Cost Behaviour

Question 1

Cause and effect criterion

Answer 1

When estimating a cost function determining the cause-and-effect relationship that exists between the level of activity and the costs related to it.

Question 2

Four methods of cost estimation

Answer 2

1. Industrial engineering method
2. Conference method
3. Account analysis
4. Quantitative analysis method

Question 3

Quantitative analysis

Answer 3

Uses formal mathematical method to fit cost functions to past data observations.

Question 4

Quantitative analysis - pros and cons

Answer 4

Pros: Results are more objective and most rigorous approach to estimate costs.
Cons: requires more detailed information about costs, cost drivers and cost functions so is therefore more time consuming.

Question 5

High-Low method

Answer 5

• Simpliest method of quantitative analysis.
• Uses only the highest and lowest observed values.
• Fits a line to data points that can be used to predict costs

Question 6

Cost driver criteria

Answer 6

1. Economic plausibility
2. Goodness of fit
3. Significance of the independent variable