Cost Behaviour

Question 1

Steps for the High-Low Method?

Answer 1

1. choose highest and lowest output levels
2. Minus from each other, do the same with the costs
3. Divide the difference in cost by the difference in output= VC per unit
4. Then times the VC by the lowest value and subtract from total to get fixed costs

Question 2

What are high-low method advantages?

Answer 2

simple to calculate and explain, only requires 2 pieces of data

Question 3

What are high-low method disadvantages?

Answer 3

data points used by definition are extreme points, may not be representative

Question 4

What is regression analysis?

Answer 4

Line of best fit- How to calculate:

1. plotted graph and draw the line of best fit
2. estimate fixed costs as where the line crosses the Y axis
3. estimate VC by using a point that is fairly close to the line (find output and TC and minus fixed costs and divided by output to get VC per unit)

Question 5

Advantage of regression analysis?

Answer 5

takes all observations into account

Question 6

Disadvantage of regression analysis?

Answer 6

uses historic data, estimates which may not be accurate, assumes output/activity solely determine costs

Question 7

What is positive correlation?

Answer 7

x and y change together in same direction

Question 8

Negative correlation?

Answer 8

x and y change together in opposite directions

Question 9

Explain the correlation coefficient (r)?

Answer 9

indicates strength of relationship between variables (output and total cost)
always between -1 and +1
closer to 1, closer line of best fit it to actual variables
if 1= perfect straight line

Question 10

What is the coefficient of determination?

Answer 10

r(2)- indicates the proportion of the change in the Y (dependent) variable as explained by change in the x (independent variable)
always between 0 and 1
ie 0.9 would mean 90% of change in total cost is explained by change in output

Question 11

Advantages of regression analysis?

Answer 11

takes all pairs of data into consideration, statistically accurate link between output and cost

Question 12

Disadvantages of regression analysis?

Answer 12

relies of historical data, assumes linear relationship between output and cost, may suggest cause and effect where there isnt one, dependent variable may be affected by many variables not just one