Cost Estimation Flashcards
What are 2 methods for splitting mixed costs into variable & fixed components?
High-low method
Least squares regression method/linear regression
What is a COST DRIVER?
An activity that is identified for each cost
What does measuring costs mean?
To measure how a cost change in response to a change in activity
How do you choose a cost driver?
Choose the one that causes the costs to be incurred.
If a change in the cost driver would cause the cost to change.
What does plausibility of the cost driver mean?
That the cost would be significantly affected by changes in the activity
Can costs be driven by only one cost driver?
No, it can be driven by more than one
What is a SCATTER graph?
A GRAPHICAL method of cost estimation that plots various observations of costs against the activity level
How is the scatter graph’s line drawn?
According to your own visual judgement
What indicates the fixed cost portion on the scatter graph?
The intercept (on the assumption that it falls within the relevant range)
Is the scatter graph accurate?
No, it is not very accurate
What is the HIGH-LOW method?
A MATHEMATICAL approach to split a mixed cost into its variable and fixed components
What is the equation for a linear relationship for the high-low method?
The regression equation: y = mx + c
y: total (aggregate cost)
m: gradient or slope of the line (variable cost per unit of the cost driver)
x: cost driver level
c: where the line intercepts the y-axis (fixed cost)
In the regression equation, what is the dependent and independent variable?
y = the dependent variable (y is DEPENDENT on x) x = the independent variable
What is the flaws of the high-low method?
- Only 2 points are selected (no coverage of population)
2. These points are extremes and may not be representative of the population (or lie outside the relevant range)
What is the LEAST SQUARES REGRESSION method?
A STATISTICAL approach to establishing the equation of the line that best fits all of the data points provided
