Question 1

Regression analysis usually provides a higher quality cost function than the high-low method.

Accepted Answer

Regression analysis uses all available data points to determine the relationship between the independent and dependent variables, which results in a more accurate cost function. The high-low method only uses the highest and lowest data points to estimate the cost function, which can lead to less accuracy in predicting costs.

Question 2

A scatter plot provides helpful information about the relationship between a cost and a potential cost driver.

Accepted Answer

A scatter plot can visually display the relationship between two variables, such as cost and a potential cost driver, and help identify any patterns or trends in the data.

Question 3

The high-low method is a specific application of the two-point method of cost estimation.

Accepted Answer

The high-low method is a specific type of two-point method that uses the highest and lowest levels of activity to estimate fixed and variable costs.

Question 4

Cost functions are most useful for estimating costs over short periods such as one year.

Accepted Answer

Cost functions are most useful for estimating costs over short periods such as one year because they are based on the assumption that the cost of production is a linear function of the quantity produced. This assumption is only valid over short periods of time, as in the long run, the cost of production may be affected by factors such as technological change and economies of scale.

Question 5

Simple regression analysis produces an equation of the form : Y= α + βX + ε

Accepted Answer

This is true. Simple regression analysis produces an equation of the form Y= α + βX + ε, where Y is the dependent variable, X is the independent variable, α is the constant or intercept, β is the regression coefficient or slope, and ε is the error term or residual.

Question 6

Estimates of future costs can be used in budgeting.

Accepted Answer

Estimates of future costs can be used to create a more accurate budget by forecasting and planning for upcoming expenses.

Question 7

The high-low method frequently distorts a cost function because it uses too few data points to make an estimate.

Accepted Answer

The high-low method uses only the highest and lowest data points to estimate a cost function. This can lead to a distortion of the true cost function as it may not accurately represent the relationship between costs and the level of activity.

Question 8

Preparing a scatter plot is a requirement before applying the two-point method of cost estimation.

Accepted Answer

This is true, as a scatter plot is necessary to visually represent the relationship between the two variables being analyzed (such as cost and quantity) before applying the two-point method of cost estimation.

Question 9

Reviewing the pattern of a cost over time is a critical step in determining an engineered cost estimate.

Accepted Answer

The answer of Reviewing the pattern of a cost over...

Question 10

The method for determining the cost function that does not rely on past costs is regression analysis.

Accepted Answer

Regression analysis typically uses historical data to model the relationship between variables, including past costs, to predict future costs or outcomes.

Question 11

Categorising costs by their behavior is one step in estimating relevant costs for a cost object.

Accepted Answer

Categorizing costs by behavior helps in identifying which costs are relevant and which ones are not while estimating costs for a particular cost object. The behavior of costs can be classified as either fixed or variable, and this knowledge helps in predicting how costs may change in response to changes in the activity level of the cost driver.

Question 12

Changes in cost behavior over time are one source of uncertainty in estimating future costs.

Accepted Answer

Cost behavior can change over time due to various factors such as inflation, changes in technology, changes in production methods, and changes in market conditions. These changes can make it difficult to accurately estimate future costs, leading to uncertainty.

Question 13

Financial statements usually distinguish between fixed and variable costs.

Accepted Answer

The answer of Financial statements usually distinguish between fixed and...

Question 14

In regression analysis, the Adjusted R-square statistic is used to evaluate how well the cost driver explains the behavior in the cost.

Accepted Answer

The adjusted R-square statistic is used to evaluate how well the independent variables (including the cost driver) explain the variation in the dependent variable (the cost).

Question 15

Regression analysis is classified as simple or multiple depending upon the number of dependent variables to be estimated.

Accepted Answer

Regression analysis is classified as simple or multiple depending upon the number of independent variables, not dependent variables, to be estimated.

Question 16

The first step in estimating a cost function for relevant costs is to select a cost estimation technique.

Accepted Answer

The first step in estimating a cost function for relevant costs is to define the cost object and identify the cost drivers.

Question 17

It would be helpful for managers to have some training in engineering in calculating an engineered cost estimate.

Accepted Answer

Managers who have some training in engineering would have a better understanding of the technical aspects involved in calculating an engineered cost estimate, which would be helpful in making more accurate cost estimates and decisions.

Question 18

If the organisation has only operated for a short time several methods of determining the cost function cannot be used.

Accepted Answer

Methods such as regression analysis and high-low method require historical data which may not be available for a new organisation that has only operated for a short time. However, other methods such as engineering and account analysis may still be applicable.

Question 19

If fixed costs are graphed against output fixed costs are represented by a straight line.

Accepted Answer

Fixed costs do not vary with output, so they will be represented by a horizontal straight line in a graph where output is shown on the x-axis and total cost is shown on the y-axis.

Question 20

Steel used in the production of automobiles would generally be classified as a direct cost.

Accepted Answer

Direct costs are costs that can be specifically traced to a particular product, service, or department. Steel used in the production of automobiles can be directly tied to the cost of manufacturing the automobile, making it a direct cost.

Quiz 2: Cost Concepts, Behaviour and Estimation