Application of Quantitative Methods to Management Accounting Flashcards
COST DRIVER
Any factor whose change causes a change in the total cost of an activity.
COST BEHAVIOUR
The relationship between a cost and the level of activity or cost driver.
REGRESSION EQUATION
Measures relationship between a dependent variable (total cost) and potential independent variables (activity measures or cost driver)
A single regression equation only includes on independent variable.
If there is only one independent variable and the relationship is linear, the regression line will be straight.
Y = a +bX
SINGLE REGRESSION LINE
Y = a + bX Y = total cost for te period at an activity level of x a = total fixed cost for the period (the intercept on the vertical axis) b = average variable cost per unit of activity (the slope of the line) X = volume of activity level or cost driver for the period
COST ESTIMATION
The process of determining the cost behaviour of a particular cost item.
- Engineering methods
- Inspection of the accounts method
- Graphical or scatter graph method
- High-low method
- Least-square method
ENGINEERING METHODS (cost estimation)
Studying processes that result in the incurrence of a cost.
Using time and motion studies (or task analysis), where employees are observed as they undertake tasks to record the steps for each task and the times, as a basis for estimating cost behaviour.
EXPENSIVE AND TIME CONSUMING
When are engineering methods useful?
When there is no reliable past data on which to base cost estimates.
Most effective when there is a direct relationship between inputs and outputs.
Appropriate for estimating the costs associated with direct labour, materials and machine time.
INSPECTION OF THE ACCOUNTS
Managers and accountants inspect each item of expenditure within the accounts for a particular period, and then classify each item of expense as fixed, variable or a semi-variable cost.
SUBJECTIVE: dependent on the discretion of accountants.
GRAPHICAL OR SCATTER GRAPH METHOD
Past observations are plotted on a graph and a line of best fit is drawn.
Plot totals costs for each activity level (y = total costs, x = activity level) and then draw a straight line to fit the scatter of plotted points by visual approximation.
SIMPLE
SUBJECTIVE: different people will draw different lines with different slopes, giving different slopes, giving different estimates.
HIGH-LOW METHOD
- Plot points on a scatter graph.
- Extract data for high and low volume production.
- Use these two levels of activity to compute the variable cost per unit, the fixed cost and express the costs in equation form.
Y = a + bX
Unit variable cost = change in cost / change in units
Fixed cost = total cost - total variable cost
LEAST SQUARE METHOD
- Draw a regression line in a way that the sum of the squares of the vertical deviations from the line is the smallest.
- Mathematical method of determining the regression line of best fit.
What factors must be considered when using past date to estimate cost functions?
- Identify the potential activity bases (cost drivers). The objective is to find the cost driver that has the greatest effect on cost.
- Ensure that the cost data and activity measures relate to the same period. Some costs lag behind the associated activity measures (e.g. wages paid for the output of a previous period).
- Ensure that a sufficient number of observations are obtained.
What is the learning curve effect?
Changes in the efficiency of the labour force as workers become more familiar with the tasks they perform.
Renders past information unsuitable for predicting future labour cost.
ASSUMPTION: The improvement is regular and it could be reduced to a formula.
Learning Curve Formula
Yx = aX^b
Yx = average time per unit of cumulative production to produce X units.
a = time required to produce the first unit of output.
X = number of units of output.
b = ratio of logarithm of the learning curve improvement rate divided by the logarithm of 2.
RELEVANT COSTS IN DECISION MAKINg
- Ignore sunk cost (fixed costs)
- Consider opportunity cost (variable costs)
