Cost Estimation Solutions to Review Questions a4. ‘Common methods of cost estimation are engineering analysis, account analysis, and ‘Statistical analysis of historical data #2. Engineering estimates are based on design specifications and industry and firm cost Standards a3. Engineering is probably helpful when: + Attempting to compare company operations with standards: « Trying to estimate costs for projects that have been taken in the past (eg, New construction, major special orders such a5 defense tems); « Considering alternatives to present operations. such as assembly line Reorganization and similar changes, where & would be too costly to carry out the (Change and then see if twas cost-effective. sa. The biggest problem would be encountered from the indiscriminate use of regression Methods is that the model may not have any logical foundation. This may result in a model That appears sound on a statistical basis, but with no logical relationship between ¥ and x's, The mode! may not continue to provide good predictions. A number of spurious correlation And regression studies have been presented in the iterature. For example, a simple run of Correlations between average education levels in the US and US inflation rates might Lead one 10 concluded that education causes inflation(Chapter 115 - Cust Fostimastiom os. The longer the data series used in the analysis, the easier it is to see a trend in the data When using the scattergraph method. When using any method, the longer the data senes, The greater the likelihood of having the widest possible range of observations Statistical methods, the more observations, the smaller the standard deviations and the Tighter the resuking estimates. On the other hand, the longer the data series, the more possibiliy That operating conditions, technology. prices and costs have changed. Thus as the order data May not be wery representative of the operations expected over the period for which the Estimate is made 56. Simple regression assumes a single independent variable (eg, cost driver) and multiple Regression presentation two of more independent variables. 5-7. Adjusted R” Considers the number of independent variables used in the estimation and -adjustel the FP To reflect the use of additional variables 5-8. Accurate cost based improvement decision-making Company valueSolutions to Critical Analysis and Discussion Questions 59. Direct tabor would be fixed if a union contract limited the company’s ability to Isy off ‘Unneeded personnel or if management were contemplating a change in facilities but Maintaining the same labor force. 8. Equipment depreciation would be = variable cost if computed on a unit-ofipreduction Basis. ‘C. Utilities are variable above the minimum, but # the company’s usage falls to the minimum ‘Or below, the costs would be fixed. D. Supervisory salaries Regular increase in steps. If the activity range is narrow, the costs is fixed; but if the range is wide encugh 50 that several "steps" would fall within the range, Then the costs would appear to be variable. E. A certain (fixed) level of spoilage may be a fact of life in some operations. For example. Certain waste that occurred in setting up machines. 5-10. Account analysis ineorporating people the judgment of the executive where experience would be Quite a. As 5 result t may include factors that are not quite captured in statistical Models. The best overall cost estimate may be derived by considering bath account Analysis results and statistical results 5-11. Data in the historical accounting records should only be used insofar as they are likely to Continue in the future Historical date without adjustment is likely to result in incomest estimates Atternative is to use the costs that are expected to be inourred during the period for which The cost estimate is prepared e412, (One may: + Adjust the data to present all costs in some common dollar measure; = Use activity measures that are expressed in dollars that move with the price change Effects in the cost to be estimated, + Use a multiple regression approach with a suitable price index 25 one af the Predictor variables