Week 2 Lecture 1 Flashcards
Relevant Range
Parameters where company maintains same fixed costs
Linear Cost Function Equation
Y = a + bX
What is Y in the linear cost function
The dependent variable: the cost that is being predicted
What is A in the linear cost function
The intercept: Fixed costs
What is b in the linear cost function
The slope of the line: variable cost per unit
What is X in the linear cost function
The independent variable: the cost driver
- A change in X will trigger a change in the dependent variable Y.
When B is positive, graph goes from
Left to right
Total costs =
Fixed costs + (variable costs per unit x quantity)
Mixed costs
Are costs that have fixed cost and variable cost components
CVP
Cost Volume Profit
Cost driver
Something that drives the cost, the thing causing the cost to happen
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 costs related to it.
What established an economically plausible relationship between the level of an activity and its costs.
A cause and effect relationship
What are the 4 methods of cost estimation
Industrial engineering
Conference
Account analysis
Quantative analysis
Quantative analysis
Uses a formal mathematical method to fit cost functions to past Data observations.
- most results are objective
- Most rigorous approach to estimate costs
- required more detailed information about costs, cost drivers, and cost functions and is therefore more time-consuming.
