Chap5_Additional_Cost_Estimation

Chap5_Additional_Cost_Estimation - Chapter 5 (Additional)...

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Unformatted text preview: Chapter 5 (Additional) Cost Estimation 10 - 1 Relevant Range s s Variable and fixed cost behavior patterns are valid for linear cost functions only within the given relevant range. Costs may behave nonlinear outside the range. When volume breaks out of the relevant range we have to estimate the size of the step in fixed cost. 10 - 2 Cost Estimation... s is the attempt to measure a past cost relationship between costs and the level of an activity. Managers are interested in estimating past costbehavior functions primarily because these estimates can help them make more accurate cost predictions. How much profit will I make if I embark on a plan that doubles my volume? 10 - 3 The Cause-and-Effect Criterion In Choosing Cost Drivers Physical relationship (materials costs) Contractual agreements (phone charges based on minutes) Implicitly established by logic (ordering costs driven by number of parts) Choose the most logical, practical cost drivers. 10 - 4 Quantitative Analysis Methods s Quantitative analysis uses a formal mathematical method to fit linear cost functions to past data observations. High Low Method Scattergraph Regression Analysis 10 - 5 Steps In Estimating A Cost Function 1 2 3 4 5 6 Choose the dependent variable. Identify the independent variable cost driver(s). Collect data on the dependent variable and the cost driver(s). Plot the data. Estimate the cost function. Evaluate the estimated cost function. 10 - 6 Steps In Estimating A Cost Function 3 s Collect data on the dependent variable and the cost driver(s). Cost analysts obtain data from company documents, from interviews with managers, and through special studies. Time-series data Cross-sectional data Number of Units Number of Orders Number of Set-ups 10 - 7 Steps In Estimating A Cost Function s A B Two important aspects when identifying a cost driver: It should have an economically plausible relationship with the dependent variable. It should be accurately measurable. A cost driver is a measurable unit associated with an activity that drives cost. 10 - 8 Regression Analysis... is used to measure the average amount of change in a dependent variable, such as electricity, that is associated with unit increases in the amounts of one or more independent variables, such as machine hours. s Regression analysis uses all available data to estimate the cost function. 10 - 9 Regression Analysis Simple regression analysis estimates the relationship between the dependent variable and one independent variable. s Multiple regression analysis estimates the relationship between the dependent variable and multiple independent variables. s 10 - 10 Regression Analysis The vertical difference (residual term) measures the distance between the actual cost and the estimated cost for each observation. s The regression method is more accurate than the high-low method. s 10 - 11 Regression Analysis A company has the following data for its shipping cost. Month January February March April May June July Units Shipped (X) 3 6 4 5 7 8 2 35 Shipping Cost (Y) $ 18 23 17 20 23 27 12 $140 (1) XY = aX + bX2 (2) Y = na + bX 10 - 12 Regression Analysis A company has the following data for its shipping cost. Month Units Shipped (X) Shipping Cost (Y) January 3 $ 18 February 6 23 March 4 17 April 5 20 May 7 23 June 8 27 July 2 12 35 $140 XY $54 138 ? ? ? ? ? X2 9 36 ? ? ? ? ? 10 - 13 Regression Analysis A company has the following data for its shipping cost. Month Units Shipped (X) Shipping Cost (Y) January 3 $ 18 February 6 23 March 4 17 April 5 20 May 7 23 June 8 27 July 2 12 3 $140 XY $54 138 68 100 161 216 24 $761 X2 9 36 16 25 49 64 4 203 (1) 761 = 35a + 203b (2.18) (1) 140 = 7a + 35b (1) $761 = 35a + 203b [(2) X 5] 700 = 35a + 175b $ 61 = 28b $140 = 7a + 35b [Substitute] 140 = 7a + 35 63.70 = 7a $9.10 = a 10 - 14 $2.18 = b (rounded) ...
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