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.

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- Fall '16
- taher refaat
- Accounting, Difficulty, Kareem Abozeed