Lecture Management accounting: Information for creating and managing value (4/e): Chapter 3 "Cost behaviour, cost drivers and cost estimation". In this chapter you will learn: What are cost behaviour, cost estimation and cost prediction? Cost drivers. | Chapter 3 Cost behaviour, cost drivers and cost estimation 3- What are cost behaviour, cost estimation and cost prediction? 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 forecast the level of cost at a particular level of activity 3- 3- Cost drivers A cost driver An activity or factor that drives or causes costs The higher the correlation between the cost and the cost driver, the more accurate is the description and understanding of cost behaviours Cost allocation base is commonly used instead of cost driver, as the causal relationship may not always exist Conventional understandings of cost behaviour regard costs as variable or fixed, based on the level of production volume Volume-based cost drivers include units produced, direct labour hours, direct labour cost and machine hours continued 3- Cost drivers Contemporary viewpoints recognise that there are a range of possible cost drivers other than production volume (non-volume cost drivers) Activity-based approaches classify costs and cost drivers into four levels: Unit Batch Product Facility continued 3- Cost drivers Unit level costs Relate to activities that are performed for each unit produced Use 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 3- Cost drivers Selecting the best cost drivers Input or outputs? One input cost driver is the weight of material One output driver is the number of units of production Cost–benefit principles will determine the choice How detailed should the analysis be? As the number of cost categories increases, the accuracy of the resulting . | Chapter 3 Cost behaviour, cost drivers and cost estimation 3- What are cost behaviour, cost estimation and cost prediction? 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 forecast the level of cost at a particular level of activity 3- 3- Cost drivers A cost driver An activity or factor that drives or causes costs The higher the correlation between the cost and the cost driver, the more accurate is the description and understanding of cost behaviours Cost allocation base is commonly used instead of cost driver, as the causal relationship may not always exist Conventional understandings of cost behaviour regard costs as variable or fixed, based on the level of production volume Volume-based cost drivers include units produced, direct labour hours, direct labour cost and machine hours continued
