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Chapter 2
The Cost Function
LEARNING OBJECTIVES
Chapter 2 addresses the following questions:
Q1 What are different ways to describe cost behavior?
Q2 What is a learning curve?
Q3 What process is used to estimate future costs?
Q4 How are the engineered estimate, account analysis, and twopoint methods used to
estimate cost functions?
Q5 How does a scatter plot assist with categorizing a cost?
Q6 How is regression analysis used to estimate a mixed cost function?
Q7 What are the uses and limitations of future cost estimates?
These learning questions (Q1 through Q7) are crossreferenced in the textbook to individual
exercises and problems.
COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:
No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
e
This question requires students to extend knowledge beyond the applications
shown in the textbook.
Openended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):
Step 1 skills (Identifying)
Step 2 skills (Exploring)
Step 3 skills (Prioritizing)
Step 4 skills (Envisioning)
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Cost Management
QUESTIONS
2.1
This function has both fixed costs and variable costs.
If at least part of the cost is
variable; total cost increases as production volumes increase.
If at least part of the cost is
fixed, the average total perunit cost decreases because the average fixed cost decreases
as volume increases.
2.2
Several years’ worth of data for August would be helpful for estimating the overhead cost
function for subsequent Augusts, but the August data should not be used for estimating
the overhead cost function for other months during the year.
It is highly unlikely that the
August data would be representative of the data during normal operations.
However,
August’s costs are probably a good estimate of the fixed costs for other months.
When
zero production occurs, only fixed costs are incurred.
2.3
Since time appears to be of the essence, one of several cost estimation techniques might
be employed.
First, account analysis will provide a rough estimate.
Second, the two
most recent income statements could be used to approximate fixed and variable costs
using the twopoint method, but the president would need to understand that the quality
of information could be low using this method.
Third, if enough observations of cost
data are readily available, regression analysis can be run.
However, usually it takes more
time to collect the data necessary to use regression analysis.
2.4
The information leads to a conclusion that fixed costs exist because cost per unit changes
between two levels of activity within the relevant range.
The information is not sufficient
to determine the amount of fixed costs or whether variable costs exist.
2.5
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