horngren_ima15_im 03.doc

# Discretionary fixed costs can be easily altered but

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Discretionary fixed costs can be easily altered but become fixed until the next planning period. E. Technology Decisions (e.g., labor-intensive versus robotic manufacturing or traditional banking services versus automated tellers) position a company to meet current goals and to respond to changes in the environment and affect the costs of products and services. F. Cost-Control Incentives - created by management in order to have employees control costs. Managers use their knowledge of cost behavior to set expectations, and employees may receive compensation or other rewards that are tied to meeting these expectations while maintaining quality and service. 34

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III. Cost Functions {L. O. 3} Cost Measurement (or measuring cost behavior) - the first step in estimating or predicting costs as a function of appropriate cost drivers. The second step is to use these cost measures to estimate future costs at expected levels of the cost-driver activity. Measuring costs without obvious links to cost drivers presents some difficulty. Assumed relationships between costs and cost drivers are often used. A. Form of Cost Functions. Cost Function - Algebraic equations that describe the relationship between a cost and its cost driver(s). A typical cost function equation is: Y = F + VX where: Y = Total cost F = Fixed cost V = Variable cost X = Cost-driver activity When this mixed cost function is graphed, F is the intercept of the vertical axis and V is the slope of the cost function. Sometimes two or more cost drivers are used. B. Developing Cost Functions Two principles should be applied to obtain accurate and useful cost functions: plausibility (i.e., believable) and reliability (conformity between a cost function’s estimate of costs at actual levels of activity and actually observed costs). C. Choice of Cost Drivers: Activity Analysis {L. O. 4} A ctivity Analysis - identifies appropriate cost drivers and their effects on the costs of making a product or providing a service. The final product or service may have a number of cost drivers because a number of separate activities may be involved. Cost Prediction - applies cost measures to expected future activity levels to forecast future costs. Activity analysis is especially important for measuring and predicting costs for which cost drivers are not obvious. For many years, most organizations used only one cost driver: the amount of direct labor. However, previously "hidden" activities greatly influence cost behavior. Activities related to the complexity of performing tasks affect costs more directly than labor usage or other volume-related activity measures. 35
IV. Methods of Measuring Cost Functions {L. O. 5} A. Engineering Analysis - measures cost behavior according to what costs should be , not by what costs have been . It entails a systematic review of materials, supplies, labor, support services, and facilities needed for products and services. This can be used for existing products or for new products similar to what has been produced before. Disadvantages are that it is extremely costly and not timely.

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