Week 11 Chapter 9 Reading Flashcards
mixed costs
costs comprising of fixed and variable costs
step variable costs
cost function looks like steps/staircase
costs jump between intervals in a discrete manner (no slope)
e.g., 1-5 = 1
5-10 = 2
10-15 = 3
15-20 = 4
2 types of fixed costs
committed = long term commitment to this cost
discretionary = fixed cost, but short term in nature - avoidable
high low method for analysing mixed costs
assume costs are linear
(highest cost - lowest cost) / (highest activity - lowest activity)
e.g., (4,675 - 2,925) / (850-300) = 1,750 / 550 = 3.18 VC per unit
total VC = VC per unit * total units
Total Cost - Total VC = Total FC
least squares regression method for analysing mixed costs
uses computerised statistical software to identify cost function
calculates regression, line of best fit and y-intersect to identify variable and fixed costs
error in a regression?
difference between a data point and the mean (line of best fit)
equation for regression?
y = fixed cost + variable cost per unit
what is r squared a measure of?
the goodness of fit
how well the line of best fit aligns with the data
you can have confidence that the fixed cost is accurate
learning curve analysis
the analysis of costs that don’t behave in a linear manner
e.g., labour costs:
- labour costs can decline as more units are produced, for example
- aka, experience curve - they become more efficient and require less hours to do it
two assumptions when estimating cost functions?
variations in total cost are explained by variations in a single cost driver
cost behaviour is linear
linear cost function?
within relevant range, graph total costs forms a straight line
relevant range
the range of the cost driver where the relationship between total costs and the driver is valid
cost estimation
the measurement of past cost relationships
cost predictions
forecasts of future costs
what are the 3 specifications necessary to classify costs into variable/fixed cost components?
- choice of cost object
- relevant range
- time span
when do non linearities occur?
at very high levels of production
3 ways cause and effect can be established?
- implicitly established by logic & knowledge of operations
- contractual arrangement
- physical relationship
does correlation = causation?
no
4 approaches to cost estimation?
- industrial engineering method
- conference method
- account analysis method
- quantitative analysis method of current/past cost relationships
industrial engineering method?
aka work measurement method
estimates cost functions by analysing the relationship between inputs and outputs in physical terms
conference method
gather opinions about costs and their drivers from various departments
discussions
subjective
account analysis method?
similar to conference method
classify cost accounts as variable, fixed, or mixed with respect to level of activity
quantitative analysis methods?
- high low method
- least squares regression method
six steps in estimating a cost function
1) choose dependent variable (variable being predicted)
2) identify cost driver (independent variable)
3) collect data on dependent variable and the cost drivers
4) plot the data
5) estimate the cost function
6) evaluate the estimated cost function
