Slide Deck 2 Flashcards
Rapid Fire Terminology:
Direct Cost
Indirect Cost
Variable Cost
Fixed Cost
Mixed Cost (Semivariable)
Relevant Range
Cost Drivers
DC: related to a particular cost object traced to the object. (DL and DM)
IDC: Cannot be traced directly to that object (Cleaning supplies, securities)
VC: Changes in relation to activity level
FC: Does not change in relation to activity level
MX: Both VC and FC
RR: Band of normal activity
CD: Variables, such as levels of activity of volume that causally affect costs over a given time span
What is a Cost Function and 2 assumptions managers make about them:
- A mathematical desc of how a cost changes with changes in levels of an activity
- Variations in the level of a single activity (cost driver) explain the variations in the related total cost
- Cost behaviour is approximated by a linear cost function within the relevant range
Total Costs & Unit Cost for
VC, FC,& MC functions
VC:
TC: Proportiional to change by activity
UC: Constant
FC:
TC: Same the whole time
UC: Varies inversely to activity
MC:
TC: Varies by volume
UC: Varies based on VC and FC
y= a +bx
What do each of these variables represent in the linear cost function:
y=Total cost
a= Fixed cost
b= Variable cost Per unit
x= the cost driver
What is the cause and effect criterion:
And three factors that might cause it to arise
The most important issue in estimating a cost function is determining whether a cause-and-effect relationship exists between the level of an activity and the cost related to that level of activity
A physical relationship between the level of activity and costs (producing more units requires more direct material)
A contractual arrangement
Knowledge of operations
What are the 4 cost estimation methods:
- Industrial Engineering Method (Work Measurement Method)
- Conference Method
- Account Analysis Method
- Quantitative Analysis Method
Industrial Engineering Method
- Estimates cost functions by analyzing the relationship between inputs and outputs in physical terms
-Uses tiem and motion studies to determine the time required to perform various operations
-Very thorough and detailed way to estimate a cost function when there is a physical relationship between inputs and outputs
-Can be very time consuming and costly
Conference Method:
Estimates cost functions based on analysis and opinions about costs and their drivers gathered from various department
-Encourages interdepartmental cooperation’s(The pooling of knowledge gives it credibility even if subjective_
- does not involve analysis of data, so it can be done quickly
-The accuracy dependances heavily on the skill of people providing the inputs.
Account Analysis Method:
-Estimates cost functions by classifying various cost accounts as V,F, M with respect to identified level of activity
-Widely used because its reasonably accurate, cost effective, easy, though still relatively subjective.
Quantitative Analysis Method
Subcategories:
High Low Method
Regression Analysis
-Uses a formal math method to fit cost functions to past data and observations- creates objective results.
: Quick, initial insight into how the cost driver affects costs
Disadvantage: Ignores information from all but two observations
:Statistical method that measures the average amount of change in the dependent variable with a unit change in one or more independent variables (Graph)
Formula/Steps for High Low Method
VCPU= (Highest cost - lowest cost)/ (Highest activity level- lowest activity level)
FC= TC- (VCPU* Output level)
Non Linear Cost Functions:
A cost function for which the graph of total costs is not a straight line within the relevant range
Learning Curve: Laboure hours consumed decrease as workers learn cause they get better
Step Functions: Because Resources increase in ‘lot-sizes’ not individual units
Time as a Cost Drivers (Increasingly Popular)
Two Operational Measures of time:
Time Drivers + 2 examples:
- Customer Response Time (From ordering to delivery time)
- On Time performance- Delivering by the time it was scheduled to arrive
: Any factor in which a change in it causes a change in the speed of an activity
- Uncertainty of when customers will order
- Bottle Neck due to limited Capacity
Quality as a Competitive Tool:
4 Benefits of Focusing on Quality:
2 Aspects of Quality:
4 Costs of Quality:
Quality: The total features and characteristic of a P/S according to specifications to satisfy a customer.
1 Build Expertise
2 Lower Production Cost
3 Create Customer Satisfaction
4 Generate Higher Future Revenues
- Design Quality (How well the products meets need/wants of customers)
- Conformance Quality (Performance of P/S relative to its design and production specifications)
1 Prevention cost (Prevent deformity)
2.Appraisal Costs (Detect non-conformity)
3Internal failure (Defective prior to shipping)
4External Failure (Defective after shipped)
The ideal database for estimating cost functions has:
Numerous reliably measured observations of the cost driver and the related costs
Should consider many values spanning a wide range
