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Antitrust Laws
Antitrust laws are an outgrowth of the early years of the Industrial Age in the United States when a small number of powerful businessmen used any tactic at their disposal to force competitors out of business. Because such business practices were not in the best interest of the country, federal legislation was passed that prohibits the formation and continuation of monopolies except when in the best interest of the public.
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Predatory Pricing
Predatory pricing is the act of pricing a product so low that the only logical explanation is that the pricing is designed to drive competitors out of business. The operational definition is whether a company prices its products or services below average variable cost and, if so, predatory pricing is present.
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To use in many different types of cost-volume-profit (CVP) analyses. For use in flexible (dynamic) budgeting activities. For use in standard costing, in particular, MOH variance analysis. For use in determining Manufacturing Overhead (MOH) application rates. For use in litigating or defending a wide variety of costrelated legal issues:
Federal antitrust cases - predatory pricing. Alleged contractual violations. Measurements of damages for lost sales/profits/etc.
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FIXED COSTS: Costs that fundamentally are not driven by changes in volume. Y = Total Cost Y = a, where a is the amount of fixed cost Common examples of fixed costs - Depreciation, Property taxes, Supervisor salaries
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VARIABLE COSTS: Costs that change directly and proportionately with the volume of activity. Y = bX, where b is the slope of the line (the increase in cost relating to the increase in volume) and X is the measure of the volume of activity. Common examples of variable costs - Direct materials, Direct Labor, Sales Commissions
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SEMI-VARIABLE COSTS: Costs that change but not proportionately with the volume of activity. Learning curve costs - are costs that increase at a decreasing rate with the volume of activity. When graphed, learning curve costs slope upward and to the right but not in a straight line; Instead they curve downward.
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Relevant Range: Cost behavior estimates are usually based on historical cost observations and analyses. If cost behavior characteristics are projected outside of the observed range of activities, the projections may not be accurate. Time assumption: As time passes, the business environment changes, and cost behavior may change as well.
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Most organizations have very little cost information that is captured and reported by type of cost behavior pattern. In order to determine cost behavior characteristics, accountants must use a variety of methods to estimate cost behavior patterns.
EXPERIENCE: Often a working knowledge of a firms accounting system will provide some knowledge of the nature of cost behavior in the firms accounting system. Merely trying to separate all current cost accounts into fixed and variable costs is usually not a very accurate method of estimating cost behavior.
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PLOTTING COST DATA: A picture is worth a 1,000 words, is an old saying that has some merit in describing cost behavior patterns.
It is really easy now to take accounting cost data and use many different software packages to plot data. The resulting graphs can provide a good idea of the general nature of the cost volume relationships, although precise descriptive cost models are not provided.
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HIGH-LOW METHOD: The highest and lowest costs are identified along with their related volume levels. These are used to estimate fixed and variable costs: Example: Variable cost = $300,000 - $280,000 100,000 un. - 90,000 un. = $20,000 = $2.00 / unit 10,000 un.
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REGRESSION/CORRELATION ANALYSIS
An analytical tool for measuring the degree of association between two or more variables.
It is a two-step process:
Regression measures the nature of the association between the variables. Correlation measures the strength of the association between the variables.
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Regression/Correlation Analysis
TYPES OF REGRESSION: Simple Linear Regression or Bi-Variate Regression
Two variables:
A dependent variable which is usually cost in our analyses. An independent variable or predictor variable which is usually the measure of the volume of activity in our analyses.
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Regression/Correlation Analysis
A positive (+) value for b indicates that the dependent and the independent variables are positively correlated (moving in the same direction). A negative (-) b value indicates that the dependent and the independent variables are moving in opposite directions. (Example, and increase in interest rates is related to a decrease in construction costs.) The a value indicates point where the regression line crosses the Y axis. What does a negative? positive? value for a indicate?
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Regression/Correlation Analysis
The coefficient of determination measures the amount of explained variance (i.e. Of the total variance of the dependent variable about its mean (average) value, the amount of that variance that can be explained by changes in the volume of activity is measured by the coefficient of determination.) For example, a coefficient of determination of .84 or 84% means that 84% of the dependent variables total variance can be explained by changes in the volume of activity. Association vs. Causation - Regression/correlation analysis shows the degree of association between variables, but it does not prove causation.
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Regression/Correlation Analysis
Standard Error of the Estimate: Indicates the variability of the data used in the regression calculations. The greater the variability of the data, the less precision that results from estimates made from the regression data.
Point estimates are made and confidence intervals are used to achieve desired levels of precision. t-tables and z tables: Used to provide desired precision levels.
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Virtually all cases in which liability is found has a damages phase to the case. Most scenarios require an analysis of what would have happened absent the act that caused the liability.
Regression analysis gives an expert a foundation from which to develop and support costs behavior assertions. There is a solid analysis approach which describes the nature of the analysis so the expert can present his/her findings clearly to the jury/judge in order to gain support of the experts opinions.
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Regression/Correlation Analysis
USING REGRESSION/CORRELATION ANALYSIS MULTIPLE REGRESSION
More than one independent variable. Most medical research uses multiple regression. Still one a value and r value.
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