Week 2- Cost behaviour and Estimation

Question 1

what does cost behaviour refer too?

Answer 1

The relationship between cost and activity

Question 2

what is cost estimation?

Answer 2

The process of estimating the relationship between costs and cost driver activities that cause the cost (eg. production of activities)

Question 3

What is cost prediction?

Answer 3

Using the results of cost estimation to forecast a level of cost at a particular activity. Focus is on the future

Question 4

What do variable costs per unit look like on a graph?

Answer 4

They remain constant

Question 5

what is a step variable cost?

Answer 5

The cost remains constant over a narrow range of activity and then increases or decreases at a set level of activity

Question 6

What happens to fixed cost per unit as activity increases?

Answer 6

decreases (until a set period in which the business may need to increase fixed costs in order to grow

Question 7

what are set fixed costs?

Answer 7

The cost increases at a certain level of activity

Question 8

what are the differences between step fixed costs and step variable costs?

Answer 8

• Step variable cost can be adjusted faster

- Step variable cost jumps are narrower

Question 9

what is a mixed cost?

Answer 9

One that has a fixed and variable cost element to it. eg. a phone contract usually has an upforont cost and a monthly cost to it.

Question 10

what is the best way to estimate costs?

Answer 10

Collect historical dat to forecast costs in th future

Question 11

how can we forecast costs?

Answer 11

A process called regression analysis

Question 12

what is regression analysis?

Answer 12

a statistical method that creates an equation that relates dependant and independant variables together. Its objective is to use the equation to estimate costs

Question 13

what are the independent variables in cost estimation?

Answer 13

The cost drivers

Question 14

what are the dependant variables in cost estimation?

Answer 14

the cost

Question 15

what is the equation used for regression analysis?

Answer 15

TC=F+VX

Question 16

what is an outlier?

Answer 16

Any data point outside the normal grouping of data points

Question 17

What is correlation coefficient?

Answer 17

a measure of the linear relationship between variables such as cost and activity

Question 18

what does it mean if the correlation coefficient is high( close to 1)

Answer 18

There is a strong correlation between the variables

Question 19

what does it mean if the correlation coefficient is 0

Answer 19

It means that there is no correlation between the variables

Question 20

what does it mean if the correlation coefficient is low (close to -1)

Answer 20

There is a negative correlation between the variables

Question 21

what does coefficent of determination ( R-squared) measure?

Answer 21

The goodness of fit between the data points

Question 22

what is multiple regression analysis?

Answer 22

A regression that has more than one independant variable

Question 23

give an example of when multiple regression may be helpful?

Answer 23

Factors such as inflation or interest rates are all affecting costs

Question 24

what are the key considerations one need to be aware of when using regression analysis?

Answer 24

• A logical relationship must be established between the variables
• Entering data that have no logical relationship will result in meaningless estimates
• Outliers? These will alter the results of the analysis if included
• The fixed cost needs to be inline with the companies activity in order to be meaningful

Question 25

what does cost estimation provide useful info for?

Answer 25

Ultimately it is useful for DECSION MAKING but this can be split up in to:

forecasting:

• Levels of demand under different prices
• Success of new products
• Adequacy of present production and office facilities; feasibility of outsourcing
• Overall profitability under many cost and price scenarios
• Consider the impact of learning on customer behavior: as labour become more experienced it takes them less time to complete a task