Accounting

Accounting

CHAPTER 6
Activity Analysis, Cost Behavior, and Cost Estimation

ANSWERS TO REVIEW QUESTIONS

6-1 Cost behavior patterns are important in the process of making cost predictions. Cost predictions are used in planning, control, and decision making. For example, cost budgets are based on predictions of costs at various levels of activity. Cost control is accomplished by comparing actual costs against budgeted costs, which are based on cost predictions. Cost predictions are also important in decision making, since the desirability of various alternatives often depends on the costs that will be incurred under those alternatives.

6-2 a. Cost estimation is the process of determining how a particular cost behaves.

      b. Cost behavior is the relationship between cost and activity.

      c. Cost prediction is the forecast of cost at a particular level of activity.

      Cost estimation determines the cost behavior pattern, which is used to make a cost prediction about the cost at a particular level of activity contemplated in the future.

6-3 a. Hotel: Percentage of rooms occupied or the number of occupancy-days, where an occupancy-day is defined as one room occupied for one day.

        b. Hospital: Patient-days, where a patient-day is defined as a one-day stay by one patient.

        c. Computer manufacturer: Number of computers manufactured, throughput, engineering specifications, engineering change orders, or number of parts in the finished product.

      d. Computer sales store: Sales revenue.

      e. Computer repair service: Repair calls or hours of repair service.

        f. Public accounting firm: Hours of auditing service provided by each classification of personnel (partner, manager, supervisor, senior accountant, and staff accountant).

  4.       Graphs of the cost behavior patterns are as follows:

      6-5 As the level of activity (or cost driver) increases, total fixed cost remains constant. However, the fixed...