L2- Cost Behaviour

Question 1

Define Direct cost

Answer 1

Cost can be directly traced to cost object

Question 2

Define Indirect cost

Answer 2

Cost cannot be directly traced to cost object

Question 3

Example of direct cost

Answer 3

Salary of workers working exclusively on Honda Civic line

Question 4

Example of indirect cost

Answer 4

The cost of lighting in factory where Honda civic is made

Question 5

2 assumptions when estimating cost function

Answer 5

–Variations in the total costs of a cost object are explained by variations in a single cost driver
–Cost behaviour is adequately approximated by a linear cost function of the cost driver within the relevant range. A linear cost function is a cost function where, within the relevant range, the graph of total costs versus a single cost driver forms a straight line

Question 6

Define fixed costs

Answer 6

Change in activity doesn’t change cost

Question 7

Define variable cost

Answer 7

Change in activity causes a change in cost

Question 8

Define mixed cost

Answer 8

Both fixed and variable cost

Question 9

What’s the relevant range

Answer 9

The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat

Question 10

4 Cost estimation approaches

Answer 10

–Industrial engineering method
–Conference Method
–Account Analysis Method
–Quantitative analysis of cost relationships

Question 11

What is the Industrial engineering method

Answer 11

estimates cost functions by analysing the relationship between inputs and outputs in physical terms

Question 12

Example of industrial engineering method

Answer 12

To produce 20 square metres of carpet requires 2 kilograms of cotton and 3 litres of dye. Result is an estimated cost function relating total manufacturing costs to the cost driver, square metres of carpet.

Question 13

Cons of industrial engineering method

Answer 13

–time consuming
–Costly

Question 14

What’s the conference method

Answer 14

Estimates cost functions by collecting feedback from various departments

Question 15

Example of conference method

Answer 15

The Metro Bank in the UK has a cost-estimating department that develops cost functions for its retail banking products The Metro Bank in the UK has a cost-estimating department that develops cost functions for its retail banking products. The bank uses this information to price products, to adjust its product mix to the products that are most profitable, and to monitor and measure cost improvements over time.

Question 16

Pros of conference method

Answer 16

–cost functions and cost estimates to be developed quickly.
–Method is credible as from expert’s opinions

Question 17

What is account analysis method

Answer 17

estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed

Question 18

What equation is used for account analysis method

Answer 18

y = a + bX

Question 19

6 steps in estimating cost function

Answer 19

1) Choose the dependent variable
2) Identify the cost driver(s)
3) Collect data on the dependent variable and the cost driver(s)
4) Plot the data
5) Estimate the cost function
6) Evaluate the estimated cost function

Question 20

What is the high low method

Answer 20

using only the highest and lowest observed values of the cost driver within the relevant range. The line connecting these two points becomes the estimated cost function.

Question 21

What is the scattergraph method (regression analysis)

Answer 21

a statistical method that measures the average amount of change in the dependent variable that is associated with a unit change in one or more independent variables

Question 22

What’s the difference between scattergraph method and high low method

Answer 22

scatter graph method uses all available data

Question 23

Revise on mylab the method’s

Answer 23

Chapter 9

Question 24

Why is it important to split the cost into fixed and variable components?

Answer 24

–financial planning
–managing costs
–pricing

Question 25

Describe managing costs

Answer 25

Which costs are easy/difficult to manage?
The cost of making standard beef burgers (buns, patties, sauce, salad)
The cost of lighting
Rent
Salaries of staff