Please enable JavaScript.
Coggle requires JavaScript to display documents.
Topic 4 : Cost Estimation - Coggle Diagram
Topic 4 : Cost Estimation
Overview
Cost Behaviour
Relationship between a cost and the level of activity (cost driver)
Cost Estimation
Process of determining the cost behaviour of a particular cost item
Cost Prediction
Application of cost behaviour to forecast the cost at a particular level of activity
Cost Driver
an activity or factor that causes costs to be incurred
Volumed-based
Non-volume-based
not directly related to production volume
Types of cost driver
Unit Level
conventional volume-based cost drivers
Batch Level
Based on the group of product units (batch, delivery load)
Product level (Product-sustaining)
Specific to products or product groups
Facility Level
Non-specific cost drivers
Types of Cost
Engineered Cost
Defined physical relationship to the level of output
When level of activity is known, total cost can be predicted
Committed Cost
Cost of organisation’s basic structure and facilities
Discretionary Cost
Management decision to spend money
Cost Estimation
Managerial judgment
Estimates future costs by examining past costs and identifying factors that might affect costs in the future
Reliability of cost estimates is dependent upon the ability of the manager
Engineering method
Studying processes that result in the incurrence of a cost
Using time and motion studies (task analysis) for estimating cost behaviour
Quantitative analysis
High-low Method
Scatterplot Method
The Method of Least Squares
Practical issues
Data collection problems
Effect of learning on cost behaviour
Labour time per unit decreases as the labour force gains experience in manufacturing a new product
Activity-based approaches allow more complex cost behaviour patterns to be recognised
Accuracy of cost estimates are subject to cost benefit decisions
All cost functions are based on simplifying assumptions
Cost behaviours depend on a single or a few types of activity
Cost behaviours are linear within a relevant range