cost estimation and behaviour Flashcards
why we care about cost behaviour
1.setting price points- single unit or bulk
2. make or buy
3. production scheduling and budgeting
managers must know how cost change in relation to various factors
Assumption in cost-behaviour estimation
- changes in total cost can be explained by changes in the level of a single activity- labour, machine hours
- cost behaviour can adequately be guessed by a linear function of the activity level within a relevant range
Factors influencing the cost type:
1. the choice of cost object
cost item may vary in respect to one cost object and a fixed with another
Factors influencing the cost type:
2. time span
more cost are variable with longer time spans
Factors influencing the cost type:
3. relevant range
vc and fc behaviour patterns are valid for linear cost functions only within a given range
what is cost estimation?
attempt to measure a past cost relationship between cost and the level of an activity
why are managers interested in cost estimation?
as it helps them make more accurate cost predictions
how to choose cost drivers for estimating the cost?
use cause-and-effect
1. physical relationship
2. contractual agreements
3. implicitly established by logic
steps to estimate cost function
- choose dependent variable
- identify the independent variable
- collect data on the dependent variable and cost drivers
- plot
- estimate cost function
- evaluate the cost function
cost estimation methods
1.engineering method
2. inspection of accounts
3. conference
4. high-low
5. graph
6. regression
engineering method
late 19th-20th century
F W taylor
-based on close observation and measurement of processes
-expensive
unpopular with workers- time studies
inspection of accounts
estimates cost functions by classifying cost accounts in ledger as variable, fixed or mixed
-uses experience and judgment to separate total costs in fc and vc
-based on data, but separated from reality
conference method
ESTIMATES COST FUNCTIONS ON THE BASIS OF ANALYSIS AND OPINIONS ABOUT COSTSAND THEIR DRIVERS GATHERED FROM VARIOUS SOURCES
quick and easy to do
brings in expertise from across the org
PREVENTS ACCOUNTANTS FROM MAKING DECISIONS ‘IN A SILO
Regression analysis
used to measure average amount of change in dependent variable that is associated with unit increase in the amounts of one or more independent variables
-uses all data available
simple - 1 dependent and 1 independent
multi- 1 dependent and multi independent variable
Regression factors
- enough data collected in same time period of activity
- enough no of observations
- accounting polices dont lead to distorted cost functions
- adjust for inflation
describe 3 alternative cost functions
semi-variable/fixed= a cost function that has both variable and fixed elements.Total costs change, but not in proportion to changes in the cost driver in therelevant rang
varaible
fixed
two assumptions are frequently made when estimating a cost function
- Variations in the total cost of a cost object are explained by variations in a singlecost drive
- linear cost function adequately approximates cost behaviour within therelevant range of the cost driver. A linear cost function is a cost function where,within the relevant range, the graph of total costs versus a single cost driverforms a straight line.
What is the difference between a linear and a non-linear cost function? Give an exampleof each type of cost function
linear= WITHIN THE RELEVANT RANGE,THE GRAPH OF TOTAL COSTS VERSUS A SINGLE COST DRIVER FORMS A STRAIGHT LINE
non= A non-linear cost function is a cost function where, within the relevant range, thegraph of total costs versus a single cost driver does not form a straight line. Examplesinclude economies of scale in advertising
All the independent variables in a cost function estimated with regression analysis are cost drivers.’ Do you agree? Explain
no
A cost driver is any factor whose change causes a change in the total cost of a related cost object.
A cause-and-effect relationship underlies selection of a cost driver.
Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximise goodness of fit, irrespective of the economic plausibility of the independent variables included.
Some of the independent variables included may not be cost drivers
Multicollinearity exists when the dependent variable and the independent variable are highly correlated.’ Do you agree? Explain
NO.
- MULTICOLLINEARITY EXISTS WHEN TWO OR MORE INDEPENDENT VARIABLES ARE HIGHLYCORRELATED WITH EACH OTHER
