Question 1

Most firms rely on future data to estimate their cost structure.

Accepted Answer

Most firms rely on historical data to estimate their cost structure, as it provides actual figures and trends from which to forecast future costs.

Question 2

The high-low method avoids the need to classify individual cost items as fixed or variable.

Accepted Answer

The high-low method uses only the highest and lowest activity levels to estimate fixed and variable costs, bypassing the need to classify each cost item individually.

Question 3

The contribution margin is well suited to evaluate short-term decision options.

Accepted Answer

Contribution margin analysis helps management to make short-term decisions by evaluating the contribution margin of different products or services. It helps in identifying the products or services that are more profitable and have a higher contribution margin.

Question 4

An advantage of using the high-low method is that we can apply it if we know only total revenues, total costs, and activity volume.

Accepted Answer

This is true. The high-low method involves taking the highest and lowest activity levels and their corresponding costs, and using them to calculate a variable cost rate per unit of activity. This rate can then be used to estimate costs at any other activity level, regardless of whether we know the individual costs at those levels. Total revenues and activity volume are also used to calculate the contribution margin, which can provide insights into profitability.

Question 5

A disadvantage of using the regression analysis method is that it provides only one statistic to evaluate the data.

Accepted Answer

While regression analysis does provide a single statistic (the coefficient of determination, or R-squared value) to evaluate the relationship between variables, it also provides additional information such as the individual coefficients of the independent variables and the significance of the model overall. Therefore, the statement is false.

Question 6

With advances in computer and information technologies, the account classification task may still be a daunting task.

Accepted Answer

Despite advances in computer and information technologies, the account classification task can still be challenging due to the complexity of financial transactions, the need for judgment in classifying accounts, and the evolving nature of financial standards and regulations.

Question 7

The contribution margin statement groups costs by their function.

Accepted Answer

The contribution margin statement groups costs based on their behavior (variable or fixed) rather than their function.

Question 8

The major disadvantage of the account classification method is that it uses few observations of aggregate cost data to estimate total fixed and variable costs.

Accepted Answer

The major disadvantage of the account classification method is its reliance on subjective judgment to classify costs, not the number of observations of aggregate cost data.

Question 9

The regression analysis method results in the least error between the estimated and true total cost line.

Accepted Answer

The regression analysis method aims to minimize the sum of squares of the residuals (the difference between the estimated and true values). Thus, the regression analysis method does indeed result in the least error between the estimated and true total cost line.

Question 10

The regression analysis method of estimating fixed and variable costs uses all available observations to come up with a line that best "fits" the data.

Accepted Answer

Regression analysis is a statistical technique used to estimate relationships between variables. In the context of cost estimation, regression analysis is used to estimate fixed and variable costs by analyzing the data on past costs and activity levels. The method uses all available observations to identify a line that best fits the data points.

Question 11

R-square will always lie between negative one and positive one.

Accepted Answer

R-square, or the coefficient of determination, ranges from 0 to 1, indicating the proportion of the variance in the dependent variable that is predictable from the independent variable(s).

Question 12

Because account classification requires us to examine each account in detail, it often provides inaccurate estimates.

Accepted Answer

Account classification involves categorizing accounts based on their nature and behavior, which helps in accurate financial reporting and analysis rather than providing estimates.

Question 13

The high-low method uses two observations of aggregate cost data to estimate total fixed costs and the unit variable cost.

Accepted Answer

The high-low method involves using the highest and lowest levels of activity to calculate both the total fixed costs and the unit variable cost.

Question 14

Using the high-low method, we know the true cost line.

Accepted Answer

The high-low method can only provide an estimate of the cost line. It uses two data points (the highest and lowest activity levels) to estimate the fixed and variable costs, but it is not guaranteed to give the true cost line.

Question 15

A major drawback of using regression analysis is that the technique makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions.

Accepted Answer

Regression analysis assumes that the relationship between the variables is linear, there is no multicollinearity, homoscedasticity, and the errors are normally distributed. Accounting data may violate these assumptions, leading to inaccurate results.

Question 16

Capacity costs are controllable in the short term.

Accepted Answer

Capacity costs refer to the fixed costs associated with maintaining a certain level of production capacity. These costs are typically not easily controllable in the short term, as they are often tied to long-term contracts or investments in equipment and facilities. While capacity costs may be manageable through long-term planning and strategic decision-making, they are generally not considered a variable cost that can be easily adjusted in the short term.

Question 17

The account classification is both time-consuming and subjective in nature.

Accepted Answer

Account classification requires careful analysis and judgment of the transactions, which can be time-consuming. Additionally, different accountants may classify transactions differently based on their interpretation and understanding of accounting standards. Therefore, it is also subjective in nature.

Question 18

Using the high-low method, managers use the two observations pertaining to the highest and lowest activity levels because these values are most likely to define any abnormal costs.

Accepted Answer

The high-low method uses the highest and lowest activity levels to estimate the variable and fixed components of a cost, not to identify abnormal costs. It assumes a linear relationship between cost and activity across these points.

Question 19

The contribution margin is the amount that contributes toward recovering fixed costs and earning a profit.

Accepted Answer

The contribution margin is calculated by subtracting variable costs from revenue. This amount can then be used to first cover fixed costs and then contribute to profit. Therefore, the contribution margin does indeed contribute toward recovering fixed costs and earning a profit.

Question 20

We obtain the data for the account classification method from the contribution margin statement.

Accepted Answer

The account classification method typically uses financial statements like the income statement or balance sheet, not specifically the contribution margin statement.

Quiz 4: Techniques for Estimating Fixed and Variable Costs