L2- Cost Behaviour Flashcards
Define Direct cost
Cost can be directly traced to cost object
Define Indirect cost
Cost cannot be directly traced to cost object
Example of direct cost
Salary of workers working exclusively on Honda Civic line
Example of indirect cost
The cost of lighting in factory where Honda civic is made
2 assumptions when estimating cost function
–Variations in the total costs of a cost object are explained by variations in a single cost driver
–Cost behaviour is approximated by a linear cost function of the cost driver within the relevant range.
Define fixed costs
Change in activity doesn’t change cost
Define variable cost
Change in activity causes a change in cost
Define mixed cost
Both fixed and variable cost
What’s the relevant range
The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat
4 Cost estimation approaches
–Industrial engineering method
–Conference Method
–Account Analysis Method
–Quantitative analysis of cost relationships
What is the Industrial engineering method
estimates cost functions by analysing the relationship between inputs and outputs in physical terms
Example of industrial engineering method
To produce 20 square metres of carpet requires 2 kilograms of cotton and 3 litres of dye. Result is an estimated cost function relating total manufacturing costs to the cost driver, square metres of carpet.
Cons of industrial engineering method
–time consuming
–Costly
What’s the conference method
Estimates cost functions by collecting feedback from various departments
Example of conference method
The Metro Bank in the UK has a cost-estimating department that develops cost functions for its retail banking products The Metro Bank in the UK has a cost-estimating department that develops cost functions for its retail banking products. The bank uses this information to price products, to adjust its product mix to the products that are most profitable, and to monitor and measure cost improvements over time.
Pros of conference method
–cost functions and cost estimates to be developed quickly.
–Method is credible as from expert’s opinions
What is account analysis method
estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed
What equation is used for account analysis method
y = a + bX
6 steps in estimating cost function
1) Choose the dependent variable
2) Identify the cost driver(s)
3) Collect data on the dependent variable and the cost driver(s)
4) Plot the data
5) Estimate the cost function
6) Evaluate the estimated cost function
What is the high low method
using only the highest and lowest observed values of the cost driver within the relevant range. The line connecting these two points becomes the estimated cost function.
What is the scattergraph method (regression analysis)
a statistical method that measures the average amount of change in the dependent variable that is associated with a unit change in one or more independent variables
What’s the difference between scattergraph method and high low method
scatter graph method uses all available data
Revise on mylab the method’s
Chapter 9
Why is it important to split the cost into fixed and variable components?
–financial planning
–managing costs
–pricing
