Lecture 3 - Cost Estimation

Lecture 3 - Cost Estimation - Cost Estimation What you need...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Cost Estimation What you need to know • How to use various methods to understand and estimate cost behavior – Creation of a “new” understanding – Use of existing past data • How to interpret the results of methods – Implications and limitations for forecasts of sales, costs, etc. Understanding Cost Behavior We want to understand how spending will vary in a variety of decision settings Can we separate the fixed and variable costs? Cause-effect relations and cost drivers
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
• Direct costs (i.e., materials and labor) are generally well understood • Overhead costs tend to be mixed in nature and/or less consistent from period to period • Overhead cost behavior has implications for several types of decisions: Our Focus – Overhead Costs Mixed overhead cost behavior Total Power Cost Production volume or other cost driver Total Power Costs The fixed part: the vertical intercept The variable part: the slope Assumed Linearity TC = FC + [VC x (level of cost driver)] where TC = TOTAL cost FC = TOTAL fixed cost VC =variable cost PER UNIT of the cost driver
Background image of page 2
Volume Overhead Costs A B C D Total Cost Curve Cost Estimation Methods • Engineering estimates • Account analysis • Rough estimates: scattergraph and high-low estimates • Statistical methods: e.g., linear regression Engineering Estimates • Very detailed production method analysis performed, in part, to understand costs • Usually done for new production processes – May supplement past information, especially when changes to production method occur • Closely tied to activity-based costing – Cost system in which costs are computed/allocated based on average cost of activity performed for a product and/or in a particular department
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/19/2008 for the course ACCT 2521 taught by Professor Basu during the Fall '07 term at Temple.

Page1 / 12

Lecture 3 - Cost Estimation - Cost Estimation What you need...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online