lecture 3.docx - ACC2200 Cost Behaviour Cost Drivers and...

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ACC2200 Cost Behaviour, Cost Drivers and Cost Estimation Cost Estimation: the process of determining cost behaviour. Cost Behaviour: the relationship between a cost and the level of activity. Cost Prediction: using knowledge of cost behaviour to forecast the level of cost at a particular level of activity. How do we Estimate Cost Behaviour? We do this using cost drivers, An activity or factor that drives a cost to be incurred In choosing appropriate cost drivers, consideration needs to be given about the underlying causes of the costs What drives it to go up or down? e.g., 1 – Spray Painting Business The cost of paint goes up - Why? What drives the increase? There is an increase in the number of cars sprayed, hence cost driver = number of cars A volume-based cost driver e.g., 2 – Large Bank Administration costs in the corporate headquarters has gone down - Why? Senior managers decided to hold less face-to-face meetings and communicate electronically instead, hence cost driver = number of face-to-face senior management meetings A non-volume-based cost driver Conventional vs Contemporary Cost Drivers Using a conventional approach, Uses volume-based cost drivers (e.g., units produced, DLH, DL$, MH) Assumes that all costs are driven by the organisation’s level of activity , e.g., production or sales volume This will be accurate for direct product costs such as direct material and labour …but not for other types of costs Using a contemporary approach, Recognises that there are a range of possible cost drivers other than production volume that explain cost behaviour Uses both volume and non-volume -based cost drivers Activity-based Approach to Cost Drivers Classifies costs and cost drivers into four levels: - Unit level
Relates to activities performed for each unit produced, and uses conventional volume-based cost drivers, e.g., direct material - Batch level Relates to activities performed for a group of product units, e.g., a batch or a delivery load, delivery costs. - Product (or product-sustaining) level These are also called product sustaining costs, and relate to activities performed for specific products or product groups, e.g., research & design costs - Facility level These are also called facility-sustaining costs, and are incurred to run the business, not caused by any particular product, e.g., premise costs.

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