Fraud Chapter 11 Powerpoint

If cost behavior characteristics are projected

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Unformatted text preview: ide of the observed range of activities, the projections may not be accurate. activities, Time assumption: As time passes, the business environment changes, and cost behavior may change as well. change IES-Tomkins College 14 Cost Behavior Estimation Methods Cost Most organizations have very little cost information that is Most captured and reported by type of cost behavior pattern. In order to determine cost behavior characteristics, accountants must use a variety of methods to estimate cost behavior patterns. behavior – EXPERIENCE: Often a working knowledge of a firm’s EXPERIENCE: accounting system will provide some knowledge of the nature of cost behavior in the firm’s accounting system. cost – Merely trying to separate all current cost accounts into fixed and Merely variable costs is usually not a very accurate method of estimating cost behavior. cost IES-Tomkins College 15 Cost Behavior Estimation Methods Cost PLOTTING COST DATA: “A picture is worth PLOTTING picture a 1,000 words”, is an old saying that has some merit in describing cost behavior patterns. merit – It is really easy now to take accounting cost data and It use many different software packages to plot data. – The resulting graphs can provide a good idea of the The general nature of the cost volume relationships, although precise descriptive cost models are not provided. provided. IES-Tomkins College 16 Cost Behavior Estimation Methods Cost HIGH-LOW METHOD: The highest and lowest costs are identified along The with their related volume levels. These are used to estimate fixed and variable costs: estimate Example: Variable cost = $300,000 - $280,000 Variable 100,000 un. - 90,000 un. 100,000 = $20,000 = $2.00 / unit $20,000 10,000 un. 10,000 IES-Tomkins College 17 Cost Behavior Estimation Methods Cost HIGH-LOW METHOD (cont.) Fixed cost = $300,000 - (100,000 units x Fixed $2.00 unit) $2.00 = $100,000 $100,000 Total cost = $100,000 + $2.00 X IES-Tomkins College 18 Cost Behavior Estimation Methods Cost REGRESSION/CORRELATION ANALYSIS – An analytical tool for measuring the degree of An association between two or more variables. association It is a two-step process: – Regressi...
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