Exam 10: Quantitative Analyses of Cost Functions

Munir Hassan, controller, gathered data on overhead costs and direct labour-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labour-hours as the cost driver.

The account analysis method classifies cost accounts with respect to the identified cost driver.

Which of the following statements related to assumptions about estimating linear cost functions is true?

Use the information below to answer the following question(s). Presented below is the production data for the last six months of the year for the mixed costs incurred by Wagner Company. -The total cost at an operating level of 10,000 units would be

Which of the following statements about a high correlation between two variables s and t is False?

Pam's Stables used two different predictor variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows: Trainer's hours: r² = 0.56 Number of horses: r² = 0.63 What is the estimated total cost for the coming year if 16,000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver?

The selection of the best measure of benefit will depend upon the corresponding change in the cost pool.

Answer the following question(s) using the information below. The Taranto Company uses the high-low method to estimate it's cost function. The information for 2012 is provided below: -What is the slope coefficient per machine-hour?

Schotte Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows: Machine-hours: Number of packages: Required: a. What are the estimating equations for each cost driver? b. Which cost driver is best and why?

Which of the following is/are one of the criteria used when a manager evaluates an estimated cost function for decision making purposes?

Which of the following statements about the cost estimation methods is False?

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Windsor, Ontario. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected: Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. c. For July, the company ran the machines for 3,150 hours and used 4,180,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?

The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $120,000. Required: Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is a. number of employees. b. the number of new hires. c. Which cost estimation method is being used by Miller Company?

A better database for estimating cost functions has the following characteristics:

Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct manufacturing labour is $10 per hour. b. Direct materials cost $9.20 per cubic yard. c. Utilities have a minimum charge of $1,000, plus a charge of $0.05 per kilowatt-hour. d. Machine operating costs include $200,000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation.

The Wildcat Company has provided the following information for the factory overhead cost pool: Required: Using the high-low method and the information provided above, a. identify the linear cost function equation and b. estimate the total cost at 36,000 units of output.

A major concern that arises with multiple linear regression is multicollinearity, which exists

The ideal database for estimating cost functions quantitatively includes values for the predictor variable over a wide range.

The ideal database for estimating cost functions has two characteristics: 1. It contains at least 31 reliably measured observations of the predictor variable and the outcome variable. 2. It includes values for the predictor variable over a wide range. Unfortunately, management accountants rarely have the advantage of working with a database that has both characteristics. Required: Following are a list of data problems that may be encountered. Select three, then for each selection describe the describe the cause/effect of the problem and provide a remedy. 1. The time period for measuring the outcome variable does not match the period for measuring the predictor variable. 2. Fixed costs are allocated as if they were variable. 3. Data are either unavailable for all observations or not uniformly available. 4. Extreme values of observations, or outliers, occur when recording costs. 5. There is no causal, economically plausible relationship between the individual cost items in a heterogeneous mixed pool and a single cost driver. 6. Inflation affects the outcome variable, the predictor variable(s), or both.

All of the following are approaches to cost estimation EXCEPT