Int. Acc. MA LECT 4: CH 9 Cost estimation part 3: (Explain and give…
Int. Acc. MA LECT 4: CH 9 Cost estimation part 3:
Choose the highest and lowest value of the cost driver and their respective costs.
Determine a and b using algebra.
Regression analysis (I)
Regression analysis uses all available data to estimate the cost function.
Simple regression analysis
estimates the relationship between the dependent variable and one independent variable.
: Measures the average amount of change in a dependent variable, such as electricity, that is associated with unit increases in the amounts of one or more independent variables, such as machine- hours.
Multiple regression analysis
estimates the relationship between the dependent variable and multiple independent variables.
Regression analysis (II)
The objective of least-squares is to develop estimates of the parameters a and b.
The vertical difference (residual term) measures the distance between the actual cost and the estimated cost for each observation.
The regression equation and regression line are derived using the least-squares technique. Using a large amount of data.
The regression method is more accurate than the high- low method.
Describe three criteria to evaluate and choose cost driver
2. Goodness of fit
The coefficient of determination (r2) expresses the extent to which the changes in (x) explain the variation in (y).
An (r2) of 0.80 indicates that more than 80% of the change in the dependent variable can be explained by the change in the independent variable.
3. Slope of regression line
relatively steep slope
relationship between the cost driver and costs.
relatively flat regression line
relationship between the cost driver
closer the value of the correlation coefficient (r) to ±1
the statistical relation between the variables.
(r) approaches +1, a positive relationship
is implied, meaning the dependent variable (y) increases as the independent variable (x) increases.
(r) approaches –1, a negative
, or inverse, relationship is implied, meaning the dependent variable (y) decreases as the independent variable (x) increases.
1. Economic plausibility
Explain and give examples of non-linear cost functions
A non-linear cost function is a cost function
in which the graph of total costs versus the level of a single activity is not a straight line within the relevant range.
Step cost functions
Economies of scale
Example: Economies of scale arises when unit costs fall as output increases SLIDE 90/93
$50 to produce up to 10 copies of a magazine --> after 10 copies the average production cost
decreases from $5 to $2 a copy
because the main elements of the costs in producing a magazine (editorial and design) are unrelated to the number of magazines produced
on direct materials purchases produce a lower cost per unit purchased with larger orders.
is a cost function in which the cost is constant over various ranges of the level of activity, but the cost increases by discrete amounts as the level of activity changes from one range to the next.
How can food retailers profitably sell food at low prices? à Major food retailers have buying power when
purchasing supplies from farmers and other suppliers