Cost Accounting 2 Midterm

Ch 10 - What are linear cost functions, and how do they behave

Within the relevant range, total cost is a straight line: Y = a + bX. a = fixed cost; b = variable cost per unit. Types: variable, fixed, mixed.

Ch 10 - Why is causality important in estimating cost functions

A cost driver should have a cause-and-effect relationship with cost. Correlation alone does not prove an economically plausible cost relationship.

Ch 10 - What are the four methods of cost estimation

Industrial engineering; conference; account analysis; quantitative analysis (high-low and regression). Using multiple methods provides a cross-check.

Ch 10 - What are the steps in quantitative cost estimation

Choose dependent variable; identify cost driver; collect data; plot data; estimate cost function; evaluate the cost driver/cost function.

Ch 10 - What are nonlinear cost functions and learning-curve effects

Nonlinear costs do not form a straight line. Learning curves mean labour-hours per unit decline as production increases.

Ch 10 - Cumulative average-time vs incremental unit-time learning model

Cumulative average: average time/unit falls by a constant % when quantity doubles. Incremental: time for the last unit falls by a constant %.

Ch 10 - What is the impact of time as a cost driver

Relevant cost = incremental cost to improve time. Benefits = cost savings + increased contribution margin from higher revenues.

Ch 10 - What are the four costs of quality

Prevention; appraisal; internal failure; external failure. Think: prevent → detect → defect before shipping → defect after shipping.

Ch 10 - What quality measures/tools can managers use

Measures: complaints, defects, rework, training. Tools: control charts, Pareto diagrams, cause-and-effect diagrams.

Ch 10 - How are regression models interpreted

Regression relates independent variable(s) to a dependent variable. A low P-value suggests the independent variable is useful in the cost function.

Ch 10 - What is a learning curve model

It measures how labour-hours per unit decline as workers gain experience. Used to predict labour-hours and labour costs as production increases.

Ch 13 - What are the three major influences on pricing decisions

Customers; competitors; costs. Customers/competitors affect demand; costs affect supply. Time horizon affects which costs are relevant.

Ch 13 - Target pricing vs cost-plus pricing

Target pricing: market/customer price → target cost. Cost-plus: cost base + markup → price, then adjusted for customer and competitor reactions.

Ch 13 - How do companies make long-run pricing decisions

Consider all future variable costs + fixed costs + a target return on investment.

Ch 13 - How do companies price products using target costing

Set target price and target operating income → determine target cost → use value analysis/value engineering to achieve the target cost.

Ch 13 - How do target and cost-plus pricing support long-term profitability

Customer/market determines target price; target ROI determines required operating income; together they determine the full product target cost.

Ch 13 - Customer life-cycle costing vs life-cycle pricing

Customer life-cycle: value/cost through acquisition, maintenance and disposal. Life-cycle pricing: include all company value-chain costs over the product life.

Ch 14 - How do competitive forces help identify strategy

Value leadership fits differentiated products customers pay a premium for. Cost leadership fits commodity markets with substitutes and many competitors.

Ch 14 - What is reengineering

Fundamental examination/redesign of business processes to improve performance by reducing costs and improving quality.

Ch 14 - What are the four Balanced Scorecard perspectives

Financial, customer service; internal business processes; learning and growth. FCIL

Ch 14 - How is strategic success measured

Use growth, price-recovery and productivity components of operating-income change. Results should align with the company's strategy.

Ch 14 - How are Balanced Scorecard expectations achieved

Align financial management, customer relations/service, internal business processes, and learning and growth with the organization's strategy.

Ch 22 - What is a control system and its goal

A control system organizes elements into an orderly structure. It must comply with legislation and should nurture and sustain good governance.

Ch 22 - How are transfer-pricing methods ranked

Arm's-length principle. Preferred: current market price. Alternatives: cost-based and negotiated transfer prices.

Ch 22 - Benefits of transferring at current market price

Can promote optimal company-wide decisions when the intermediate market is competitive, products/prices are comparable, and subunit interdependence is minimal.

Ch 22 - Why can cost-plus transfer pricing cause suboptimal decisions

Buyer may treat seller's fixed costs + markup as variable, making an outside supplier look cheaper even when company-wide savings will not occur.

Ch 22 - What constraints apply to transfer prices and what is minimum TP

Tax rules restrict transfer prices. Minimum TP = incremental cost per unit + opportunity cost per unit to the supplying division.

Ch 23 - What financial and nonfinancial measures evaluate performance

Financial: ROI, RI, EVA. Nonfinancial examples: customer satisfaction, defects, productivity. Use both to evaluate managers/subunits.

Ch 23 - What is the current cost of an asset

The cost today of purchasing an identical asset. Historical cost uses original cost net of accumulated depreciation.

Ch 23 - Why is comparing divisions in different countries difficult

Legal, political, social, economic and currency differences. ROI may need adjustment for inflation and exchange-rate changes.

Ch 23 - How do salaries and incentives work together

Incentives reward performance but expose managers to uncontrollable risk. Compensation balances incentive benefits with the cost of imposing risk.

Ch 23 - What are the four levers of control

Diagnostic control systems; boundary systems; belief systems; interactive control systems.

Ch 23 - Why implement the four levers of control

To pursue performance, support ethical behaviour, inspire employees, and respond to strategic threats and opportunities.

Ch 23 - What should managers check before Power BI performance analysis

Ensure data is clean and accurate; create appropriate groupings/calculations; choose visualizations that provide useful insights.

Ch 11 - How are relevant and irrelevant information distinguished

Relevant costs/revenues occur in the future AND differ among alternatives. If they do not differ, they are irrelevant.

Ch 11 - Short-term vs long-term relevant production costs

Long-term decisions include strategic elements and lasting financial impacts. Short-term decisions usually relate to individual projects and terminate.

Ch 11 - Relevant vs irrelevant, quantitative vs qualitative information

Relevant information belongs in the decision. Quantitative = financial/numerical data; qualitative = contextual/descriptive data.

Ch 11 - What is opportunity cost and why is it used

Opportunity cost = contribution to income forgone by choosing one alternative and rejecting another.

Ch 11 - Explain theory of constraints and managing bottlenecks.

Choose the product with highest CM per unit of limiting resource. Keep bottlenecks busy and increase their efficiency/capacity to raise throughput CM.

Ch 11 - Why is equipment book value irrelevant in replacement decisions

Book value is a past cost (sunk cost), so it should not affect the current replacement decision.

Ch 11 - What is needed to determine an optimal production schedule

Identify objectives and constraints, gather relevant data, and create the objective and constraint functions.

Ch 11 - Why is Solver useful for an optimal production schedule

Solver handles changes quickly: update the Excel data, rerun Solver, and obtain a new optimization schedule.

Ch 12 - How can management accountants use data to create value

7 steps: understand problem; obtain/explore data; prepare data; build model; evaluate; visualize/communicate; deploy.

Ch 12 - Will solving the problem create value, and are relevant data available

Assess whether the problem creates value; avoid target leakage; ensure data are objective, correctly measured, and relevant to the target.

Ch 12 - Strengths and weaknesses of a decision tree

Strength: flexible fit to training data. Weakness: may fit noise as well as signal (overfit), reducing performance on new data.

Ch 12 - What is pruning and why is it useful

Pruning limits tree depth. It reduces overfitting by preventing the model from capturing too much dataset-specific noise.

Ch 12 - How do managers choose full vs refined decision trees

Balance model complexity, interpretability, generalization ability, and the characteristics of the dataset/problem.

Ch 12 - How do managers choose among data science models

Cross-validate on new data; compare predictive accuracy/likelihood; choose the model that best balances bias and variance.

Ch 12 - What happens to bias and variance as decision-tree depth increases

Greater depth → lower bias and higher variance. Validation results should also be similar to results on an unseen hold-out sample.

Ch 12 - How do management accountants help evaluate data science models

Assess likelihood, confusion matrix/ROC, economic sense, underlying reality and payoff matrix; then visualize and communicate insights.