Difficulty : 2 Objectives : 1,2 Terms to Learn: cost function, linear cost function Mr . Kareem Abozeed

41 150. Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver. Answer: The four approaches to cost estimation are: 1. industrial engineering method 2. conference method 3. account analysis method 4. quantitative analysis of current or past cost relationships The industrial engineering method , also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.). The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver. Quantitative analysis of cost relationships are formal methods, such as the high- low method or regression, to fit linear cost functions to past data observations. Difficulty : 2 Objective : 3 Terms to Learn: cost estimation, industrial engineering method, conference method, account analysis method Mr . Kareem Abozeed

41 151. List and briefly describe the six steps in estimating a cost function under quantitative analysis. Answer: The first step is to select the dependent variable. Selection of which dependent variable to use will depend on the cost function being estimated. Once the dependent variable has been selected, it is necessary to identify the independent variable or cost driver. The cost driver is the factor that is used to predict the dependent variable costs. The cost driver should have an economically plausible relationship with the dependent variable and be measurable. The third step involves collecting data on the dependent variable and the cost driver. The data may be time-series data or they may be cross-sectional data. Once the data are collected, they need to be plotted, which is step four. Plotting the data allows for the relationship between the cost driver and the dependent variable to be more readily observed. This also allows for the identification of extreme observations that should be further investigated. The fifth step is to estimate the cost function, using some form of quantitative analysis. The last step is to evaluate the cost driver of the estimated cost function to determine if the cost function provides a good estimation. Difficulty : 2 Objective : 4 Terms to Learn: cost estimation 152. What are the three criteria a company should use to evaluate and choose a cost driver? Briefly explain each of the three criteria.