Week 2- Cost behaviour and Estimation Flashcards
what does cost behaviour refer too?
The relationship between cost and activity
what is cost estimation?
The process of estimating the relationship between costs and cost driver activities that cause the cost (eg. production of activities)
What is cost prediction?
Using the results of cost estimation to forecast a level of cost at a particular activity. Focus is on the future
What do variable costs per unit look like on a graph?
They remain constant
what is a step variable cost?
The cost remains constant over a narrow range of activity and then increases or decreases at a set level of activity
What happens to fixed cost per unit as activity increases?
decreases (until a set period in which the business may need to increase fixed costs in order to grow
what are set fixed costs?
The cost increases at a certain level of activity
what are the differences between step fixed costs and step variable costs?
- Step variable cost can be adjusted faster
- Step variable cost jumps are narrower
what is a mixed cost?
One that has a fixed and variable cost element to it. eg. a phone contract usually has an upforont cost and a monthly cost to it.
what is the best way to estimate costs?
Collect historical dat to forecast costs in th future
how can we forecast costs?
A process called regression analysis
what is regression analysis?
a statistical method that creates an equation that relates dependant and independant variables together. Its objective is to use the equation to estimate costs
what are the independent variables in cost estimation?
The cost drivers
what are the dependant variables in cost estimation?
the cost
what is the equation used for regression analysis?
TC=F+VX
what is an outlier?
Any data point outside the normal grouping of data points
What is correlation coefficient?
a measure of the linear relationship between variables such as cost and activity
what does it mean if the correlation coefficient is high( close to 1)
There is a strong correlation between the variables
what does it mean if the correlation coefficient is 0
It means that there is no correlation between the variables
what does it mean if the correlation coefficient is low (close to -1)
There is a negative correlation between the variables
what does coefficent of determination ( R-squared) measure?
The goodness of fit between the data points
what is multiple regression analysis?
A regression that has more than one independant variable
give an example of when multiple regression may be helpful?
Factors such as inflation or interest rates are all affecting costs
what are the key considerations one need to be aware of when using regression analysis?
- A logical relationship must be established between the variables
- Entering data that have no logical relationship will result in meaningless estimates
- Outliers? These will alter the results of the analysis if included
- The fixed cost needs to be inline with the companies activity in order to be meaningful
