Chapter 3 Flashcards
What is the cost behaviour pattern/ function formula?
Y = F+VX Y = total cost F = total fixed cost V = total variable cost/ unit of the activity variable X = Volume of the activity variable
What are the 2 types of fixed costs
Discretionary Costs: Fixed costs arising from annual management decisions i.e advertising costs
Committed Costs: Fixed costs which are long term investments Ex. Buildings
What are the pros of using the scattergraph/ visual fit method?
Simplicity
Highlights Outliers
Uses all data points
Shows correlation between dependent and independent variables
Shows cost behaviour at different ranges of activity
What are the cons of using the scattergraph/ visual fit method?
Subjective
How does the High Low Method Work?
Uses 2 data points - the highest and lowest level activity levels and there corresponding costs.
V or VC/Unit = changes in total costs/ change in activity level
F or FC = Y - V(X)
What are the pros of the high to low method?
Objective, Simple
What are the cons of the high to low method?
Only use 2 data points
How does the Least Square Regression method work?
Use stats to determine line of best fit so sum of squared deviations is minimized
Goodness of fit measurement measured by the coefficient of determination or r squared to determine the correlation of the dependent and independent variable
What are the pros of the Least Square Regression Method?
Objective, Uses all data points, uses stats
What are the cons of the Least Square Regression Method?
extensive calculations, not always economically feasible
How does multiple regression work?
Use more than one activity variable simultaneously
V = F+ V1X1… F + VnXn
What assumptions are made for cost estimation methods?
Costs must be linear within relevant range
except for multiple regression, only one activity variable can be used at a time
Define Activity Base
A measure of whatever causes
a variable cost to be incurred.
Define True Variable Cost
Cost varies in direct proportion to level of activity.
Define Step-Variable Cost
A cost (such as the cost of a maintenance worker) that is obtainable only in large amounts and that increases and decreases only in response to fairly wide changes in the activity level.
