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39 Cards in this Set
 Front
 Back
What assumptions are usually made when estimating a cost function

* changes in the level of a single activity explain changes in total costs
* cost behavior can adequately be approximated by a linear function of the activity level within the relevant range 

What is a linear cost function

Is a cost function wich, within the relevant range, the graph is a straight line


Three types of linear cost functions are

variable, fixed, and mixed


What are the different methods that can be used to estimate a cost function?

engineering method
conference method account analysis method quantitive analysis method 

What methods does the quantative analysis method include

highlow
and regression analysis 

WHat are the six steps to estimate a cost function

choose the dependant variable
identify the cost driver collect data on the dependent variable and the cost driver plot the data estimate the cost function evaluate the cost driver of the estimeated cost function 

how should a company estimate and choose cost drivers

economic plausibility
goodness of fit significance of independent variable 

what is a non linear cost function

Nonlinear costs are costs that are non linear within the relevant range that arise because of qty discounts, step cost functions, and learning curve effects


two types of learning curve models

cummulative average time model
incrimental unit time learning model 

What are the common data problems a company must watch for when estimating costs?

missing data
extreme values of observations changes in technology inflation distortion 

account analysis method

Approach to cost function estimation that classifies various cost accounts as variable, fixed, or mixed with respect to the identified level of activity. Typically qualitative rather than quantitative analysis is used when making these costclassification decisions


coeffiecient of determination

Measues the percentage of variation in a dependent variable explained by one or more independent variables.


conference method

Approach to cost fucnction estimation 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.)


constant

The componenent of total cost that within the relevant range does not change with level of activity


cost function

Mathematical description of how a cost changes with changes in the level of an activity relating to that cost


cost prediction

forcasts about future costs


cumulative average time learning model

learning curve model in which the cumulative average time per unit declines by a constant percentage each time the cumulative qty of units produced doubles


dependent variable

the cost to be predicted


experience curve

function that measures the decline in cost per unit in various business functions of the value chain, such as manufacturing, marketing, distribution, and so on as the amount of these activities increases


highlow method

Method used to estimate a cost function that uses only the highest and lowest observed values of the cost driver within the relevant range and their respective costs


incremental unittime learning model

learning curve model in which the incremental time needed to produce the last unit declines by aq constant % each time the cumulative qty of untis produced doubles


independent variable

level of activity or cost driver used to predict the dependent variable (costs) in a cost estimation or prediction model.


industrial engineering method

Approach to cost function estimation that analyzes the relationship between inputs and outputs in physical terms. Also called work measurement method


intercept

same as a constant


learning curve

function that measures hos laborhours per unit decline as untis of production increase because workers are learning and becoming better at their jobs


linear cost function

cost function in which the graph of total costs versus the level of a single activity related to that cost is a straight line within the relevant range


mixed cost

a cost that has both fixed and variable elements


multi collinearity

exists when two or more independent variables in a mulitiple regression model are highly correlated with each other


multiple regression

regression model that estimates the relationship between the dependent variable and two or more independent variables


nonlinear cost function

cost function in which the graph of total costs based on the level of a single activity is not a straight line within the relevant range


regression analysis

statistical method that measures the average amount of change in the dependent variable associated with a unit change in one or m ore independent variables


residual term

the vertical difference or distance between actual cost and estimated cost for each observation in a regression model


semivariable cost

same as mixed cost


simple regression

regression model that estimates the relationship between the dependent variable and one independent variable


slope coefficient

coefficient term in a cost estimation model that indicates the aomunt by which total cost changes when a oneunit change occurs in the level of activity within the relevant range


specification analysis

testing of the assumptions of regression analysis


standard error of the estimated coefficient

regression statistic that indicates how much the estimated value of the coefficient is likely to be affected by random factors


stepcost function

a cost function in which the cost remains the same over various ranges of the level of activity, but the cost increases by discrete amounts (that is increases in steps) as the level of activity changes from one range to the next


work measurement method

see industrial engineering method.
