Question 1

A basic assumption of most cost estimation methods is cost behavior patterns are linear within the relevant range.

Accepted Answer

Most cost estimation methods assume that costs behave in a linear manner within a certain range of activity, known as the relevant range, to simplify analysis and prediction.

Question 2

The linear cost estimate tends to understate the slope of the cost line in ranges close to capacity.

Accepted Answer

The linear cost estimate assumes a constant rate of cost increase, which may not account for the accelerated cost increases that occur as production approaches capacity limits.

Question 3

The relevant range represents those activity levels for which valid cost relationships have been observed.

Accepted Answer

The relevant range is the span of activity levels where the assumptions about cost behavior (fixed and variable costs) hold true, based on historical data and observations.

Question 4

Because outliers are extreme data points, they can be included in the regression analysis and not significantly affect the results.

Accepted Answer

Outliers can significantly affect the results of a regression analysis by skewing the line of best fit, leading to misleading conclusions.

Question 5

In general, the account analysis method focuses on the underlying relationship between cost and activities from the previous period.

Accepted Answer

The account analysis method involves examining past data to understand how costs relate to activities, helping to predict future costs based on historical patterns.

Question 6

In general, cost behavior results are likely to differ between the engineering method and the account analysis method.

Accepted Answer

The engineering method relies on technical evaluations and specifications, while the account analysis method uses historical accounting data, leading to potential differences in cost behavior results.

Question 7

The engineering method of determining cost behavior is particularly useful for new activities or products.

Accepted Answer

The engineering method is useful for new activities or products because it relies on technical analysis and specifications rather than historical data, which may not be available for new ventures.

Question 8

Cost behavior is the most important characteristic for managerial decision making.

Accepted Answer

Cost behavior helps managers understand how costs change with different levels of activity, which is crucial for budgeting, forecasting, and decision-making processes.

Question 9

A scattergraph is useful for identifying outliers/irrelevant data points.

Accepted Answer

A scattergraph visually displays data points, making it easier to spot those that deviate significantly from the overall pattern, which are considered outliers.

Question 10

One way to control the effects of a nonlinear relation between total costs and volume is to reduce the relevant range.

Accepted Answer

Reducing the relevant range can help manage the effects of nonlinearity by focusing on a smaller, more predictable segment of the cost-volume relationship.

Question 11

In general, accounting records accumulate cost information according to its behavior (i.e., variable and fixed).

Accepted Answer

The answer of In general, accounting records accumulate cost information...

Question 12

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

Accepted Answer

The high-low method uses only the highest and lowest data points to estimate costs, which may not accurately reflect typical operations if those points are outliers or anomalies.

Question 13

One advantage of the engineering method is that it does not require data from prior periods to estimate cost behavior.

Accepted Answer

The answer of One advantage of the engineering method is...

Question 14

Different cost estimations methods may produce different cost equations, even when using the same set of data.

Accepted Answer

Different cost estimation methods, such as regression analysis, high-low method, or account analysis, use different approaches and assumptions, which can lead to different cost equations even with the same data set.

Question 15

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

Accepted Answer

Regression analysis can provide more precise estimates by considering multiple variables, but it is not always more accurate or dependable than scattergraph methods, which can be simpler and more intuitive for certain datasets.

Question 16

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

Accepted Answer

The quality of a cost equation is contingent on the accuracy and relevance of the data used to develop it, as this data informs the relationship between cost drivers and costs.

Question 17

The account analysis method is more subjective than other cost estimation methods because it relies heavily on the personal judgment and experience of accountants.

Accepted Answer

The account analysis method involves classifying costs based on the accountant's judgment and experience, making it more subjective compared to methods that rely on statistical data or formulas.

Question 18

In general, the use of multiple independent variables increases the proportion of the variation in the dependent variable explained by the cost equation.

Accepted Answer

Using multiple independent variables in a regression model can increase the explanatory power, as it allows the model to account for more factors that might influence the dependent variable, potentially increasing the R-squared value.

Question 19

One advantage of the account analysis method for estimating cost behavior is that it includes actual work conditions.

Accepted Answer

The account analysis method uses historical data and actual work conditions to estimate cost behavior, making it more reflective of real-world scenarios.

Question 20

One advantage that regression techniques have over other cost estimation methods is it generates information that can be used to determine how well the estimated cost equation will predict future costs.

Accepted Answer

Regression techniques provide statistical measures, such as R-squared and p-values, which help assess the accuracy and reliability of the cost predictions, allowing for evaluation of how well the model might predict future costs.

Quiz 5: Cost Estimation