Cost estimation - Cost behavior. What we really want to understand is how spending will vary in a variety of decision settings. Cause-effect relations and costs drivers. Capacity and capacity costs:. Theoretical = 100,000 Practical = 90,000 Normal = 85,000 Budgeted = 80,000
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What we really want to understand is how spending will vary in a variety of decision settings.
Cause-effect relations and costs drivers.
Which measure should the company use?
Suppose the company allocates overhead based on practical capacity and actual production is 70,000 units.
By how much is overhead underapplied?
What does that cost represent?
The cost of idleor excess capacity.
What is the scarcest resource?
TC = FC + VC*(level of cost driver)
TC = total cost
FC = fixed cost
VC = variable cost per unit of the cost driver,
and sometimes the cost driver is represented by X.
Suppose management believes that the monthly overhead cost ($5000) in the factory is mixed. It is believed to be 50% fixed and 50% variable. The variable portion is believe to depend on machine hours, which average 10,000 per month. How would you show this as a linear equation?
TC = $2500 + $.25(machine hours)
Peterson Mfg. in Problem Set #1 will require account analysis.
Suppose you have data on overhead costs and machine hours for the past 15 months. Can you easily determine whether the posited relationship exists?
Yes, plot the data and look for a relationship.
Find the variable cost per unit of the cost driver (VC):
Estimate the total overhead cost during amonths when 115 machine hours will be used:
Y = *X +
where X = machine hours and = random error.
TC = FC + VC*X + .
Measures the percentage of variation in thedependent variable explained by the independentvariable.
When the predicted values exactly equal theactual costs, R2 = 1.
A goodness of fit test: R2 > .3