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Flashcards in Week 2 Deck (12):

Why do we need to understand cost behaviour?

Manage resources
Predict future costs
Prepare budgets => cost control
Facilitate value-chain analysis
Assist tactical decision making


What is cost behaviour?

The relationship between a cost and the level of activity that causes this cost (ie the cost driver)


What is cost estimation?

The process of determining the cost behaviour of a particular cost item


What is cost prediction?

Using knowledge of cost behaviour to forecast the level of cost at a particular level of activity


What is the two types of cost drivers?

Volume based cost driver - An activity or factor that causes costs to be incurred. Such as the number of chairs manufactured drives the cost of the direct material used. (Or sales)
Non volume based cost driver - a cost driver that is not directly related to production volume


Examples of cost drivers?

Unit level costs - relate to activities performed for each unit produced
Batch level costs - relate to activities performed for a group of product units (delivery truck costs)
Product level - relates to activities performed for specific products or product groups (products available)
Facility level - costs incurred to support the business as a whole, no caused by any particular product (factory)


What are cost behaviour patterns? (The relationship between the cost and the level of activity)

Variable costs
Fixed costs
Step fixed costs (remain fixed to a level then jump such as renting a new factory)
Semi variable costs (both fixed and variable components)
Curvilinear costs


How to estimate costs?

Y - total cost
a - 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 activity


Why are costs analysed?

The help the control of costs (manage resources)
The estimate future costs and plan.
To do this cost drivers must be known


The three different ways to distinguish a cost?

Engineered cost - a cost that bears a defined physical relationship to the level of output
Committed cost - a cost resulting from an organisations basic structure and facilities, difficult to change in short term
Discretionary cost - a cost resulting from managements decision to spend a particular amount of money for some purpose, and where the decision can be changed easily.


What are the three approaches to cost estimation?

Managerial approach - rely on experience
Engineering approach - study the processes which incur the costs, this process identifies the relationship that should exist between inputs and outputs
Quantitive approach - analyse past data, separate variable and fixed costs, use a scatter diagram, the high-low method, regression analysis


Some issues with cost estimation are?

Outliers (extreme observations)
Missing data
Mismatched time periods
Trade offs in choosing time periods
Allocated fixed costs
Inflation, past data won't be as accurate
Time having to teach employees about cost behaviour
Activity based approach allows more complex cost behaviour patterns to be considered