Exam 5: Cost Estimation

A cost driver is defined as: (CMA adapted)

Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow: Month Machine Hours Electricity Costs January 2,500 \ 18,400 February 2,900 21,000 March 1,900 13,500 April 3,100 23,000 May 3,800 28,250 June 3,300 22,000 July 4,100 24,750 August 3,500 22,750 September 2,000 15,500 October 3,700 26,000 November 4,700 31,000 December 4,200 27,750 Summary Output Regression Statistics Multiple R 0.965 R Squuare 0.932 0.925 Standard Error 1,425.18 Observations 12.00 Standard Lower Upper Coefficients Error t Stat P-value 95\% 95\% Intercept 3,726.88 1,682.82 2.21 0.05 (22.69) 7,476.45 Machine 5.77 0.49 11.7 0.00 4.67 6.87 Hours - If the controller uses the high-low method to estimate costs, the cost equation for electricity costs is:

The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted) Hours of Activity Maintenance Costs January 480 \ 4,200 February 320 3,000 March 400 3,600 April 300 2,820 May 500 4,350 June 310 2,960 July 320 3,030 August 520 4,470 September 490 4,260 October 470 4,050 November 350 3,300 December 340 3,160 Sum 4,800 \ 3,200 Average 400 3,600 A coefficient 684.65 B coefficient 7.2884 Standard error of the a coefficient 49.515 Standard error of the b coefficient 0.12126 Standard error of the estimate 34.469 0.99724 T-value a 13.827 T-value b 60.105 -Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at:

One disadvantage of the high-low method is the highest and lowest points may not be representative of normal operating activities.

A manager is trying to estimate the manufacturing costs of a new product. The company makes several other products that utilize some of the same manufacturing procedures as the new product. Which cost estimation method would be the best method to determine the total cost of manufacturing the new product?

Your manager asks you for a cost estimate to open a new retail outlet and says, "I want you to use statistical analysis, so it will be objective because it is based on real data." How would you respond?

Cost estimates using regression analysis are always more accurate and dependable than cost estimates using the scattergraph methods.

Fast-food restaurants, like Taco Bell and McDonalds, are known for high employee turnover, high quality, and low costs. Using your knowledge of the learning phenomenon, how do these fast-food chains get high quality and low costs when they have so much employee turnover?

In determining cost behavior in business, the cost function is often expressed as Y = a + bX. Which one of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation? (CMA adapted)

Brewsky's is a chain of micro-breweries. Managers are interested in the costs of the stores and believe that the costs can be explained in large part by the number of customers patronizing the stores. Monthly data regarding customer visits and costs for the preceding year for one of the stores have been entered into the regression analysis and the analysis is as follows: Average monthly customer visits 1,462 Average monthly total costs \4 ,629 Regression Results Intercept \1 ,496 b coefficient \2 .08 0.86814 - In a regression equation expressed as y = a + bx, how is the letter x best described? (CMA adapted)

The Macon Company uses the high-low method to determine its cost equation. The following information was gathered for the past year: Machine Direct Labor Hours Costs Busiest month (June) 14,000 \ 200,000 Slowest month (December) 6,000 \ 120,000 - What are the direct labor costs per machine hour?

Describe the engineering method of cost estimation. Provide two advantages and two disadvantages associated with the engineering approach to cost estimation.

Fromme's Frocks has the following machine hours and production costs for the last six months of last year: Machine Month Hours Production Coption July 15,000 \ 12,075 August 13,500 10,800 September 11,500 9,580 October 15,500 12,080 November 14,800 11,692 December 12,100 9,922 If Fromme expects to incur 14,000 machine hours in January, what will be the estimated total production cost using the high-low method?

The controller of Fortnight Co. has requested a quick estimate of the manufacturing supplies needed for the Cleveland Plant for the month of July, when production is expected to be 470,000 units to meet the ending inventory requirements and sales of 475,000 units. Fortnight Co.'s budget analyst has the following actual data for the last three months. Production in Month Units Manufacturing Supplies March 450,000 \ 723,060 April 540,000 853,560 May 480,000 766,560 Using the high-low method to develop a cost estimating equation, the total estimated cost of needed manufacturing supplies for July would be: (CMA adapted)

Assume that as part of their recent merger, Dell and EMC are perfecting a new device that will access and coordinate the internet of things. The new company is interested in estimating the impact of learning on the cost of producing this new device and plan to use data from previous products to estimate the learning parameter. What are the advantages of doing this? What are the disadvantages?

Which of the following cost estimation methods is based on two cost observations?

Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of the material handled? (CPA adapted)

Explain the difference between the engineering method of cost estimation and the account analysis method.

Markham, Inc. has received a contract for 8 units of a new product. The contract is a cost-plus contract, with the total to be received equal to the total labor cost + 30%. Markham found that the first unit of a new product required 90 hours to complete. The second unit was completed using only 76.5 hours. Markham believes that the rate of learning that was observed will continue for all 8 units of the contract. The labor wage paid is $40/hour. The following factors are available for various rates of learning: 80% learning, b = ?0.3219; 85%, b = ?0.2345; 90%, b = ?0.1520; 95%, b = ?0.0740. Required: (a.) What will the total labor cost be for the contract?f (b.) What will be the total fee for the contract?

The quality of the cost equation depends on collecting appropriate data.