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Unformatted text preview: relevant range. This means that total cost versus the level of a single activity that is related to that cost is a straight line within the relevant range. Once linearity is established, there are three possible types of linearity:
1) A strictly variable cost of the form Y =
bX, where b is the slope of the straight line and is the variable cost per unit of the cost driver;
2) A strictly constant cost of the form Y =
a, where a is the total fixed cost or constant; and
3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fixed cost or constant, and b is the variable cost per unit of the driver or the slope of the straight line. Diff: 2 Terms: cost function, linear cost function Objective: 1, 2 AACSB: Reflective thinking 176) Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver. Answer: The four approaches to cost estimation are: 1. industrial engineering method
2. conference method
3. account analysis method
4. quantitative analysis of current or past cost relationships The industrial engineering method, also called the workmeasurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.). The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver. Diff: 2 Terms: cost estimation, industrial engineering/confere
nce/account analysis method Objective: 3 AACSB: Reflective thinking 177) List and briefly describe the six steps in estimating a cost function under quantitative analysis. Answer: The fi...
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- Spring '08