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Lecture Cost management: Measuring, monitoring, and motivating performance (3rd edition) – Chapter 2

Chapter 2 - Cost concepts, behaviour, and estimation. In this chapter we will discuss: Explain the cost concept and cost terms, describe the different type of cost behaviour, Describe cost estimation techniques, apply cost estimation techniques to determine the future costs. | Lecture Cost management Measuring monitoring and motivating performance 3rd edition Chapter 2 COST MANAGEMENT Measuring Monitoring and Motivating Performance Third Canadian Edition ELDENBURG WOLCOTT CHEN COOK CHAPTER 2 Cost Concepts Behaviour and Estimation Learning Objectives LO1 Explain the cost concept and cost terms LO2 Describe the different type of cost behaviour LO3 Describe cost estimation techniques LO4 Apply cost estimation techniques to determine the future costs LO5 Utilize regression analysis in cost estimation LO6 Appreciate the uses and limitations of cost estimates LO1 Explain the cost concept and cost terms Classifying Costs Classifications Applications Cost Terms Relevance Decision-making Relevant vs. irrelevant cost Behaviour Cost estimation Fixed vs. variable cost Traceability Cost assignment Direct vs. indirect cost Function Cost determination Manufacturing cost vs. nonmanufacturing cost Product vs. period cost Controllability Performance Controllable vs. evaluation uncontrollable cost Classifying Costs Relevant costs costs that differentiate between two alternatives e.g. opportunity cost Irrelevant costs will not make a difference to either alternative and has no bearing on decision making e.g. sunk cost Classifying Costs Opportunity cost the benefits an organization forgoes when it chooses one alternative over another Sunk cost cost has already been incurred and cannot now be avoided Classifying Costs Fixed costs behaves such that the total cost will not change within the relevant range Variable costs varies in proportion to the production level Classifying Costs Cost object any thing or activity for which we measure costs include such things as individual products product lines projects customers departments and even the entire company Classifying Costs Direct cost a cost that can be easily traced to a cost object because a clear cause-and-effect relationship generally exists between the cost object and the cost Indirect cost incurred for