HDFRIChapter10Solutions13e - CHAPTER 10 DETERMINING HOW...

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CHAPTER 10 DETERMINING HOW COSTS BEHAVE 10-1 The two assumptions are 1. Variations in the level of a single activity (the cost driver) explain the variations in the related total costs. 2. Cost behavior is approximated by a linear cost function within the relevant range. A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity forms a straight line. 10-4 No. High correlation merely indicates that the two variables move together in the data examined. It is essential also to consider economic plausibility before making inferences about cause and effect. Without any economic plausibility for a relationship, it is less likely that a high level of correlation observed in one set of data will be similarly found in other sets of data. 10-5 Four approaches to estimating a cost function are 1. Industrial engineering method. 2. Conference method. 3. Account analysis method. 4. Quantitative analysis of current or past cost relationships. 10-6 The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations, etc.). Advantages of the conference method include 1. The speed with which cost estimates can be developed. 2. The pooling of knowledge from experts across functional areas. 3. The improved credibility of the cost function to all personnel. 10-7 The account analysis method estimates cost functions by classifying cost accounts in the subsidiary ledger as variable, fixed, or mixed with respect to the identified level of activity. Typically, managers use qualitative, rather than quantitative, analysis when making these cost- classification decisions. 10-8 The six steps are 1. Choose the dependent variable (the variable to be predicted, which is some type of cost). 2. Identify the independent variable or cost driver. 3. Collect data on the dependent variable and the cost driver. 4. Plot the data. 5. Estimate the cost function. 6. Evaluate the cost driver of the estimated cost function. Step 3 typically is the most difficult for a cost analyst.
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10-10 Three criteria important when choosing among alternative cost functions are 1. Economic plausibility. 2. Goodness of fit. 3. Slope of the regression line. 10-12
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HDFRIChapter10Solutions13e - CHAPTER 10 DETERMINING HOW...

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