Cost Estimation Steps in Cost Accounting

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What is the purpose of step 3 in the cost estimation process?

To determine the cost drivers of a cost

To collect consistent and accurate data (correct)

To identify unusual patterns in data

To assess the accuracy of the cost estimate

What is the primary advantage of the high-low method?

It uses all the available data points

It requires the study of a graph of the data (correct)

It is more accurate than linear regression

It is less subjective than linear regression

What does the slope of the line (b) represent in the high-low equation?

The number of operating hours

The value of the estimated cost

The fixed quantity for the value of Y when X = 0

The unit variable cost (correct)

What is a disadvantage of the high-low method?

It relies on only two points, and the selection of those two points requires judgment Signup and view all the answers

What is the purpose of step 6 in the cost estimation process?

To assess the accuracy of the cost estimate Signup and view all the answers

What is the measure of the accuracy of the estimation method?

Mean absolute percentage error Signup and view all the answers

What is a limitation of the Sales Value at Split-off method?

Market prices for some industries change constantly. Signup and view all the answers

What is a characteristic of independent projects?

Their cash flows are not affected by the cash flows of other projects. Signup and view all the answers

What is the purpose of capital budgeting?

To identify, evaluate, select, and control capital investments. Signup and view all the answers

What is the net realizable value (NRV) of a product?

The product’s estimated sales value at the split-off point. Signup and view all the answers

What is a characteristic of the Net Realizable Value (NRV) method?

It can be used when joint products cannot be sold at the split-off point. Signup and view all the answers

What is a capital investment?

A project that involves a large expenditure of funds and expected future benefits over a number of years. Signup and view all the answers

What is the term used to describe the situation where the acceptance of one investment alternative precludes the acceptance of one or more other alternatives?

Mutually exclusive projects Signup and view all the answers

What is the primary purpose of using the weighted-average cost of capital (WACC) in capital budgeting?

To determine the discount rate for a project Signup and view all the answers

What is the result of a capital budgeting decision if the net present value (NPV) of a project is greater than zero?

The project is accepted Signup and view all the answers

What is the difference between discounted cash flow (DCF) and non-discounted cash flow (non-D CF) decision models?

DCF incorporates the present value of future cash flows, while non-D CF does not Signup and view all the answers

What is the term used to describe the rate used in capital budgeting for converting future cash flows to a present-value basis?

Discount rate Signup and view all the answers

What is net working capital in the context of capital budgeting?

Current assets minus current liabilities Signup and view all the answers

What does the Internal Rate of Return (IRR) represent?

The rate of return that results in a NPV of zero Signup and view all the answers

What should happen if IRR > WACC?

The proposed project should be accepted Signup and view all the answers

What does the Modified Internal Rate of Return (MIRR) assume?

All positive interim cash flows are reinvested at the WACC Signup and view all the answers

What is the formula for calculating the payback period when cash inflows are equal?

Net initial investment ÷ Annual after-tax cash inflows Signup and view all the answers

What is a strength of the Payback Decision Model?

It is easy to understand Signup and view all the answers

What does a longer payback period indicate?

A higher perceived risk Signup and view all the answers

What is a limitation of the model that does not consider returns over the entire life of the investment?

It fails to consider the time value of money. Signup and view all the answers

Which model takes into consideration the time value of money?

Discounted Payback Model Signup and view all the answers

What is a weakness of the Accounting (Book) Rate of Return (ARR) method?

It does not adjust for the time value of money. Signup and view all the answers

What happens if the discounted payback period is less than the life of the project?

The project will have a positive NPV. Signup and view all the answers

What is a disadvantage of the Discounted Payback Model?

It ignores returns beyond the payback period. Signup and view all the answers

What is a strength of the Discounted Payback Model?

Takes into consideration the time value of money. Signup and view all the answers