Ch3: Cost behaviour, cost drivers and cost estimation Flashcards
Explain the relationship between cost estimation, cost behaviour and cost prediction
Cost estimation: the process of determining cost behaviour
Cost behaviour: the relationship between a cost and the level of activity
Cost prediction: using knowledge of cost behaviour to forecast level of cost at a particular level of activity.
What is needed to do cost estimation? Explain.
Cost drivers.
Cost drivers can be volume based or non volume based.
volume based - number of cars to be sprayed
non volume based - less face-to-face meetings, using electronic communication instead
Ask: What is the underlying reason for this cost? What would cause it to change?
Explain the difference between traditional and modern approach to cost drivers.
Traditional approach uses volume based cost drivers. Assumes all costs are driven by internal levels of activity, e.g. sales volume or production.
Modern approach - recognises wider range of potential cost drivers, volume and non volume.
What are the four activity levels for cost drivers? Provide an example of each.
unit level: activities performed for each unit, volume based drivers e.g. labelling wine bottles
- batch level: activities performed for each group of units, e.g. delivery costs
- product (or product-sustaining level): activities performed for specific products or product groups, eg. research and design costs
- facility level: cost incurred to run business, not caused by any particular product, eg. facility rent.
What is the difference between cost estimation and prediction compared to cost management?
Cost estimation and prediction: aim to predict future costs
Cost management: analyse costs to reduce them and manage resources more effectively.
Cost drivers for these two purposes may be different. e.g.
Blood samples sent to external pathology lab.
Cost prediction cost driver - number of blood samples sent
Cost management cost driver - skill level of internal staff
What four factors need to be considered when choosing cost drivers?
- cost and benefits of the cost driver should be considered
- reasons for analysis cost behaviour
- timeframe for analysis cost behaviour
- availability of cost driver data
What is the difference between variable and fixed costs?
VC: change in total in direct proportion to changes in the level of activity. Variable cost per unit remains constant.
FC: remain unchanged despite changes in level of activity. Fixed cost per unit does change.
What is fixed costs per unit useful for?
Useful for product costing.
Not useful for decision making as it does not reflect actual behaviour of fixed costs.
What are step fixed costs?
remain fixed at wide range of activity levels but jump to a different amount for levels outside that range.
What is a semi variable or mixed cost? What function describes this.
Has both fixed and variable components. Y = a + bx a - fixed cost b - variable cost x - level of activity
What are curvilinear costs?
at low activity levels, decreasing marginal cost,
at high activity levels, increasing marginal cost
Explain the engineering approach. When is this useful?
- study processes that result in the incurrence of a cost
- using time and motion studies - employees are observed as they work and results recorded
- useful when there is no past data to base cost estimates
- needs direct relationship between inputs and outputs
- expensive and time consuming
What are the three methods for quantitative cost analysis?
- visual fit method using scatterplots
- high-low method
- regression method
How is the high-low method calculated for cost analysis?
uses min and max levels of activity and respective costs.
calculating different in level of activity and costs.
difference in cost/difference in activity level = variable cost
solve equation using variable cost -> total cost = fixed cost + variable cost
Is the high-low method or regression method more useful?
Regression - uses more data points.
High-low uses outlier data which may be skewed.
