105 1 2 3 4 fourapproachestoestimat ingacostfunct

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Unformatted text preview: less likely that a hig h level of correlation observed in one set of data will be similarly found in other sets of data. 10­5 1. 2. 3. 4. Four approaches to estimat ing a cost funct ion are Industrial engineering method. Conference method. Account analysis method. Quant itative analysis o f current or past cost relat ionships. 10­6 The conference method est imates cost funct ions on the basis of analysis and opinio ns about costs and their drivers gathered fro m various departments of a co mpany (purchasing, process engineering, manufacturing, emplo yee relat ions, etc.). Advantages o f the conference method include 1. The speed with which cost estimates can be develo ped. 2. The pooling of knowledge fro m experts across functional areas. 3. The improved credibilit y o f the cost funct ion to all personnel. 10­1 10­7 The account analysis method est imates cost funct ions by classifying cost accounts in the subsidiary ledger as variable, fixed, or mixed wit h respect to the ident ified level o f activit y. Typically, managers use qualitat ive, rather than quant itative, analys is when making these cost­ classificat ion decisio ns. 10­8 The six steps are 1. Choose the dependent variable (the variable to be predicted, which is so me type of cost). 2. Ident ify the independent variable or cost driver. 3. Collect data on the dependent variable and the cost driver. 4. Plot the data. 5. Estimate the cost funct ion. 6. Evaluate the cost driver of the estimated cost functio n. Step 3 typically is the most difficult for a cost analyst. 10­9 Causalit y in a cost function runs fro m the cost driver to the dependent variable. Thus, choosing the highest observat ion and the lowest observat ion of the cost driver is appropriate in the high­low method. 10­10 1. 2. 3. Three criteria important when choosing amo ng alternat ive cost funct ions are Economic plausibilit y. Goodness of fit. Slope of the regressio n line. 10­11 A learning curve is a function that measures how labor­hours per unit decline as units o f production increase because workers are learning and bec...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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