Midterm Flashcards
What are the 2 main business level strategies?
- Cost leadership: generate economic value by having lower costs than competitors
- Product differentiation: generate economic value by offering a product that customers prefer over competitors’ product
What are the characteristics of cost leadership?
Characteristics (critical success factors)?
- Strives for the lowest cost of operation in the industry
- Driven by efficiency, size, scale, scope, and experience
- Production of highly standardized products
- Compete on price
What are success factors of product differentiation?
Characteristics (critical success factors)?
- Strives to compete on a unique characteristic – could be almost anything!!
- Product features (function or design)
- Delivery
- Customer service
- Image, brand, reputation
- Price premium usually paid for unique characteristic
What are the required resources and execution factors of cost leadership?
- Resources:
- Substantial capital investment and access to capital
- Process engineering skills
- Intense supervision of labor
- Execution
- Tight cost control
- Frequent and detailed control reports
- Incentives based on meeting strict quantitative targets
What do the values from the slope formula mean as far as cost accounting?
Y= a + bx
Y= the dependent variable, or the cost that is being predicted
a= the intercept, or the total fixed costs
b= the slope of the line, or the variable cost per unit
x= the independent variable, or the cost driver
What are the steps in estimating a cost function using quant analysis?
Steps in Estimating a Cost Function Using Quantitative Analysis
- Choose the dependent variable (the cost to be predicted)
- Identify the independent variable (the cost driver)
- Collect data on the dependent variable and the cost driver
- Consistent
- Accurate
- Plot the data
- Looking for outliers and data shifts
- Estimate the cost function using the High-Low Method or Regression Analysis
- Evaluate the cost driver of the estimated cost function
How is the high/low method used?
It’s the simplest method of quant analysis
It uses only the highest and lowest observed values of the cost driver
You use the high and low points to write the equation of a line- this is the cost estimation equation.
*slope equals rise over run
What is regression analysis and what is its application in cost accounting?
It measures the average amount of change in the dependent variable associated with a unit of change in one or more independent variables
It’s more accurate than the hi low method because regression estimates costs using info from all observations; not just two like hi low
What is R squared in regression analysis?
The goodness of fit. It’s the coefficient of determination.
It’s the explanatory power of the independent variables
It should be better than .75 or better
What does the standard error mean in regression?
Indicates the accuracy of the estimate or coefficient returned by the regression equation
It should be small relative to the mean of the dependent variable based on the given data
It measures precision
What is the calculated T stat in regression?
Used to test the hypothesis that the variables have a relationship- the bigger the better
Should be greater than 2
What is the p-value in regression?
Measures the probability that the independent variable does not have a statistical relationship with the dependent variable
Should be less than 0.1
What is the F statistic in regression?
Measures the reliability of the whole equation.
Should be large
P value is a better measure related to the F stat.
Pvalue should be less than .05
What are confidence intervals and how are they used?
A calculated range where we can express a certain confidence that the actual value of the dependent variable belongs within
Or the probability that the actual number will be within a given range of numbers.
What are some of the problems of regression analysis?
Nonlinear relationships
Outliers
Spurious relationships
Data problems such as missing data, inflation, arbitrarily allocated costs
