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ACCT 306 > Ch 10 > Flashcards

Ch 10 Flashcards

1
Q

Cost function

A

Is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost

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2
Q

Managers often estimate cost functions on two assumptions

A
  1. Variations in the level of a single activity (cost driver) explain the variations in the related total costs
  2. Cost behavior is approximated by a linear cost function within the relevant range. For a linear cost function, total cost versus the level of a single activity related to that cost is a straight line within relevant range
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3
Q

General form of this linear cost function is

A

Y = a + bX

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4
Q

A particular cost item could be what?

A

Variable for one cost object and fixed for another cost object

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5
Q

The longer the time horizon, all other things being equal, the more likely the cost will be?

A

Variable

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6
Q

Variable and fixed cost behavior patterns are valid for linear cost functions only within the given

A

Relevant range

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7
Q

Outside the relevant range, variable and fixed cost behavior patterns change, which causes what?

A

Costs to become nonlinear

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8
Q

Cost functions are estimated from what kind of data?

A

Past cost data

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9
Q

Cost estimation is used to

A

Measure a relationship based on data from past costs and the related level of activity

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10
Q

Why are managers interest in estimating past cost functions?

A

Primarily because they can help them make more accurate cost predictions or forecasts of Future costs

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11
Q

What is the most important issue in estimating a cost function?

A

Determining whether a cause and effect relationship exists between the level of an activity and the costs related to it e

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12
Q

Cause and effect relationship exists when?

A

A change in the level of an activity and a change in the level of total costs, we refer to the activity measure as a cost driver

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13
Q

A cause and effect relationship might arise as a result of the following

A
  1. A physical relationship between the level of activity and the costs
  2. A contractual agreement
  3. Knowledge of operations
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14
Q

Managers should always use a long time horizon because

A

Costs may be fixed in the short run (during which time they have no cost driver) but usually variable and have a cost driver in the long run

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15
Q

What are the 4 methods of cost estimation?

A
  1. Industrial engineering method
  2. Conference method
  3. Account analysis method
  4. Quantitative analysis method
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16
Q

Industrial engineering method also called the work measurement method, estimates

A

Cost functions by analyzing the relationship between inputs and outputs in physical terms

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17
Q

Advantages and challenges of the industrial engineering method include

A

Advantage

Very thorough and detailed to estimate cost function where there is a relationship between inputs and outputs

Challenges

Time consuming
Too costly or impractical

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18
Q

Conference method

A

Estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations

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19
Q

Conference method advantages and challenges

A

Advantages

Encourages interdepartmental cooperation

The pooling of knowledge from different business functions of value chain gives conference method credibility

Does not need detailed analysis of data cost functions and cost estimates can be developed quickly

Challenges
Bc opinions are used, the accuracy of cost estimates depends largely on care and skill of people providing output

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20
Q

Account analysis method

A

Estimates cost functions by classifying various cost accounts as variable, fixed or mixed in regard to identified level of activity

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21
Q

What do managers typically use when making cost classification decisions?

A

Qualitative analysis

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22
Q

Advantages and challenges of account analysis method

A

Advantages

Widely used bc it is accurate, cost effective and easy to use.

Supplementing account analysis method with conference method improves credibility

The accuracy depends on the accuracy of qualitative judgments that managers and management accountants make about which costs are fixed and which are variable

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23
Q

Quantitative analysis

A

Used a formal mathematical method to fit cost functions to past data observations.

24
Q

When estimating the cost function using quantitative analysis, we examine two techniques

A
  1. The relatively simple high low method as well as the more common quantitative tool used to examine and understand data, regression analysis
25
Q

Advanatages and challenges of quantitative analysis

A

Challenges

Most rigorous approach to estimate costs

Advantages

Computers have Have made performing quantitative analysis & regression analysis way easier

26
Q

What are the six steps in estimating a cost function using quantitative analysis of past data

A
  1. Choose the dependent variable
    (Cost to be predicted & managed)
  2. Identify the independent variable or cost driver
    (IV used to predict DV)

When cost is indirect cost, the IV is also called a cost allocation base (or cost driver)

  1. Collect data on the DV and cost driver

Obtain data and it may be time series or cross sectional.

Time series: pertain to same entity over successive past periods

Cross sectional: pertain to different entities during the same period

  1. Plot the data

Plot provides insight into relevant range of cost functions. & reveals whether the relationship between driver and cost is approx. linear.

  1. Estimate cost function
    - most two common methods: high low and regression analysis
  2. Evaluate cost driver of estimated cost function
27
Q

High low method

A
  • simplest form of quantitative analysis to fit a line to data points
  • uses highest and lowest observed values of cost driver within relevant range and their respective costs to estimate the slope coefficient & the constant of cost function
28
Q

Regression analysis

A

A statistical method that measures the avg amount of change in the DV associated with a unit change in one or more IV

29
Q

Regression analysis method is widely used because

A

It helps managers get behind the numbers so they can understand why costs behave the way they do and why managers can do to influence them

30
Q

Simple regression

A

Estimates relationship between DV & one IV

31
Q

Multiple regression

A

Estimates relationship between DV and two or more IV

32
Q

Residual term

A

Vertical difference

Measures the distance between Actual costs & estimated cost for each observation of cost driver

33
Q

The smaller the residual term is the better it is for what?

A

Better the fit between actual costs observations and estimated costs

34
Q

Goodness of fit

A

Indicates strength of relationship between cost driver and costs

35
Q

Why is the regression method more accurate than high low method?

A

Regression equation estimates costs using info from all observations

High low method uses info from only 2 observations

36
Q

How does a company determine best cost driver when estimating a cost function?

A

Managers must understand both operations and cost accounting

37
Q

What is the major advantage of quantitative method?

A

They are objective and managers can use them to evaluate different cost drivers

38
Q

There are 3 criteria when deciding which of two cost drivers you should use

A
  1. Economic plausibility
  2. Goodness of fit
  3. Significance of IV
39
Q

Choosing the correct cost driver to estimAte indirect manufacturing labor is important because

A

If you identify the wrong driver or misestimating cost functions can lead management to incorrect and costly decisions along a variety of dimensions

40
Q

Activity based costing

A

Focuses on individual activities such as product design, machine setup, materials handling, distribution and customer service as fundamental cost objects

41
Q

How do you implement ABC systems?

A

Managers must identify a cost driver for each acitvity

42
Q

To choose a cost driver

A

The manager collects data on materials handling costs and quantities of 2 competing cost drivers over a reasonably long period

43
Q

Why in the long run?

A

Bc in the short run materials handling costs may be fixed and therefore will not vary with changes in the level of cost driver.

44
Q

Nonlinear cost function

A

Is a cost function for which the graph of total costs (based on level of single activity) is nog a straight line within a relevant range

45
Q

Step cost function

A

The cost remains the same over various ranges of level of activity but the cost increases by discrete amounts that is increases in steps as the level of activity increases from one range to the next

-non linear cost function

46
Q

Non linear cost functions can also result from

A

Learning curves

47
Q

Learning curve

A

A function that measures how labor hours per unit decline as units of production increases because workers are learning and becoming better at their Jobs

48
Q

How do managers use learning curves?

A

To predict how labor hours of labor costs will increase as more units are produced

49
Q

Experience curve

A

Measures the decline in the cost per unit of these various business functions as the amount of activities increases

50
Q

Cumulative average time learning model

A

Cumulative avg time per unit declines by a constant % each time the cumulative quantity of units produced doubles

51
Q

Incremental unit time learning model

A

Incremental time needed to produce the last unit declines by a constant % each time the cumulative quantity of units produced doubles

52
Q

Many companies use the learning curve to evaluate what?

A

Performance levels

53
Q

Studies indicate that factors other than production output such as ______ contributes to learning that improves quality

A

Job rotation & organizing workers into teams

54
Q

The ideal database for estimating cost functions quantitatively had two functions

A
  1. The database should contain numerous reliably measured observations of the cost driver (IV) and related costs (DV)
  2. The database should consider many values spanning a wide range for the cost driver
55
Q

Pg. 394

A

:)

ACCT 306 (4 decks)

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