Management Accounting chapter 3

Why do companies estimate the relationship between costs and cost drivers?

For cost management, decision making, and planning and standard setting

Relevant range

Range of workload or output (cost-driver levels) over which the company expects to operate and over which assumed cost patterns are reasonably accurate

What problems might you encounter if you simply enter data into a regression program to compute cost estimates?

There is no logical relationship between the Y and X axis

Trade-offs

A compromise that involves giving up something in return for getting something else

Step cost

Semi fixed cost that increases as the cost-driver volume increases (machine, space, service costs)

T-statistic

Indicated the statistical significance of the coefficients, or b’s

Cost estimation

Process of estimating relations between cost object and cost drivers

Cost objects

Anything that the cost analyst may want to estimate the costs (products, services, projects, activities, organisational entities, or inputs to products)

Cost drivers

Measures of workload or output that explain the costs

Reasons for estimating costs

Accurate cost estimations, efficient business processes, alternative courses of action, performance standards, and financial forecasts

Mixed cost pattern

A fixed and variable component

Non-linear cost pattern

Curved with either an increase or a decrease in variable costs per unit

Total costs (TC)

Fixed costs (F) + variable costs (Vx)

Account analysis method (cost estimation methods)

Based on a review of each activity account, making up the total cost being analysed

Linear regression analysis (cost estimation methods)

Based on data from the past to estimate relationships between costs and activities

High-low method (cost estimation methods)

Use two data points to estimate the general cost equation

Multiple regression analysis (cost estimation methods)

Analysis that has more than one independent (x) variable. Useful when the dependent variable is impacted by various independent variables

Engineering estimation (cost estimation methods)

Measurement of work involved in the activities that go into a product and assigning a cost to each of the activities (past costs not taken into account)