Module 2

Question 1

What is a cost behaviour?

Answer 1

The relationship between a cost and the level of activity (cost driver)

Question 2

What is Cost Estimation?

Answer 2

The process of determining the cost behaviour of a partiular cost item.

Question 3

What is cost prediction?

Answer 3

The Application of cost behaviour to forecast the cost at a particular level of activity.

Question 4

What is a cost Driver?

Answer 4

A cost driver is an activity or factor that causes costs to be incurred.
Cost drivers may be volume-based or non-volume-based
A non-volume-based cost driver is a cost driver that is not directly related to production volume.

Question 5

What is a unit level cost driver?

Answer 5

Use conventional volume-based cost drivers

Question 6

What is a batch level cost driver?

Answer 6

Cost driver based on the group of product units such as a batch or a delivery load.

Question 7

What is a product level cost driver?

Answer 7

A specific cost for a specific product.

Question 8

What is a facility level cost driver?

Answer 8

A non-specific cost driver.

Question 9

What is a cost function?

Answer 9

Cost functions are equations used to describe cost behaviours.

Question 10

What is the variable cost function?

Answer 10

Y = a + bx
(a = fixed costs, b = variable costs, Y = total costs, x = units or some level of activity)

Question 11

What is a fixed cost per unit?

Answer 11

A figure allocated to each unit to cover the fixed costs. The fixed cost per unit decreases as activity levels increase.

Question 12

What is a step-fixed cost?

Answer 12

A cost that remains fixed over a wide range of activity levels but change outside that range.

Question 13

What is a semivariable (or mixed) cost?

Answer 13

A cost that has fixed and variable componants.

Question 14

What is a curvilinear cost?

Answer 14

A cost that has a curved cost line. Activity levels impact the marginal cost.

Question 15

What is the relevent range?

Answer 15

The relevent range is the range of activity over which a particular cost behaviour pattern is assumed to be valid.

Question 16

What behaviours are key to relevent range?

Answer 16

Outside the relevent range the cost behaviour pattern may not hold.
The range of activity that is relevent for a partocular cost estimate should be specified.

Question 17

What is an engineerd cost?

Answer 17

An engineered cost is a defined physical relationship to the level of output.
When level of activity is known, total cost can be predicted.

Question 18

What is a committed cost?

Answer 18

A committed cost is the cost of an organisations basic structure and facilities.

Question 19

What is a discretionary cost?

Answer 19

A discretionary cost is managements decision to spend the money.

Question 20

Why are cost structures shifting?

Answer 20

• Automation has led to less relaiance on labour.
• Equipment costs generally do not vary with production volume.
• Some employee wage agreements specify fixed salaries and a stabilised workforce.

Question 21

What are the three approaches to cost estimation?

Answer 21

1. Managerial judgement
2. Engineering method
3. Quantitative analysis.

Question 22

What are the three methods in Quantitative analysis?

Answer 22

1. A scatter diagram that plots the data points.
2. The high-low method
3. Regression analysis.

Question 23

What is the high-Low method?

Answer 23

The high-low method estimates a cost function using two data points: highest activity level and lowest activity method.

Question 24

What are the steps in the High-Low method?

Answer 24

1. Calculate the difference in costs at one of these points.
2. Calculate the difference in activity levels at one of these points.
3. Dervice the variable cost per unit.
4. Substitute into the cost function Y = a + bx