Chapter 6: Estimating Cost Functions Answers to Review Questions R6.1. A: Estimation is prediction or forecast of resources (time, cost and materials) required to achieve or obtain an agreed upon scope of a project or a volume of a product. R6.2. A: It is an indication of the degree to which the final cost outcome for a given project will vary from the original estimate cost. R6.3. It is an amount added to an estimate to allow for items, conditions or events for which the state occurrence or effect is uncertain and that experience shows will likely result in additional costs. R6.4. It is an algorithm or formula that is used to perform the costing operation. CER’s relate (Cost, Time, and Quantity) with quantity scope, execution strategies or other defining elements. . R6.5. A regression line intercepts the Y-axis at the fixed level. R6.6
The account analysis approach requires that an experienced cost analyst to review the cost accounts and determine whether the costs in each account are fixed or variable. Then, the sum of all costs identified as fixed will be the estimate of total fixed costs. To determine the variable cost per unit, the sum of all costs identified as variable is divided by the measure of activity (e.g., number of units).
R6.7. The high-low method uses the historical data during several reporting periods; but, it uses only the data points corresponding to the highest and lowest levels of activity (output) to derive the algebraic equation for the total cost. The slope of the resulting equation is the variable cost and its y-intercept is the fixed cost. It ignores all other data points than the two extremes ones. R6.8. Account analysis method of cost estimation is used to classify cost accounts as fixed or variable with respect to specific output level. AR6.9. When the cost is constant (fixed) the slope coefficient of a cost function equal to zero.
