Question

Which of the following is incorrect regarding cost behavior​ equations? A. The​ y-intercept value in a cost behavior equation represents total expected costs when the activity level is zero. B. The relevant range is defined as the range of activity over which a cost behavior equation is valid. C. If costs are​ nonlinear, managers can develop cost behavior equations by defining multiple relevant ranges. D. If a data set only contains two data​ points, the high low method and regression analysis will yield different cost behavior equation. E. The account analysis method is considered the most subjective tool available for developing a cost behavior equation.

Answer 1

The incorrect statement regarding cost behavior equations is D, as both high-low method and regression analysis will yield the same equation with only two data points.

Step-by-step explanation:

The statement which is incorrect regarding cost behavior equations is D: If a data set only contains two data points, the high-low method and regression analysis will yield different cost behavior equations. In fact, when using only two data points, both methods will yield the exact same equation. This is because with two points, there's only one possible straight line which can connect them, indicating a direct relationship between the cost and the activity level.

Option A: The y-intercept value indeed represents total expected costs when the activity level is zero, which encompasses all fixed costs. Options B and E are also correct as they describe the characteristics and methodologies of cost behavior analysis accurately.

Option C is correct because in cases of non-linear costs, it is possible to develop multiple cost behavior equations each for different relevant ranges to approximate the actual cost behavior more precisely.

Answer 2

E) The account analysis method is considered the most subjective tool available for developing a cost behavior equation.

Step-by-step explanation:

Cost behavior equations show us how costs change depending on the output level. Generally costs equations follow this model TC = F + VX, where TC is total cost, F is fixed costs, V is variable cost and X is output level. Generally units are located on the X axis and costs ($) in the Y axis.

The account analysis method estimates different costs associated with a product and divides them into variable, fixed and mixed. There is nothing subjective with this method, since each type of classification of costs has a reason behind it, e.d. fixed costs do not vary as the output level varies, variable costs on the other hand vary as the output level varies.