Slide 1

1. Slide # 1

2. Slide # 2 Chapter 2: The Cost Function Learning objectives This slide is entirely automated, with each bullet on a 1.5 second delay.This slide is entirely automated, with each bullet on a 1.5 second delay.

3. Slide # 3 Q1: Different Ways to Describe Costs Costs can be defined by how they relate to a cost object, which is defined as any thing or activity for which we measure costs. The first bullet is automated, then one click is required for each bullet.The first bullet is automated, then one click is required for each bullet.

4. Slide # 4 Q1: Assigning Costs to a Cost Object The �cost assignment� text box is automated. The first click begins the sequence to define direct costs. The second click begins the sequence to define indirect costs. The �cost assignment� text box is automated. The first click begins the sequence to define direct costs. The second click begins the sequence to define indirect costs.

5. Slide # 5 Q1: Direct and Indirect Costs The first primary bullet is automated, and one click is required for every remaining primary and secondary bullet on this slide.The first primary bullet is automated, and one click is required for every remaining primary and secondary bullet on this slide.

6. Slide # 6 Q1: Direct and Indirect Costs

7. Slide # 7 Q1: Linear Cost Behavior Terminology Total fixed costs are costs that do not change (in total) as activity levels change. The first bullet is automated and then one click is required for each subsequent bullet.The first bullet is automated and then one click is required for each subsequent bullet.

8. Slide # 8 Q1: Behavior of Total (Linear) Costs The first click completes the top graph and brings in the first text box, which disappears on the next click. The second click brings in all of the elements on the rest of the slide in an automated sequence.The first click completes the top graph and brings in the first text box, which disappears on the next click. The second click brings in all of the elements on the rest of the slide in an automated sequence.

9. Slide # 9 Q1: Behavior of Total (Linear) Costs The first click brings in all of the elements on the rest of the slide in an automated sequence.The first click brings in all of the elements on the rest of the slide in an automated sequence.

10. Slide # 10 Q1: Total Versus Per-unit (Average) Cost Behavior If total variable costs look like this . . . The top part of the slide is automated. The first click brings in the rest of the elements on the slide in an automated sequence.The top part of the slide is automated. The first click brings in the rest of the elements on the slide in an automated sequence.

11. Slide # 11 Q1: Total Versus Per-Unit (Average) Cost Behavior If total fixed costs look like this . . . The first click brings in the rest of the elements on the slide in an automated sequence. The first click brings in the rest of the elements on the slide in an automated sequence.

12. Slide # 12 Lari�s Leather produces customized motorcycle jackets. The leather for one jacket costs $50, and Lari rents a shop for $450/month. Compute the total costs per month and the average cost per jacket if she made only one jacket per month. What if she made 10 jackets per month? Q1: Total Versus Per-Unit (Average) Cost Behavior

13. Slide # 13 Relevant Question in Sample Quiz1 4. Variable costs a. Do not vary in total within the relevant range b. Do not vary on a per-unit basis within the relevant range c. Vary on a per-unit basis within the relevant range d. Both (a) and (c)

14. Slide # 14 Relevant Question in Sample Exam1 8. The relevant range is defined as a. The period of time over which costs do not change b. The volume of production over which the cost assumptions hold c. The volume of production over which step-wise fixed costs increase d. The time period in which the level of production does not change

15. Slide # 15 Relevant Question in Sample Exam1 Consider the following cost data for the cost object, number of machine setups. Each set of costs (A, B, and C) is from a different type of manufacturing operation and represents the cost behavior for the cost of that company�s machine setups. Number of Machine Setups Cost A Cost B Cost C 0 $ 0 $80 $ 5 10 20 79 37 20 40 82 66 30 60 78 91 40 80 81 123 50 100 79 154 14. Cost C is best described as a. Fixed b. Variable c. Mixed d. Indirect

16. Slide # 16 When costs are linear, the cost function is: TC = F + V x Q, where F = total fixed cost, V = variable cost per unit of the cost driver, and Q = the quantity of the cost driver. Q1: The Cost Function The cost function discussion text box and the graph are automated. The first click brings in the definition of the intercept, which is hidden on the next click. The second click brings in the definition of the slope, which is hidden on the next click. The third click brings in the definition of a mixed cost.The cost function discussion text box and the graph are automated. The first click brings in the definition of the intercept, which is hidden on the next click. The second click brings in the definition of the slope, which is hidden on the next click. The third click brings in the definition of a mixed cost.

17. Slide # 17 Sometimes nonlinear costs exhibit linear cost behavior over a range of the cost driver. This is the relevant range of activity. Q1: Nonlinear Cost Behavior This slide is entirely automated.This slide is entirely automated.

18. Slide # 18 Some costs are fixed at one level for one range of activity and fixed at another level for another range of activity. These are known as stepwise linear costs. Q1: Stepwise Linear Cost Behavior

19. Slide # 19 Some variable costs per unit are constant at one level for one range of activity and constant at another level for another range of activity. These are known as piecewise linear costs. Q1: Piecewise Linear Cost Behavior

20. Slide # 20 Q1: Cost Terms for Decision Making In Chapter 1 we learned the distinction between relevant and irrelevant cash flows. The first primary bullet is automated. The first click brings in the a sequence with the second primary bullet and its secondary bullets. The second click brings in the a sequence with the third primary bullet and its secondary bullet.The first primary bullet is automated. The first click brings in the a sequence with the second primary bullet and its secondary bullets. The second click brings in the a sequence with the third primary bullet and its secondary bullet.

21. Slide # 21 Q1: Cost Terms for Decision Making The first primary bullet is automated; the first click begins the sequence for its two secondary bullets. The second click begins the sequence for the second primary bullet and its two secondary bullets.The first primary bullet is automated; the first click begins the sequence for its two secondary bullets. The second click begins the sequence for the second primary bullet and its two secondary bullets.

22. Slide # 22 A learning curve is the rate at which labor hours per unit decrease as the volume of activity increases the relationship between cumulative average hours per unit and the cumulative number of units produced. Q2: What is a Learning Curve? The first primary bullet with its secondary bullets is automated. The first click begins a sequence to bring in the rest of the elements of the slide.The first primary bullet with its secondary bullets is automated. The first click begins a sequence to bring in the rest of the elements of the slide.

23. Slide # 23 Q2: Learning Curve Example Deanna�s Designer Desks just designed a new solid wood desk for executives. The first desk took her workforce 55 labor hours to make, but she estimates that each desk will require 75% of the time of the prior desk (i.e. �% learning� = 75%). Compute the cumulative average time to make 7 desks, and draw a learning curve. The text box is automated. The first click brings in �first compute r�. The 2nd click computes r. The 3rd click brings in �Then compute the �� The 4th click computes Y. The 5th click brings in the last text box and the graph.The text box is automated. The first click brings in �first compute r�. The 2nd click computes r. The 3rd click brings in �Then compute the �� The 4th click computes Y. The 5th click brings in the last text box and the graph.

24. Slide # 24 Past costs are often used to estimate future, non-discretionary, costs. In these instances, one must also consider: Q3: What Process is Usedto Estimate Future Costs? The top text box is automated. One click is required for each bullet.The top text box is automated. One click is required for each bullet.

25. Slide # 25 Use accountants, engineers, employees, and/or consultants to analyze the resources used in the activities required to complete a product, service, or process. Q4: Engineered Estimates of Cost Functions The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets.The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets.

26. Slide # 26 Review past costs in the general ledger and past activity levels to determine each cost�s past behavior. Q4: Account Analysis Method ofEstimating a Cost Function The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets. The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets.

27. Slide # 27 Q4: Two-Point Method ofEstimating a Cost Function The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets.The first primary bullet is automated. The 2nd click brings in the second primary bullet. The 3rd click brings in the sequence for the secondary bullets.

28. Slide # 28 Q4: Two-Point Method ofEstimating a Cost Function We first need to determine V, using the equation for the slope of a line.

29. Slide # 29 The high-low method is a two-point method the two data points used to estimate costs are observations with the highest and the lowest activity levels Q4: High-Low Method ofEstimating a Cost Function The first primary bullet and its sub-bullet are automated. The first click brings in the second primary bullet and its sub-bullets.The first primary bullet and its sub-bullet are automated. The first click brings in the second primary bullet and its sub-bullets.

30. Slide # 30 A scatterplot shows cost observations plotted against levels of a possible cost driver. Q5: How Does a ScatterplotAssist with Categorizing a Cost? The first bullet is automated. The first click begins the sequence for the remaining text.The first bullet is automated. The first click begins the sequence for the remaining text.

31. Slide # 31 Q5: Which Cost Driver Has the BestCause & Effect Relationship with Total Cost?

32. Slide # 32 Q5: What is the Underlying Cost Behavior?

33. Slide # 33 Q5: What is the Underlying Cost Behavior?

34. Slide # 34 Q5: What is the Underlying Cost Behavior?

35. Slide # 35 Q6: How is Regression Analysis Used toEstimate a Mixed Cost Function? Regression analysis estimates the parameters for a linear relationship between a dependent variable and one or more independent (explanatory) variables. The first bullet is automated. The first click brings in the simple regression bullet. The second click brings in the multiple regression bullet. The third click starts the sequence to show the regression equation.The first bullet is automated. The first click brings in the simple regression bullet. The second click brings in the multiple regression bullet. The third click starts the sequence to show the regression equation.

36. Slide # 36 Q6: How is Regression Analysis Used toEstimate a Mixed Cost Function? We can use regression to separate the fixed and variable components of a mixed cost. The first text box and the regression equation are automated. The 1st click brings in the Yi definition. The 2nd click brings in the Xi definition. The 3rd click brings in the epsilon definition. The 4th click brings in the slope text. The 5th click brings in the intercept text. The first text box and the regression equation are automated. The 1st click brings in the Yi definition. The 2nd click brings in the Xi definition. The 3rd click brings in the epsilon definition. The 4th click brings in the slope text. The 5th click brings in the intercept text.

37. Slide # 37 Goodness of fit Q6: Regression Output Terminology: Adjusted R-Square One click is required for each of the three secondary bullets.One click is required for each of the three secondary bullets.

38. Slide # 38 Q6: Regression Output Terminology: Adjusted R-Square This slide is entirely automated.This slide is entirely automated.

39. Slide # 39 Q6: Regression Output Terminology: Adjusted R-Square This slide is entirely automated.This slide is entirely automated.

40. Slide # 40 Statistical significance of regression coefficients Q6: Regression Output Terminology: p-value and t-statistic. This slide is entirely automated.This slide is entirely automated.

41. Slide # 41 Q6: Regression Output Terminology: p-value and t-statistic. This slide is entirely automated.This slide is entirely automated.

42. Slide # 42 Q6: Interpreting Regression Output

43. Slide # 43 Q6: Interpreting Regression Output

44. Slide # 44 Carole�s Coffee asked you to help determine its cost function for its chain of coffee shops. Carole gave you 16 observations of total monthly costs and the number of customers served in the month. The data is presented below, and the a portion of the output from the regression you ran is presented on the next slide. Help Carole interpret this output. Q6: Regression Interpretation Example This slide is entirely automated.This slide is entirely automated.

45. Slide # 45 Q6: Regression Interpretation Example

46. Slide # 46 Q6: Regression Interpretation Example

47. Slide # 47 Q7: Considerations When UsingEstimates of Future Costs The future is always unknown, so there are uncertainties when estimating future costs. This slide is entirely automatedThis slide is entirely automated

48. Slide # 48 Q7: Considerations When UsingEstimates of Future Costs The data used to estimate past costs may not be of high-quality. The first primary bullet and its secondary bullets are automated. The first click starts the sequence for the rest of the slide.The first primary bullet and its secondary bullets are automated. The first click starts the sequence for the rest of the slide.

49. Slide # 49 Relevant Question in Sample Quiz1 5. The major disadvantage of the high-low method is that a. It uses the two most extreme data points in determining a cost function b. It is difficult to calculate c. It is difficult to understand d. It involves more judgmental factors than do other methods

50. Slide # 50 Relevant Question in Sample Exam1 9. Estimating a cost function using past cost data to help determine future costs is useful if a. Past costs are irrelevant and highly discretionary b. Past costs are irrelevant and not discretionary c. Past costs are relevant and highly discretionary d. Past costs are relevant and not discretionary 10. The account analysis method estimates cost functions a. at a high cost, which renders it seldom used b. in a manner that cannot be usefully combined with any other cost estimation methods c. using time-and-motion studies d. by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis

51. Slide # 51 Relevant Question in Sample Exam1 11. Managers analyze production activities and assign costs based on the estimated amount of resources used when they use this method. a. A scatter plot b. The high-low method c. Regression analysis d. Engineered estimate of cost 13. Simple regression analysis output produces a variety of information and statistics. Which of the following statistics provides information for fixed costs? a. T-statistic and p-value for the alpha coefficient b. T-statistics for alpha and beta coefficients c. Adjusted R-square d. P-values for alpha and beta coefficients

52. Slide # 52 Relevant Question in Sample Exam1 The Barnett Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Barnett Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Cost Hours $24,900 5,250 24,000 5,500 36,400 7,500 44,160 9,750 45,000 9,500 12. What is the cost function? a. y = $4,875 + $5.25X b. y = $41,900 + $0.23X c. y = $2,430 + $4.28X d. y = $43,191 + $0.19X