Exam 2: Cost Concepts, Behaviour, and Estimation

The learning curve refers to increases in sunk costs as production volume decreases.

The new cost analyst in your accounting department has just received a computer-generated report that contains the results from a simple regression analysis. He was estimating the marketing department costs using volume of units sold as the cost driver. The summary results of the report appeared as follows: Variable Coefficient t-statistic p-value intercept 2,222.35 2.48 p<0.01 X1 12.44 1.39 p = 0.25 Adjusted R-square = 0.40 a)Write an equation for total cost based upon the regression analysis. b)What does the Adjusted R-square tell you about the quality of information that would be produced using this cost driver? Explain. c)Is it economically plausible that the volume of units sold could drive the costs of the marketing department? Explain. d)List two other cost drivers that the cost analyst could try and explain why they might be useful. e)Describe discretionary costs. f)Is it possible for marketing costs to be discretionary? Explain. g)Describe how to estimate a discretionary cost.

NTQ Corporation manufactures and sells compact discs with music and nature sounds as relaxation and concentration tools. a)Describe why there is no single "correct" way to determine the cost of a compact disc. b)Identify three reasons why the cost of a compact disc might change or vary over time.

Mixed costs:

Discretionary costs reflect:

Fixed costs:

A regression of total selling expenses against number of units sold yields an intercept of 178,024 and a slope of 12.3. This indicates that:

A firm's production is expected to show an 85% learning rate. The first unit took 200 hours to produce. The second unit will take:

The total cost of salaries of production supervisors, where 2 supervisors are needed for each 8-hour shift, and the relevant range is 0 units to the number of units that can be produced at full capacity using 2 8-hour shifts is a:

Total revenues for the month were $80,000. Total fixed costs were $40,000. Total variable costs were $20,000. a)Write the algebraic expression for the cost function. b)Describe the general assumptions of the cost function. c)Discuss reasons why a cost function might provide poor estimates of future costs.

Learning curves lead to greater productivity over time.

The high-low method is a specific application of the two-point method of cost estimation.

A cost function estimated using regression analysis is more accurate than a cost function estimated. Using either the high-low method or the two-point method, explain the differences among the three methods. As you discuss these differences, explain why regression analysis provides higher quality information.

Preparing a scatter plot is a requirement before applying the two-point method of cost estimation.

The best source for determining historical costs is usually:

Consider the following cost data for the cost object; number of machine setups. Each set of costs (A, B, and C)is from a different type of manufacturing operation and represents the cost behaviour for the cost of that company's machine setups. Number of Machine Setups Cost A Cost B Cost C 0 $ 0 $80 $ 5 10 20 79 37 20 40 82 66 30 60 78 91 40 80 81 123 50 100 79 154 Cost A is best described as:

The steps for using regression analysis to estimate a cost function are listed below in random order. Correctly number the steps from 1 to 8. ____ Write the cost function. ____ Plot the cost for each potential cost driver. ____ Perform the regression analysis. ____ Generate a list of possible cost drivers. ____ Gather cost and cost driver data. ____ Evaluate the sign and significance of the cost function's components. ____ Discard potential cost drivers that fail to explain a high proportion of variability in the cost. ____ Consider the behaviour of the cost.

During 20x1, Advanced Systems introduced complex oil well monitoring equipment and produced 100 units in anticipation of selling to the major oil-producing companies. The first unit produced cost $125,000, and production costs are subject to a 90% learning curve. Note: ln(90%)/ ln(2)= -0.152. During 20x1, the company sold 20 units and during 20x2, the company sold 40 units. Each unit sells for $100,000. If costs are assigned to cost of goods sold based on the average expected cost for all units in the 2001 production run, what is the company's gross profit during 20x2?

Liva Company wants to develop a cost function for its maintenance costs to estimate such costs for the coming year. The following data are available: Direct Maintenance Month Labour Hours Costs Incurred January 4,000 $ 900 February 6,500 1,325 March 7,000 1,500 April 5,500 1,150 Using the high-low method, what is the fixed maintenance cost?