Ch 8 - Cost Estimation

Question 1

There are _____ steps of cost estimation. What are they?

Answer 1

Six

1. Define the cost object for which the related costs are to be estimated
2. Determine the cost drivers
3. Collect consistent and accurate data on the cost object and the cost drivers
4. Graph the data
5. Select and employ an appropriate estimation method
6. Evaluate the accuracy of the cost estimate.

Question 2

What is the most important step in developing a cost estimate?

Answer 2

Identifying cost drivers

Question 3

What are the two main estimation methods?

Answer 3

The high-low method and regression analysis

Question 4

mean absolute percentage error (MAPE)

Answer 4

A measure of cost-estimation accuracy, calculated as the mean (average) absolute percentage prediction error.

Question 5

Of the two estimation methods, which one is most accurate?

Answer 5

regression analysis

Question 6

high-low method

Answer 6

A method using algebra to determine a unique cost estimation line between representative high and low points in a given data set.

Question 7

regression analysis

Answer 7

A statistical method for obtaining the unique cost-estimating equation that best fits a set of data points.

Question 8

least squares regression

Answer 8

A cost-estimation method in which the variable and fixed cost coefficients are found by minimizing the sum of the squares of the estimation errors.

Question 9

dependent variable

Answer 9

In cost estimation, the cost to be estimated, aka the cost object

Question 10

independent variable

Answer 10

A cost driver used to estimate the value of the dependent variable.

Question 11

simple linear regression

Answer 11

Used to describe regression applications having a single independent variable.

Question 12

multiple linear regression

Answer 12

Used to describe regression applications having two or more independent variables.

Question 13

What is the principal advantage of the regression analysis method?

Answer 13

It is a unique estimate that produces the least estimation error. However, it can be strongly influenced by outlier data.

Question 14

What is the goal when choosing independent variables in the regression analysis method?

Answer 14

The goal is to choose variables that (1) change when the dependent variable changes, that is, there is a predictive relationship (correlation) between the dependent and the independent variables and (2) do not duplicate other independent variables.

Question 15

dummy variable

Answer 15

Used in a regression model to represent the presence or absence of a condition.

Question 16

R-squared

Answer 16

A number between zero and one. Often it is described as a measure of the explanatory power of the regression; that is, the degree to which changes in the dependent variable can be explained by changes in the independent variable.

Question 17

t-value

Answer 17

A measure of the reliability of each of the independent variables.

Question 18

multicollinearity

Answer 18

The condition when two or more independent variables are highly correlated with each other.

Question 19

standard error of the estimate (SE)

Answer 19

A measure of the dispersion of the actual observations around the regression line; as such it provides a measure of the accuracy of the regression’s estimates.

Question 20

confidence interval (CI)

Answer 20

When using regression analysis to estimate costs, the CI refers to a range around the regression line within which the management accountant can be confident the actual value of the predicted cost will likely fall.

Question 21

p-value

Answer 21

Measures the risk that a particular independent variable has only a chance relationship to the dependent variable.

Question 22

time-series regression

Answer 22

The application of regression analysis to predict future amounts, using prior periods’ data.

Question 23

cross-sectional regression

Answer 23

A method of cost estimation for a particular cost object based on information on other cost objects and variables, where the information for all variables is taken from the same period of time.

Question 24

True or false: the linear regression estimates are reliable when the data relationships are nonlinear.

Answer 24

False; they are not reliable when the data relationships are nonlinear.

Question 25

The __________ cannot be adapted for nonlinearity, but ________ can be adapted for nonlinear relationships.

Answer 25

high-low method; regression analysis

Question 26

trend variable

Answer 26

A variable in a regression model that takes on values of 1, 2, 3, . . . for each period in sequence.

Question 27

learning curve analysis

Answer 27

A systematic method for estimating costs when learning is present.

Question 28

learning rate

Answer 28

The percentage by which average time (or total time) falls from previous levels as output doubles.