Question

Which of the following statements is true of the account analysis method of estimating costs?

1) It can be used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed.
2) It is useful in determining the cost of manufactured items, where the process stays the same from unit to unit.
3) It is most frequently used for manufacturing processes, where there is a direct link between materials and labor inputs with the output.
4) It uses physical observation and analysis to determine what activities, in what amounts, are needed to complete a process.

Answer 1

The correct statement about the account analysis method is that it can estimate costs by classifying ledger accounts as fixed, variable, or mixed. This method is useful for analyzing historical cost data to assist in pricing, budgeting, and decision-making in manufacturing.

Step-by-step explanation:

The account analysis method of estimating costs involves analyzing ledger accounts to classify them as fixed, variable, or mixed. This method is primarily based on the categorization of costs in relation to how they respond to changes in production levels. When utilizing the account analysis method, businesses look at the historical cost data and categorize each expense as either fixed, variable, or mixed. Fixed costs, such as rent on a factory, remain constant regardless of the level of production. Variable costs, on the other hand, fluctuate with production levels. In manufacturing, knowing these costs is essential for pricing, budgeting, and decision-making.

Option 1 is the correct statement regarding the account analysis method: "It can be used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed." The other options describe different cost estimating methods or general principles of cost behavior that are not specific to the account analysis method.