Course Hero Logo

WEEK 2.docx - WEEK 2 Cost behaviour: The relationship...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 3 out of 14 pages.

WEEK 2Cost behaviour: The relationship between a cost and the level of activity that causes this cost (i.e thecost driver)Cost estimation: The process of determining the cost behaviour of a particular cost itemCost prediction: Using knowledge of cost behaviour to forecast the level of cost at a particular levelof activityWe analyse costsTo aid the control of costs manage resourcesTo estimate how costs will behave in the future planning To do this we want to understand whatcauses different costs to vary what are the drivers of coststhe cost drivers?An activity or factor that causes costs to be incurred The number of chairs manufactured drives thecost of direct material used. The level of production or volume drives the direct material costsEach style of chair to be made may require modification to the machinery to cut the timberdifferently. The number of times we adjust the machinery to cater for each style of chair will drivethe machine set up costs.• Volume based cost driver: assumes that costs are driven, or caused, by the volume of production(or sales)Non volume based cost driver: a cost driver that is not directly related to production volumeUnit level costsRelate to activities performed for each unit produced Eg Direct material costs – cost driver is numberof units producedBatch level costsRelate to activities performed for a group of product units, eg. a batch or load Eg Delivery truck costs– cost driver could be the number of deliveries madeProduct (or productsustaining) levelRelates to activities performed for specific products or product groups Eg Design of a new product –the cost driver could be number of products availableFacility level
Costs incurred to support the business as a whole, not caused by any particular product Eg Rent offactory no specific driverCost behaviour is the relationship between a cost and the level of activity• Variable costs• Fixed costs• Stepfixed costs• Semivariable costs• Curvilinear costsY = a + bXWhere Y = total costa = fixed cost component (the intercept on the vertical axis)b = variable cost per unit of activity (the slope of the line)X = the level of activityVariable costsAs activity increases or decreases total variable costs change in direct proportion. The variable costper unit remains constantThe variable cost per unit is the slope (b) of the cost line in the following cost function:Y = a + bXFixed costs• As activity increases or decreases total fixed costs do not change but fixed cost per unit changes• The fixed cost is the vertical axis intercept (a) of the cost line in the following cost function:Y = a + bXNote: Fixed cost per unit is often calculated to use in product costing but is of limited use inmanagement decision making fixed costs do not vary with activity within the relevant rangeStepfixed costsRemain fixed over a wide range of activity levels but jump to a different amount for levels outsidethat rangeSemivariable (or mixed) costsHave both fixed and variable components

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 14 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
One
Professor
NoProfessor
Tags
managing director, Daisy Wong

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture