Ch 10 Flashcards
2 assumptions managers use to estimate cost functions?
1 variations in level of single activity/or cost driver
Explain variations in total costs
2 cost behavior is approximated by linear cost function
Within relevant range
Cost function
Mathematical description of how cost changes with
Changes of level of activity relating to that cost
Linear cost function, represented graphically?
Total cost vs. level of single activity related to cost
Is straight line within relevant range
Slope coefficient
Amount by which total cost changes when
1-unit change occurs in level of activity
Constant AKA intercept
Fixed cost
Intercepts with y-axis at its constant value
Mixed cost AKA Semivariable cost
Cost has both fixed and variable elements
In the equation y = $2x + $3000, what value is the intercept and what is the slope coefficient?
Intercept = $3,000
Slope coefficient = $2
Cost estimation
Measures relationship based on data from past costs
And related level of activity
Cost predictions
Forecasts of future costs
3 ways a cause and effect relationship might arise?
1 physical relationship btw level of activity and costs
2 contractual arrangement
3 knowledge of operations
Industrial engineering method AKA Work-measurement method estimates cost functions…
by analyzing relationship Btw/ inputs
and outputs in physical terms
Conference method, Estimates cost functions…
on basis of analysis + opinion Of costs and their drivers
from various Company departments
Account analysis method, estimates cost functions…
By classifying various cost accts. as variable, fixed
Or mixed with respect to identified level of activity
6 steps in estimating cost function using quantitative analysis?
1 choose dependent variable
2 identify independent variable or cost driver
3 collect data on dependent variable and cost driver
4 plot data
5 estimate cost function
6 evaluate cost driver of estimated fct.
Dependent variable
Cost to be predicted and managed
depends on cost fct. being estimated
Independent variable
Level of activity or cost driver
is the factor used to predict the dependent variable (costs)
High low method
Uses only highest and lowest values of cost driver w/in
The relevant range
and their respective costs to estimate the slope coefficient
And the constant of the cost function
Slope coefficient calculation
Slope coefficient =
(cost of highest cost driver - cost of lowest cost driver)/
(highest - lowest cost driver)
Regression analysis
Statistical method that measures avg. amt. of change
In dependent variable associated w/ unit change in 1
Or more independent variables
Simple regression analysis
Estimates relationship btw dependent variable
And 1 independent variable
Multiple regression analysis
Estimates relationship btw dependent variable
And 2 or more independent variables
Residual term
Measures vertical difference
Measures distance btw actual cost and estimated cost
For each observation of cost driver
3 criteria used in picking cost drivers?
1 economic plausibility
2 goodness of fit
3 significance of independent variable
Nonlinear cost function (based on level of single activity)
Fct where graph of total costs is not straight line
W/in relevant range
Step cost function, is a cost function in which the…
Cost remains the same over various ranges of activity level,
But cost increases by discrete amounts (steps) as level
Of activity increased from 1 range to the next
Learning curve
Fct that measures how labor hours per unit decline as
Units of production increase
b/c workers learning and becoming better at their jobs
Experience curve
Fct. Measures the decline in cost per unit in business
Fcts.of value chain (marketing, distribution, etc.) as
Amt of these activities increase
Cumulative average time learning model
Cumulative avg. time per unit declines by constant %
Each time the cumulative quantity of units produced doubles
Incremental unit-time learning model
Incremental time needed to produce the last unit declines
By a constant percentage each time the cumulative
Quantity of units produced doubles
2 characteristics for ideal database of estimating cost functions ions quantitatively? The database should contain 2 things :
1 numerous reliably measured observations of cost driver
And related costs
2 consider many values spanning wide range for cost driver
Cost driver in quantitative cost functions? And related costs?
Independent variable (cost driver)
Dependent variable (related costs)
3 types of linear cost functions?
Fixed,
mixed,
variable
What is the most important issue in estimating a cost function?
Determining whether a cause and effect relationship
Exists btw level of activity and costs related to level
Of activity
What are 4 different methods used to estimate a cost function?
1 industrial engineering method
2 conference method
3 acct analysis method
4 quantitative analysis method
What 3 things give rise to nonlinear costs?
1 quantity discounts
2 step cost functions
3 learning curve effects
What are 4 common data problems a company must what for when estimating costs?
1 missing data
2 extreme values of observations
3 changes in technology
4 distortions resulting from inflation
