wk2_Ch10n - Ch10:CostEstimation Whatyouneedtoknow

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Ch 10: Cost Estimation
Background image of page 1

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

View Full DocumentRight Arrow Icon
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 costs
Background image of page 2
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 3

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: Price, production, process and product design decisions Make or buy decisions, special orders, etc. Answers to “what if” questions Our Focus – Overhead Costs
Background image of page 4
 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 “Pure” Fixed Cost “Pure” Variable Cost
Background image of page 5

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

View Full DocumentRight Arrow Icon
TC = FC + ( 0 × #units) Assumed Linearity TC =  FC  + [unit  VC x Activity] where TC = TOTAL cost FC = TOTAL fixed cost unit VC = variable cost PER UNIT of the cost driver Activity = # cost driver units Pure Fixed Cost: Pure Variable Cost: TC = 0 + (unit VC × #units)
Background image of page 6
Cost Estimation Methods Engineering estimates Conference method Account analysis Statistical methods:  preliminary step: plot the data rough estimates: high-low method more accurate: linear regression
Background image of page 7

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

View Full DocumentRight Arrow Icon
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 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/28/2011 for the course ACCOUNTING 2521 taught by Professor Byzalov during the Spring '11 term at Temple.

Page1 / 33

wk2_Ch10n - Ch10:CostEstimation Whatyouneedtoknow

This preview shows document pages 1 - 9. Sign up to view the full document.

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