1.3 Measurement of Cost Behaviour

Question 1

What are ways in which a manager can influence cost behavior?

1.
2.
3.
4.

What is important for them to evaluate?

Answer 1

• decisions along the value chain for product and services
• decisions about capacity (e.g. inventory or production)
• technology decisions
• ## cost control incentivesimportant to consider cost and benefits of each decision (e.g. impact it has on flexibility in meeting changing demand)

Question 2

What are….

1. Comitted FC?
2. Discretionary FC?

Answer 2

1. they arise from having facilities, equipment and basic organization
2. • Costs determined by management as part of periodic planning process in order to meet organizations goals
     - no obvious relationship with levels of capacity or output activity
     - Each planning period, mgmnt determines how much to spend on discretionary items -> costs are fixed until next planning period
     - Can also be changed even within budget period, if other spending levels are desirable

Question 3

Why does it make sense to estimate/ predict costs as a function of approrpiate cost drivers?

1.
2.

Answer 3

• allwows for planning and controlling organizations activities
• (better) operating, marketing and production decisons

Question 4

How can we determine costs as a cost function?

1. First step
2. Second Step

Answer 4

1. measure cost behavior as a function of appropriate cost drivers
2. use these cost measures to estimate future costs at expected levels of cost driver activity

Question 5

What are the Requirements for a Cost function?

1.
2.

Answer 5

• plausible (believable, plausible relationship between cost driver and resource cost)
• reliable: its estimates of costs at actual levels of activity mus reliably conform with actually observed costs

Question 6

when we want to choose a cost function we first need to choose cost drivers.
when choosing cost drivers we do an activity analysis.
What is that?

Answer 6

• process of identifying appropriate cost drivers and their effects on the costs of making a product or providing a service

Question 7

Methods of Measuring Cost Functions | What is an Account Analysis?

1.
2.
3.

Answer 7

• Classifies each account as a Variable or Fixed Cost
• Selects plausible cost driver to explain Variable Cost
• Calculate estimated Variable Cost and Estimated Fixed Costs

Question 8

Methods of Measuring Cost Functions | What is a Regression Analysis?

1.
2.
3.

Answer 8

• Measures cost function more objectively, by using statistics to fit cost function to all the data
• Use of observed data points to estimate VC and FC
• Measures cost behavior more reliably than other cost measurements methods
• Provides quality measure for appropriateness of the cost drivers

Question 9

What is an activity analysis used for?

Answer 9

• used by managers to identify appropriate cost drivers