Week 11 Chapter 9 Reading

Question 1

mixed costs

Answer 1

costs comprising of fixed and variable costs

Question 2

step variable costs

Answer 2

cost function looks like steps/staircase

costs jump between intervals in a discrete manner (no slope)

e.g., 1-5 = 1
5-10 = 2
10-15 = 3
15-20 = 4

Question 3

2 types of fixed costs

Answer 3

committed = long term commitment to this cost

discretionary = fixed cost, but short term in nature - avoidable

Question 4

high low method for analysing mixed costs

Answer 4

assume costs are linear

(highest cost - lowest cost) / (highest activity - lowest activity)

e.g., (4,675 - 2,925) / (850-300) = 1,750 / 550 = 3.18 VC per unit

total VC = VC per unit * total units

Total Cost - Total VC = Total FC

Question 5

least squares regression method for analysing mixed costs

Answer 5

uses computerised statistical software to identify cost function

calculates regression, line of best fit and y-intersect to identify variable and fixed costs

Question 6

error in a regression?

Answer 6

difference between a data point and the mean (line of best fit)

Question 7

equation for regression?

Answer 7

y = fixed cost + variable cost per unit

Question 8

what is r squared a measure of?

Answer 8

the goodness of fit

how well the line of best fit aligns with the data

you can have confidence that the fixed cost is accurate

Question 9

learning curve analysis

Answer 9

the analysis of costs that don’t behave in a linear manner

e.g., labour costs:
- labour costs can decline as more units are produced, for example

• aka, experience curve - they become more efficient and require less hours to do it

Question 10

two assumptions when estimating cost functions?

Answer 10

variations in total cost are explained by variations in a single cost driver

cost behaviour is linear

Question 11

linear cost function?

Answer 11

within relevant range, graph total costs forms a straight line

Question 12

relevant range

Answer 12

the range of the cost driver where the relationship between total costs and the driver is valid

Question 13

cost estimation

Answer 13

the measurement of past cost relationships

Question 14

cost predictions

Answer 14

forecasts of future costs

Question 15

what are the 3 specifications necessary to classify costs into variable/fixed cost components?

Answer 15

• choice of cost object
• relevant range
• time span

Question 16

when do non linearities occur?

Answer 16

at very high levels of production

Question 17

3 ways cause and effect can be established?

Answer 17

• implicitly established by logic & knowledge of operations
• contractual arrangement
• physical relationship

Question 18

does correlation = causation?

Answer 18

no

Question 19

4 approaches to cost estimation?

Answer 19

• industrial engineering method
• conference method
• account analysis method
• quantitative analysis method of current/past cost relationships

Question 20

industrial engineering method?

Answer 20

aka work measurement method

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

Question 21

conference method

Answer 21

gather opinions about costs and their drivers from various departments

discussions

subjective

Question 22

account analysis method?

Answer 22

similar to conference method

classify cost accounts as variable, fixed, or mixed with respect to level of activity

Question 23

quantitative analysis methods?

Answer 23

• high low method
• least squares regression method

Question 24

six steps in estimating a cost function

Answer 24

1) choose dependent variable (variable being predicted)

2) identify cost driver (independent variable)

3) collect data on dependent variable and the cost drivers

4) plot the data

5) estimate the cost function

6) evaluate the estimated cost function

Question 25

regression analysis?

Answer 25

statistical method that measures the average amount of change in the dependent variable with 1 unit change in the independent variable(s)

Question 26

simple regression?
multiple regression?

Answer 26

simple = estimates relationship between dependent variable and ONE independent variable

multiple = estimates relationship between dependent variable and multiple independent variables

Question 27

3 criteria for choosing cost drivers?

Answer 27

• economic plausibility
• goodness of fit
• slope of regression line

Question 28

non linear cost function?

Answer 28

cost function where, in the relevant range vs the graph of total costs vs level of activity isn’t a straight line

Question 29

step cost functiom?

Answer 29

cost function in which the cost is constant over ranges

but cost increases in discrete amounts

Question 30

learning curve?

Answer 30

a function that shows how labour hours per unit decline as units of production increase

this is because workers learn & become better at what they do - efficiency increases

Question 31

experience curve?

Answer 31

a function that shows how full product costs per unit decline as units of output increase

Question 32

two learning curve models?

Answer 32

• cumulative average-time learning model
• incremental unit-time learning model

Question 33

cumulative average-time learning model?

Answer 33

cumulative average time per unit declines by a constant percentage each time the quantity of units produced doubles

e.g., 80% learning curve = time is 100 w/ 1 unit, time is 80 w/ 2 units, time is 64 units w/ 4 units, time is 51.2 w/ 8 units etc

Question 34

incremental unit-time learning model?

Answer 34

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

Question 35

individual unit time for x units?

Answer 35

the amount of time taken to produce x units

Question 36

cumulative total time?

Answer 36

the amount of time taken to produce all units up until x units

e.g., 100mins for #1, 80 mins for #2 = cumulative total time
of 180mins

Question 37

cumulative average time per unit?

Answer 37

cumulative total time / number of units

e.g., cumulative total time (250.21mins) / number of units (3) = 83.40

Question 38

difference between cumulative average-time and incremental unit-time learning model?

Answer 38

cumulative average time = learning curve % is applied to cumulative average time per unit every time units double

incremental unit-time = learning curve % is applied to individual unit time every time the units double