Week2 Slides(6) - Why Study Cost Week 2 Cost Basics...

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1 Week 2: Cost Basics 1 Week 2: Readings Mowen Chapter 2 Exclude objective 3 (p. 41-2) Mowen Chapter 3 Mowen Chapter 4 p 124 6 only 2 Mowen Chapter 4 p.124-6 only Additional reading Langfield-Smith et al. 2009 Appendix 3 portion on “Evaluating the regression equation” p. 113-114 Most of this is revision from AFM1B Learning Objectives What are costs? What does ‘different costs for different purposes’ mean? Understand and apply various classification of costs. Understand cost drivers and the role of cost driver analysis 3 analysis. Describe and apply the activity hierarchy of costs and cost drivers. Explain the relationships between cost estimation, cost behaviour and cost prediction. Understand and apply various methods for cost estimation. Understand some practical issues faced in estimating cost functions. Why Study Cost? Financial Accounting purposes Reporting Management Accounting purposes: 4 Decision-making Cost control and management We need to consider the following questions: What drives cost? How does cost behave? How do we estimate and predict cost movement? How do we manage cost? Outline 1. Overview 2. Cost classification 3. Cost behaviour 5 3.1 Cost drivers 4. Cost estimation 1. Overview What are costs? “Cash or cash equivalent value sacrificed for goods and services that is 6 expected to bring a current or future benefit into to the organisation” Mowen (p. 32)
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2 2. Cost classification Cost Behaviour Patterns Traceability Controllability 7 Value Chain Function And more…! Remember “Different costs for different purposes!” 2.1 Cost Behaviour Patterns Cost behaviour Relationship between cost and volume of output (or activity) Behaviour Traceability Controllability Value Chain 8 Cost behaviour patterns Variable costs Fixed costs Step costs Mixed costs Curvilinear costs Function 2.1 Cost Behaviour Patterns Variable costs Varies in direct proportion to output changes Behaviour Traceability Controllability Value Chain 9 Fixed costs Within the relevant range , costs in total remain unchanged despite changes in the activity output (over the short-term) Function Cost behaviour patterns: variable and fixed Relevant range Output 10 range! Output Cost behaviour patterns: step-cost & mixed cost Mix Cost 11 Output Output Step Cost Cost behaviour patterns: Curvilinear (relaxing the linearity assumption) 12 Output
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3 Cost behaviour: Other considerations Time horizon Sufficient capacity? (longer-term investments) Maximum engineering capacity Practical capacity and unused practical capacity Type of resources Flexible: supplied as and when required Committed: supplied in advance Committed fixed expense Discretionary fixed expense Resources available = Resources used + unused capacity 13 Cost behaviour pattern Why is understanding cost behaviour important?
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Week2 Slides(6) - Why Study Cost Week 2 Cost Basics...

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