P1.B.3 Forecasting Techniques

Question 1

Simple Regression Equation: Data Analysis

P1.B.3 Forecasting Techniques

Answer 1

y = a + bx

y = total cost (dependent)
x = cost driver (independent)
a = fixed costs (y-intercept)
b = variable cost per unit (slope)

a = [(sum y)(sum x2)-(sum x)(sum xy)] / n(sum x2)-(sum x)2

b = [n(sum xy)-(sumx)(sum y)] / n(sum x2)-(sum x)2

Question 2

What is Multiple Regression?

P1.B.3 Forecasting Techniques

Answer 2

1. Derived when dependent variable is affected by more than one independent variable
2. Useful when change in total costs is attributed to several cost drivers

Question 3

Expected Value of Random Variables: Decision Theory

P1.B.3 Forecasting Techniques

Answer 3

Sum of product of expected outcome & respective probabilities.

1. Probability distribution
2. Weighted average of results
3. Sum of probability = 100%

Question 4

Cumulative Average - Time Learning Model: Model Building

P1.B.3 Forecasting Techniques

Answer 4

1. Constant % decline in average time per unit occurs every time the quantity of units produced is doubled
2. Reflects the reduction in time required by someone performing a task as they learn how to do the task

Question 5

Statistical Reliability of Each Independent Variable

Answer 5

t-value: relationship between x and y

t-value lower than 2 suggests there is little to no statistical relationship between the two variables

Question 6

Regression Analysis Benefits & Limitations

P1.B.3 Forecasting Techniques

Answer 6

Benefits

1. Quantitative and objective
2. Separates mixed costs into variable and fixed costs

Limitations

1. Can’t be used if historical data not available
2. Can be obsolete if data isn’t relevant to company’s current situation

Question 7

Learning Curve Analysis Benefits & Limitations

P1.B.3 Forecasting Techniques

Answer 7

Benefits

1. Helps in estimating costs over life of object or project
2. Labor requirement estimation
3. Labor cost standards can be adjusted accordingly

Limitations

1. Suitable for labor intensive operations involving repetitive tasks
2. Learning rate is assumed to be constant
3. Not all direct labor costs are attributable to learning

Question 8

Expected Value Technique Benefits & Limitations

P1.B.3 Forecasting Techniques

Answer 8

Benefits

1. Easy and simple
2. Easier interpretation

Limitations

1. Are subjective
2. Info not reliable, can’t be used.