Unformatted text preview: ide of the observed range of
activities, the projections may not be accurate.
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
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
– EXPERIENCE: Often a working knowledge of a firm’s
accounting system will provide some knowledge of the nature of
cost behavior in the firm’s accounting system.
– Merely trying to separate all current cost accounts into fixed and
variable costs is usually not a very accurate method of estimating
cost IES-Tomkins College 15 Cost Behavior Estimation Methods
Cost PLOTTING COST DATA: “A picture is worth
a 1,000 words”, is an old saying that has some
merit in describing cost behavior patterns.
– It is really easy now to take accounting cost data and
use many different software packages to plot data.
– The resulting graphs can provide a good idea of the
general nature of the cost volume relationships,
although precise descriptive cost models are not
provided. IES-Tomkins College 16 Cost Behavior Estimation Methods
Cost HIGH-LOW METHOD:
The highest and lowest costs are identified along
with their related volume levels. These are used to
estimate fixed and variable costs:
Variable cost = $300,000 - $280,000
100,000 un. - 90,000 un.
= $20,000 = $2.00 / unit
IES-Tomkins College 17 Cost Behavior Estimation Methods
HIGH-LOW METHOD (cont.)
Fixed cost = $300,000 - (100,000 units x
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
association between two or more variables.
association It is a two-step process:
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