Exam 3: Measurement of Cost Behavior

Account analysis is one method of approximating cost functions.

The following data has been assembled for Groundhog Company. Use the high- low method. Cost Hours \ 24,400 2,000 39,000 3,600 37,280 3,450 36,400 3,000 44,160 3,900 The variable cost per hour is:

Examples of this type of cost are advertising, research and development, and employee training programs

Joe Paparazzi has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. Paparazzi desires to establish a formal cost estimation system. Required: What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie- making system?

The Brady Corporation used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect M aterials Cost Explained by Units Produced Constant \ 21,885 Standard error of Y estimate \ 4,560 R - s quared 0.4932 No. of ob servations 22 Degrees of freedom 20 X coefficient (s) 3.75 Standard error of coefficient(s) 8.1876 the coefficient of deterinationis:

Step costs change abruptly at intervals of activity.

Variable cost per unit is the slope of a total cost line.

Least- squares regression is the easiest method to approximate a cost function.

Boxes- R- Us manufactures various cardboard boxes. Because the efforts of manufacturing are approximately equal between labor and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 20X0: 1. x = gluing time y = $29,000 + $10x r2 = 0.75 2. x = labor y = $12,000 + $15x r2 = 0.50 3. x = machinery y = $15,000 + $5x r2 = 0.45 Required: a. Which equation should be selected for the analysis? b. What are other factors that should be included in the selection of the estimating equation?

measures how much of the fluctuation of a cost is explained by changes in the cost driver.

arise as a result of strategic decisions about the scale and scope of an organization's activities.

Managers should apply plausibility and reliability to obtain accurate and useful cost functions.

Matt Helm Company used least- squares regression analysis to obtain the following output: Payroll Dep artment Cost Explained by Number of Employees Constant \ 9,800 Standard error of Y estimate \ 630 R - squared 0.9424 No. of observations 20 Degrees of freedom 18 X coefficient(s) 3902 Standard error of coefficient(s) 0.0966 a. What is the total fixed cost? b. What is the variable cost per employee? c. Prepare the linear cost function. d. What is the coefficient of determination? Comment on the goodness of fit.

Companies cannot recover fixed capacity costs when demand falls during an economic downturn.

In the mixed cost equation, Y = F + VX, the Y is the predicted total cost.

A mortgage payment would most likely be identified as a:

A cost function is an algebraic equation used to describe the relationship between a cost and its cost driver(s).

The first step in estimating or predicting costs as a function of appropriate cost drivers

Identifying the appropriate cost driver(s) is the most critical aspect of any method for measuring cost behavior.

is a method of approximating cost functions.