Term
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Definition
| the process of estimating the relation between costs and the cost drivers that cause them |
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Term
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Definition
Direct: Directly related to the activity.
Indirect: Not easy to predict, poses challenges for managers. |
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Term
| A cost is what occurs when: |
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Definition
| resources are acquired for production or other activity in an organization. |
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Term
| An expenditure are the payments: |
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Definition
| for the activities in an an organization. Expenditures do not always occure at the same time as the cost. |
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| Three reasons why organizations find it necessary to estimate costs: |
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Definition
1) To manage costs
2) Make decisions
3) plan and set standards. |
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Term
| A simple cost behavior pattern is one in which costs are some combination of: |
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Definition
Fixed and variable:
TC= F+VX |
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Term
| When it comes to real world applications of cost estimation: |
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Definition
| Some companies use multiuple cost drivers and complex cost behaviors. Managers must weigh costs and benefits of using a more complex estimation method. |
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Term
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Definition
| Change with activity of the cost driver but not in direct proportion. These costs increase in chunks. For example Rent for a store. |
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Term
| What is the relevant range? |
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Definition
| The relevant range is the range over which an organization expects to operate over which assumed cost patterns are reasonably accurate. |
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Term
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Definition
| Have elements of fixed costs and variable costs. Utility costs are an example, even the the organization shuts down, it will still have some electricity costs. |
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Term
| Some costs are curved and difficult to predict, such as: |
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Definition
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Term
| What is the formula for learning curve? |
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Definition
Y=aX^b
Y= Average number of labor hours required for X units of cost driver volume
a= number of labor hours required for the first cost driver unit
X= cumulative number of cost driver units
b= Index of learning equal to the log of the learning rate divided by the log of 2
Ex: A learning rate of .8 would result in a value for b of -.322 |
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Term
| The idea behind the learning phenomenon is: |
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Definition
| the greater the cost driver volume, the greater the experience. |
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Term
| Three cost estimation techniques are: |
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Definition
1) Statistical methods, especially multiple regression analysis
2) Account analysis
3) Engineering estimates. |
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Term
| A method that is even simpler than the simple regression method is the: |
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Definition
| high/ low method.With the high-low method, the only information needed is the highest observation-pair of costs and activity and the lowest observation of cost and activity. |
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Term
| What is the slope for the high/low method? |
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Definition
| Slope = (Highest cost – lowest cost)/(highest quantity of cost driver – lowest quantity of cost driver) |
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Term
| How do you find the intercept with the high low method? |
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Definition
| Intercept= Total cost at lowest cost driver level – (Variable cost per unit X lowest quantity of cost driver |
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Term
| In terms of validity, what is one of the most important measures? |
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Definition
| R^2, which measures the proportion of the variation the the dependant variable ( Total costs) explained by the independant variable. |
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