Chapter 3 introduce the cost behaviour, cost drivers and cost estimation. In this chapter you will learn: What are cost behaviour, cost estimation and cost prediction? Cost drivers. Inviting you refer for more information. | Chapter 3 Cost behaviour, cost drivers and cost estimation Basic concepts Cost behaviour The relationship between a cost and the level of activity or cost driver Cost estimation The process of determining the cost behaviour of a particular cost item Cost prediction Using knowledge of cost behaviour to focus the level of cost at a particular level of activity Cost drivers A cost driver An activity or factor that causes costs to be incurred The higher the correlation between the cost and cost driver, the more accurate is the description and understanding of cost behaviours Conventional understandings of cost behaviour regarded costs as variable or fixed, based on the level of production volume continued Cost drivers Contemporary viewpoints recognise that there are a range of possible costs divers other than production volume (non-volume cost drivers) Activity-based approaches classify costs and cost drivers into four levels: Unit Batch Product, and Facility continued . | Chapter 3 Cost behaviour, cost drivers and cost estimation Basic concepts Cost behaviour The relationship between a cost and the level of activity or cost driver Cost estimation The process of determining the cost behaviour of a particular cost item Cost prediction Using knowledge of cost behaviour to focus the level of cost at a particular level of activity Cost drivers A cost driver An activity or factor that causes costs to be incurred The higher the correlation between the cost and cost driver, the more accurate is the description and understanding of cost behaviours Conventional understandings of cost behaviour regarded costs as variable or fixed, based on the level of production volume continued Cost drivers Contemporary viewpoints recognise that there are a range of possible costs divers other than production volume (non-volume cost drivers) Activity-based approaches classify costs and cost drivers into four levels: Unit Batch Product, and Facility continued Cost drivers Unit level costs Relate to activities that are performed for each unit produced Uses conventional volume-based cost drivers Batch level costs Relate to activities performed for a group of product units Product (or product-sustaining) level Relate to activities performed for specific products or product groups Facility level Costs incurred to run the business continued Cost drivers Selecting the best cost drivers Input or outputs? An example of an input cost driver is the weight of material, and an output driver is the number of units of production Cost benefit principles will determine the choice How detailed should the analysis be? Long or short term? Cost behaviour and cost drivers can change over time Depends on the purpose of the cost prediction continued Cost drivers Cost drivers for cost estimation or cost management? Cost drivers that are used to predict costs, may differ from those used to manage costs Effective cost management requires the identification of .
