250_Notes_6A_Rev

250_Notes_6A_Rev - ACCT 250 ACCOUNTING FOR DECISION MAKING...

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ACCT 250 – ACCOUNTING FOR DECISION MAKING NOTES – CHAPTER 6A SPRING 2008 SUMMARY Here we examine the two primary methods of cost estimation: high-low and simple regression. NOTES 1) High-Low a) Performing high-low analysis The steps to perform a high-low analysis are as follows: o Step 1 – Determine the cost and driver(s) – assess reasonableness o Step 2 – Gather data and plot scatter-graph; identify outliers and eliminate o Step 3 – Select high and low points based on units of the cost driver o Step 4 – Determine the slope of the line (b) using the rise over run formula (Total cost at high point – total cost at low point) (Units of driver at high point – units of driver at low point) o Step 5 – Use slope and either data point to solve for fixed cost (a) o Step 6 – prepare the cost equation given b from step 2 and a from step 3 b) Strengths and weaknesses vs. simple regression Strengths – Easy to do Weaknesses – Uses only 2 data points (Highest and Lowest on X-axis) (Find
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250_Notes_6A_Rev - ACCT 250 ACCOUNTING FOR DECISION MAKING...

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