MS 02 - Self-Tests Flashcards
Cost Behavior with Regression Analysis
What is cost behavior analysis?
Understanding how costs react in response to changes in an activity like production or sales.
What is the cost function formula?
Y = a + bX
In the cost function, what does [Y] represent?
Total costs (dependent variable)
In the cost function, what does [X] represent?
Activity or cost driver (independent variable)
In the cost function, what does [a] represent?
Total fixed costs (Y-axis intercept)
In the cost function, what does [b] represent?
Variable cost per unit (slope of the line)
In the cost function, what does [bX] represent?
Total variable costs
What is the behavior of fixed costs as production increases?
Constant
What is the behavior of variable costs as production increases?
Increases (indicating direct relationship)
What is the behavior of mixed costs as production increases?
Increases (less proportionately vs. total variable costs)
What is the relevant range in cost behavior analysis?
The range of activity within which cost behavior patterns are valid.
What does the time period assumption imply in cost behavior analysis?
Cost behavior patterns are valid only over a specific period.
What is the High-Low method used for?
To compute the fixed and variable portions of mixed costs based on the highest and lowest points.
What is the formula for variable cost per unit in the High-Low method?
Variable cost per unit (b) = Change in Costs (YH – YL) / Change in Activity (XH – XL)
What is the graphic method also known as?
Scatter Diagram/Scatter Graph/Scatter Chart method
What does the least-squares regression method do?
Determines the ‘line of best fit’ by minimizing the sum of the squared deviations.
What is simple regression analysis?
Y = a + bX (one dependent variable and one independent variable)
What is multiple regression analysis?
Y = a + bX + cZ (one dependent variable and two or more independent variables)
What does the coefficient of correlation (r) measure?
The relative strength of the linear relationship between two variables.
What is the range of values for the coefficient of correlation (r)?
-1.0 to +1.0
What does an r value of +1.0 indicate?
Direct/Positive linear relationship
What does an r value of 0 indicate?
No apparent pattern / Random points
What does an r value of -1.0 indicate?
Inverse/Negative linear relationship
What is the coefficient of determination (r²)?
A measure of ‘goodness-of-fit’ indicating how well the independent variable predicts the dependent variable.
What does a higher r² value indicate?
More confidence that the independent variable predicts the behavior of the dependent variable.
True or False: Correlation analysis establishes cause-and-effect relationships.
False
What is the primary focus of correlation analysis?
To measure the strength of linear relationships between variables.
What is the result of the least-squares method?
It provides the cost function for total overhead costs.
What is the scatter diagram used for?
To visualize the correlation between two variables.
What is the main limitation of cost behavior analysis?
Assumptions about relevant range and time period may not hold true.
What type of costs are considered fixed?
Costs that remain constant regardless of the level of production.
What is the mixed cost behavior?
Costs that have both fixed and variable components.
Fill in the blank: The change in costs divided by the change in activity is used to calculate _______.
[variable cost per unit]
Fill in the blank: The formula Y = a + bX represents the cost function where ‘a’ is the _______.
[total fixed costs]
Fill in the blank: The costs that change with production levels are called _______.
[variable costs]
Fill in the blank: The costs that do not change with production levels are called _______.
[fixed costs]
What happens to the variable cost per unit as production increases within the relevant range?
Remains constant at each production level
Which of the following best describes a fixed cost?
It may change in total when such change is unrelated to changes in production
True or False: Committed fixed costs can never be changed.
False
Only difficult to change in the short run
What is an example of a discretionary fixed cost?
Research and development
What is a step cost?
A cost that is fixed over a short range of activity, then rises abruptly and remains fixed over another short range
Which of the following best describes a step cost?
It increases abruptly outside the relevant range
Mixed costs or semi-variable costs are defined as:
Are part fixed and part variable
The fixed cost of a semi-variable cost is comparable to which mathematical concept?
Y-intercept
In the cost formula equation Y = a + bX, what does ‘Y’ represent?
Dependent variable
Using the high-low method, how is ‘b’ calculated?
Change in cost (Y) divided by the change in activity (X)
Jupiter, Inc. applies the high-low method of cost estimation to customer order data for the first 3 months of 2024:
Month Orders Cost (P)
January 1,200 3,120
February 1,300 3,185
March 1,800 4,320
What is the estimated variable cost component per order for Jupiter, Inc.?
P 2.00
Venus Company estimated its materials handling cost at two activity levels as follows:
Kilos Handled Cost
80,000 160,000
60,000 132,000
What is the estimated cost for handling 75,000 kilos according to Venus Company?
P 153,000
In March, Star Company had electrical costs of P 225.00 when the total volume was 4,500 units. In April, electrical costs were P 227.50 for 4,750 units.
What is the estimated fixed cost of electricity per year for Star Company using the high-low method?
P 2,160
Sunny Company uses the high-low method to derive the cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is P 3 per machine hour. Total electrical power cost at the high level of activity was P 7,600 and the low level of activity was P 7,300. If the high level of activity was 1,200 machine-hours, then what was the low level of the activity?
If the variable cost per unit of activity is P 3 per machine hour, what is the low level of the activity?
1,100 machine-hours
What is the unit variable cost for Earth Co. given an average unit cost of
P 45 at 10,000 units and P 25 at 30,000 units?
Average unit cost = Total Costs ÷ Number of units
P 15.00
Total production costs for a company are listed below. Assume that the same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each product is the number of units produced.
Production per month (units) 3,000 9,000 16,000 35,000
Product X P 23,700 P 52,680 P 86,490 P 178,260
Product Y 47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of 8,000 units for Product X?
P 5.98
Uranus, Inc. provides you with the following flexible budget of factory overhead at three different capacity levels:
Capacity Factory Overhead
60% P 98,000
70% 106,000
85% 118,000
What will be the flexible budget of factory overhead at 90% capacity according to Uranus, Inc.?
P 122,000
The high-low method may give unsatisfactory results if:
Data points are unrepresentative
What is the method of cost analysis that involves drawing a straight line through plotted points?
Graphic approach
What is a data point that falls far away from other data points in a scatter diagram called?
Outlier
What is the major objective of preparing a scatter diagram?
Derive an equation to predict future costs
What is the principal advantage of the scatter-diagram method over the high-low method?
Considers more than two points
Which equation is required for applying the least square method of computing fixed and variable costs?
Σy = na + bΣx
An analysis of maintenance cost at four levels of plant operations is shown below:
Hours Cost Hours x cost Hours Squared
40 P 1,000 40,000 1,600
30 900 27,000 900
60 1,300 78,000 3,600
50 1,150 57,500 2,500
Under the least-squares regressions method, what is the fixed cost of maintenance?
P 480
The following cost data are made available by Pluto Manufacturing Company for your analysis:
Number of Months 10
Sum of Hours 350
Sum of Costs 1,000
Sum of Hours x Costs 39,200
Sum of Hours Squared 14,250
How much is the monthly fixed cost for Pluto Manufacturing Company?
P 26.50
Multiple regression analysis involves:
One dependent variable and many independent variables
In determining cost behavior, which method should not be used in estimating fixed and variable costs for the equation Y = a + bX?
Multiple Regression
A scatter diagram that shows a regression line sloping down to the right would most likely have a correlation coefficient (r) of:
(0.95)
If the coefficient of correlation (r) between two variables is zero, how might a scatter diagram appear?
Random points
R-squared (r2) measures:
How well the regression line accounts for the changes in the dependent variable
After constructing a scatter chart, the internal auditor of Madagascar Company provided you with the following information:
Independent variable: 1,000,000
Slope of the line: 0.25
Y-axis intercept: 7,500
Based on the internal auditor’s data, what is the estimated cost?
P 257,500
Neptune Company uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results:
MACHINE HOURS Coefficient
Y-intercept: 2,500
B: 5.0
r2 = 0.70
DIRECT MATERIALS WEIGHT
Y-intercept: 4,600
B: 2.6
r2 = 0.50
What regression equation should be used?
Y = 2,500 + 5.0X
The statistician of Galaxy Company has developed the following cost-prediction equation, using observations from 12,000
to 30,000 machine hours:
* Y = P 236,837 + 3.7625X
* R-squared = 0.81
* Standard error = P 24,363
* Several ‘outliers’ are noted within tolerable limits
* Y (dependent variable) = total maintenance cost
* X (independent variable) = machine hours
What percentage of the variation in maintenance costs is explained by the independent variable?
NOTE: R-squared (r2) or the coefficient of determination is a statistical measure of fit that indicates how much variation of a dependent variable is explained by the independent variable(s) in a regression model. Refer to item no. 33.
81%
Compute the estimated maintenance cost at 20,000 machine hours.
NOTE: Y = 236,837 + 3.7625 (20,000). In estimating costs using line functions, standard error is ignored.
P 312,067
