Cost Behaviour, Cost Drivers and Cost Estimation Flashcards
What is Cost Behaviour?
The relationship between a cost and the level of activity that causes this cost (i.e the cost driver).
What is Cost Estimation?
The process of determining the cost behaviour of a particular cost item by analysing historical data and different activity levels.
Explain Cost Prediction.
Using knowledge of cost behaviour to forecast the level of cost at a particular level of activity.
What is a Cost Driver?
Any activity or factor the causes costs to be incurred.
What is a Volume-Based Cost Driver?
A cost driver that assumes that costs are driven, or caused, by the volume of production (or sales)
I.e ingredients in making bread will increase in line with the increased sale of bread
What is a Non-Volume Based Cost Driver?
A cost driver not directly related to production volume.
I.e delivery charges would not be effected by the volume of bread made but how many deliveries are required and when/where.
Whats is an Activity?
A unit of work performed within the organisation.
What are Unit Level Costs?
Costs relating to activities that are performed for each unit produced.
I.e Direct Material Costs
What are Batch Level Costs?
Costs relating the activities that are performed for a group of product units, such as production batch or a delivery load.
What are Product Level (or Product-Sustaining) Costs?
Costs relating to activities that are performed for specific products or product families.
I.e Research and Development of a new product or product line.
What are Facility Level (or Facility-Sustaining) Costs?
The costs incurred to support the business as a whole; not caused by any particular product.
I.e Rent on premises.
What are Root Cause Cost Drivers?
The underlying factors that cause activities to be performed and their costs to be incurred.
I.e is electricity consumption high due to inefficient overs, or are inexperienced delivery drivers causing more wear and tear on the delivery vehicles.
Explain Variable Costs.
A cost that changes, in total, in direct proportion to a change in the level of activity.
What is a Cost Function?
An equation used to describe a cost behaviour.
Y = a + bX
Y = Total Cost
a = Fixed Cost Component
b = Variable Cost Per Unit of Activity
X = The Level of ActivityWhat is a Fixed Cost?
A cost that remains unchanged in total despite changes in the level of activity.
I.e Rent
