. The following past data are available: Machine Hours Repair Costs 4,800 $6,385 3,400 4,585 4,000 5,285 5,900 7,085 Using the high-low method, what is the estimated repair cost for 4,500 machine hours?

Following are the income statements for the North End Medical Clinic for the years 2004 and 2005: 2004 2005 Patient Visits 12,000 16,000 Revenue $216,000 $288,000 Costs: Nurses Salaries 80,000 120,000 Vaccine and Syringes 60,000 80,000 Miscellaneous Supplies 19,000 22,000 Administration 50,000 50,000 Surplus $ 7,000 $ 16,000 A nurse was added as patient visits increased in 2005. This nurse can handle up to 4,000 additional patients in the next period. Miscellaneous supplies include the cost of supplies for medical records. Administration is primarily salary cost of the clinic director. a)Categorize each cost as fixed, variable, or mixed, and explain your categorizations. b)If you have categorized a cost as mixed, use the high-low method to separate out the fixed and variable portions. c)Develop a cost function for North End Medical Clinic. d)Predict the cost for 18,000 patients in 2006. e)List two factors that could affect patient volumes. Can the managers be certain that the volume of patients expected in 2005 will be 18,000? Explain.

Bob and James are installing new flooring in their home. The house has 5 rooms of approximately equal size where the flooring will be replaced. Bob and James spent 3 hours removing the old flooring from the first room. If Bob and James are operating with an 85% learning curve, what is the estimated average time to remove the flooring from all 5 rooms? Note: ln(85%)/ ln(2)= -0.234.

In a regression equation, fixed costs are represented by the:

The following data were obtained from the accounting information system of POC Corporation: Production Units Raw Materials Factory Manager Month Produced Used Supplies Salary January 60 $1,560 $550 $3,000 February 80 2,000 700 3,000 March 50 1,300 475 3,000 April 30 775 325 3,000 a)Describe the behaviour of each of the costs shown above as fixed, variable, or mixed. You may wish to draw scatter plots or analyze the cost using your knowledge of costs and the actual variation in cost pattern from above (in other words, perform an informal analysis at the account level). b)Use the data for February and March and the two-point method to determine a cost function for any mixed cost(s). c)Use the high-low method to determine a cost function for any mixed cost(s).

If the average cost decreases as volume of production increases, what kinds of costs are included in the cost function? Explain your reasoning.

Here is the output from two regression models for overhead costs at a university using number of academic programs and number of students as potential cost drivers. Number of academic programs Adjusted R-square = 0.72 Intercept = 7,127.75 t-statistic = 2.14 p-value = .05 X1 variable = 240.64 t-statistic = 5.08 p-value = .001 Number of students Adjusted R-square = 0.55 Intercept = 5,991.75 t-statistic = 1.18 p-value = .35 X1 variable = 3.78 t-statistic = 3.53 p-value = 0.01 a)Develop a cost function for each potential cost driver. b)Compare the output for the two drivers. Choose the best cost driver for overhead costs and explain how you made that choice. c)Suppose you use the best cost function from part (b)to estimate overhead cost for the next semester. Why is it highly unlikely that the actual cost will be exactly the same as the cost you estimated?

(Appendix 2A)One of the questions that needs to be asked before data from regression analysis is used to develop a cost function is whether the relationship between the cost and the cost driver is economically plausible. Explain what this means. In addition, give an example of a cost with one cost driver that would be economically plausible and an example of one cost driver that would not be economically plausible.

Which of the following cost estimation techniques makes assumptions about the data being analyzed? I. Analysis at the account level II. Two-point method III. Regression analysis

Steel used in the production of automobiles would generally be classified as a direct cost.

Milano Company has an average overhead cost per hour of $10.50 at 3,500 machine hours, and at 3,000 hours it is $11.25. The company managers wish to estimate the overhead cost function. What is the fixed overhead cost?

Simple regression analysis output produces a variety of statistics. Which of the following statistics provides information for variable costs?

Opportunity costs are:

Past cost information, although accurate in predicting future costs, may be: I. Unavailable II. Irrelevant III. Outdated

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

A scatter plot provides helpful information about the relationship between a cost and a potential cost driver.

Three different divisions of a toy manufacturing company are estimating costs for their human resources departments. Each division has a cost structure that is different from the other divisions' and those structures are represented by the following cost behaviour patterns (A, B, and C). Number of Employees Cost A Cost B Cost C 0 $ 0 $120 $118 25 50 118 180 50 100 123 245 75 125 124 296 100 200 119 360 Which cost is best described as mixed?

When estimating future costs, information quality is higher when:

The first step in estimating a cost function for relevant costs is to select a cost estimation technique.