Accountancy 200 Fundamentals of Accounting

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Accountancy 200Fundamentals of Accounting

• COST ESTIMATION

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Uses for Estimated Costs
Management uses cost estimations in contracting a
wide range of operational activities
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Cost Estimation Defined
Cost estimation involves the assignment or
allocation of costs, using cost drivers, to one
or more cost objects.
Cost drivers
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Examples of Cost Objects
Service (support) departments Production
departments Service and production
activities Product lines Channels of
distribution Geographic sales districts
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Cost Estimation Defined
Again, cost estimation involves the assignment or
allocation of costs, using cost drivers, to one
or more cost objects.
Cost drivers
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Association of Cost and Cost Object
Costs can be direct or indirect. Direct
costs Indirect costs
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Association of Cost and Cost Object
Depending upon the specific cost object, a cost
might be direct for some purposes and indirect
for other purposes.
Consider, for example, a general maintenance
workers wages and benefits in a manufacturing
plant where the cost object is The products
manufactured in the plant. Plant maintenance
(either activity or department).
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Cost Estimation Methods
We can estimate costs through relations with cost
objects using a variety of methods,
including Account analysis Fitting linear
equations Estimating regression equations
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Account Analysis Estimation
Using account analysis, we Select a cost driver,
such as sales volume, which we believe relates
the costs to be estimated with the cost
object. Classify historical cost accounts as
variable or fixed relative to this driver.
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Fitting Linear Equations
We can express total cost of any cost object as a
function of historical fixed and variable costs
using the linear equation TC FC uvc x Q
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NP3-10 Visual Line Fitting
A tennis ball manufacturer has the following
costs and outputs during the last 10 years
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NP3-10 Visual Line Fitting
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NP3-10 Visual Line Fitting
We can estimate the slope of a line that connects
two points using the formula
Change in Cost / Change in Quantity
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NP3-10 Visual Line Fitting
What are the expected costs in the coming year if
the manufacturer expects to make 112 million
balls? Why would it be more difficult to
estimate the expected costs if the manufacturer
expects to make 150 million balls?
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NP3-11 Regression Estimation
Using the data in NP3-10, use regression to
estimate the fixed cost and variable cost per
unit. Using Excel functions Intercept Slope
Thus, the regression equation
is Re-estimating total costs _at_ 112 million
output
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NP3-11 Regression Estimation