Chap005 - Chapter 05 - Cost Estimation 5 Cost Estimation...

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Chapter 05 - Cost Estimation 5 Cost Estimation Solutions to Review Questions 5-1. Common methods of cost estimation are engineering analysis, account analysis, and statistical analysis of historical data. 5-2. Engineering estimates are based on design specifications and industry and firm cost standards. 5-3. Engineering estimates are particularly helpful when: Attempting to compare company operations with standards; Trying to estimate costs for projects that have not been undertaken in the past (e.g., new construction, major special orders such as defense items); Considering alternatives to present operations, such as assembly line reorganization and similar changes, where it would be too costly to carry out the change and then see if it was cost-effective. 5-4. The biggest problem likely to be encountered from the indiscriminate use of regression methods is that the model may not have any logical foundation. This may result in a model that appears sound on a statistical basis, but with no logical relationship between Y and X's, the model may not continue to provide good predictions. A number of spurious correlation and regression studies have been presented in the literature. For example, a simple run of correlations between average education levels in the U.S. and U.S. inflation rates might lead one to conclude that education causes inflation. 5-1
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Chapter 05 - Cost Estimation 5-5. The longer the data series used in the analysis, the easier it is to see a trend in the data when using the scattergraph method. When using any method, the longer the data series, the greater the likelihood of having the widest possible range of observations. When using statistical methods, the more observations, the smaller the standard deviations and the tighter the resulting estimates. On the other hand, the longer the data series, the more likely that operating conditions, technology, prices and costs have changed. Thus, the order data may not be very representative of the operations expected over the period for which the estimate is made. 5-6. Simple regression assumes a single independent variable (e.g., cost driver) and multiple regression assumes two or more independent variables. 5-7. Adjusted R 2 considers the number of independent variables used in the estimation and “adjusts” the R 2 to reflect the use of additional variables. 5-8. Accurate cost estimates improve decision-making. Better decisions lead to higher company value. 5-2
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Chapter 05 - Cost Estimation Solutions to Critical Analysis and Discussion Questions 5-9. a. Direct labor would be fixed if a union contract limited the company's ability to lay off unneeded personnel or if management were contemplating a change in facilities but maintaining the same labor force.
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This note was uploaded on 02/01/2011 for the course ACCT 111 taught by Professor Na during the Spring '10 term at Cornell University (Engineering School).

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Chap005 - Chapter 05 - Cost Estimation 5 Cost Estimation...

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