Methods of Determining cost behavior
Judgment based methods
Industrial engineering method
Account analysis method
Quantitative methods
High-Low method
Scatter plot method
Least square method
Judgment based method
1. Industrial Engineering Method
Physical observation and analysis
Time and motion study
Very expensive to implement
Seldom updated once they are done
Mostly used in manufacturing process where there is a direct link between materials and labour inputs with the outputs.
Can be applied to new processes and designs
Less useful in case of costing services
Account analysis method
Costs are classified into fixed, variable and mixed costs
Accountant uses judgment and experience to separate the accounts into two categories – Fixed and variable
Once the fixed categories are known, the monthly cost can be computed and this is the fixed amount.
The variable categories need to be further separated into categories according to the driver the accountant wishes to associate with the account
Quantitative methods
1. High-Low method:
The high-low method preselects the two points that are used to compute the parameters F ( Fixed cost) and V ( variable cost).
High point is the point with the highest output or driver level.
Low point is the point with the lowest output or driver level.
High and low point determined by the independent variable
1.Determine high and low point
The high number of moves is in May and the low number of moves is in January.
2. Calculate the variable rate for materials handling based on the number of moves.
Variable rate = ( High cost – Low cost)/ ( High moves- Low moves)
= ($7,500- $2,000)/ (500-100)
= $13.75 per move
3. Calculate the fixed monthly cost of material handling
Fixed cost= Total cost – ( Variable rate * moves)
= $7500 –($13.75*500)
=$625
4. Write the cost formula for the material handling activity showing the fixed cost and the variable rate.
Total cost = Fixed cost + Variable cost (X)
X= No of moves
Total cost = $625+$13.75(x)
5. If company estimates that Nov. will have 350 moves, what is the total estimated materials handling cost for that month?
Material handling cost = $625 +$13.75(350)
= $ 5,437.50
6. If the company wants to estimate the materials handling cost for the coming year and expects 3,940 moves, what will be the material handling cost?
12($625)+$13.75(3940)
= $61,675
2. Scatter plot method
Plot the data points so that the relationship between materials handling costs and activity output can be seen.
Scatter point can provide insight concerning the relationship between cost and output by allowing one to visually fit a line to the points on the scatter graph.
3. Method of Least Square
Method of least square identifies the best-fitting line.
With the help of this line cost can be estimated.
Method of least square is also statistically called as regression model.
Learning curve and Nonlinear cost behaviour
Learning curve is an important type of nonlinear cost curve
The document summarizes several common cost estimation methods used in project and cost analyses, including:
1) Account analysis, which involves reviewing accounts to determine fixed and variable costs.
2) The high-low method, which uses historical cost and activity data from multiple periods to estimate a cost equation.
3) The scatter graph method and regression analysis, which involve plotting historical data on a graph to derive a cost estimation equation.
The document provides examples of how to apply the account analysis and high-low methods to estimate fixed and variable production costs for a company.
This document provides an overview of activity-based costing (ABC). It discusses the limitations of traditional costing systems and the need for ABC. It describes ABC as focusing on identifying activities associated with making products and linking resource costs to activities and products. The document outlines the key steps in an ABC system: 1) tracing costs to activities, 2) selecting cost drivers, and 3) tracing costs from activities to products. It also provides an example comparing product costs and profits under traditional and ABC systems.
This document discusses different types of cost behavior and methods for analyzing mixed costs. It describes variable costs, fixed costs, and semi-variable costs. Several methods are presented for separating mixed costs into variable and fixed components, including account analysis, industrial engineering, conference methods, high-low analysis, regression analysis, and scattergraph analysis. Each method has strengths and weaknesses for estimating cost functions based on factors like objectivity, use of data points, and complexity.
Activity-based costing (ABC) focuses on identifying all activities associated with making a product and the costs of those activities. ABC identifies activities, determines the cost drivers of each activity, and uses the cost drivers to assign costs from activities to products. This allows for a more accurate assignment of overhead costs than traditional costing methods.
Process costing is a costing method used when homogeneous units are produced continuously in large quantities. It assigns costs equally over the units produced in a period. There are five steps to process costing: 1) analyze physical flows, 2) calculate equivalent units, 3) determine total costs, 4) calculate unit costs, and 5) assign costs to completed and ending work-in-process units. Process costing uses journal entries to record raw material costs, conversion costs, and transfers between departments. The weighted average and first-in, first-out (FIFO) methods are two approaches to assign costs in process costing.
The document discusses activity-based costing (ABC), a method that assigns costs to products and services based on the activities consumed by each. It provides a 4-step process for ABC implementation: 1) identify activities, 2) assign resource costs to activities, 3) identify outputs, and 4) assign activity costs to outputs using cost drivers. ABC aims to more accurately determine costs by tracing them to specific causes like production activities rather than allocating overhead broadly.
Activity-based costing (ABC) is a method that allocates costs to products and services based on the activities consumed by each. It assigns costs to products by tracing expenses to activities, and then charges each product based on the extent it uses each activity. The primary objective of ABC is to assign costs in a way that reflects the physical dynamics of the business. It helps identify inefficient areas and unnecessary costs.
1) Activity-based costing (ABC) is a cost accounting method that allocates overhead costs to products and services based on their actual consumption of resources instead of traditional methods that use less accurate cost drivers.
2) Target costing is a process that sets a target cost for a product by subtracting the desired profit margin from an estimated selling price and then works to reduce costs to meet the target.
3) Life-cycle costing tracks and accumulates all costs associated with a product or service over its entire lifetime from design through disposal to determine total profitability.
The document summarizes several common cost estimation methods used in project and cost analyses, including:
1) Account analysis, which involves reviewing accounts to determine fixed and variable costs.
2) The high-low method, which uses historical cost and activity data from multiple periods to estimate a cost equation.
3) The scatter graph method and regression analysis, which involve plotting historical data on a graph to derive a cost estimation equation.
The document provides examples of how to apply the account analysis and high-low methods to estimate fixed and variable production costs for a company.
This document provides an overview of activity-based costing (ABC). It discusses the limitations of traditional costing systems and the need for ABC. It describes ABC as focusing on identifying activities associated with making products and linking resource costs to activities and products. The document outlines the key steps in an ABC system: 1) tracing costs to activities, 2) selecting cost drivers, and 3) tracing costs from activities to products. It also provides an example comparing product costs and profits under traditional and ABC systems.
This document discusses different types of cost behavior and methods for analyzing mixed costs. It describes variable costs, fixed costs, and semi-variable costs. Several methods are presented for separating mixed costs into variable and fixed components, including account analysis, industrial engineering, conference methods, high-low analysis, regression analysis, and scattergraph analysis. Each method has strengths and weaknesses for estimating cost functions based on factors like objectivity, use of data points, and complexity.
Activity-based costing (ABC) focuses on identifying all activities associated with making a product and the costs of those activities. ABC identifies activities, determines the cost drivers of each activity, and uses the cost drivers to assign costs from activities to products. This allows for a more accurate assignment of overhead costs than traditional costing methods.
Process costing is a costing method used when homogeneous units are produced continuously in large quantities. It assigns costs equally over the units produced in a period. There are five steps to process costing: 1) analyze physical flows, 2) calculate equivalent units, 3) determine total costs, 4) calculate unit costs, and 5) assign costs to completed and ending work-in-process units. Process costing uses journal entries to record raw material costs, conversion costs, and transfers between departments. The weighted average and first-in, first-out (FIFO) methods are two approaches to assign costs in process costing.
The document discusses activity-based costing (ABC), a method that assigns costs to products and services based on the activities consumed by each. It provides a 4-step process for ABC implementation: 1) identify activities, 2) assign resource costs to activities, 3) identify outputs, and 4) assign activity costs to outputs using cost drivers. ABC aims to more accurately determine costs by tracing them to specific causes like production activities rather than allocating overhead broadly.
Activity-based costing (ABC) is a method that allocates costs to products and services based on the activities consumed by each. It assigns costs to products by tracing expenses to activities, and then charges each product based on the extent it uses each activity. The primary objective of ABC is to assign costs in a way that reflects the physical dynamics of the business. It helps identify inefficient areas and unnecessary costs.
1) Activity-based costing (ABC) is a cost accounting method that allocates overhead costs to products and services based on their actual consumption of resources instead of traditional methods that use less accurate cost drivers.
2) Target costing is a process that sets a target cost for a product by subtracting the desired profit margin from an estimated selling price and then works to reduce costs to meet the target.
3) Life-cycle costing tracks and accumulates all costs associated with a product or service over its entire lifetime from design through disposal to determine total profitability.
Activity based costing is considered to be useful only for Manufacturing Organizations whereas reality is that it is equally usefull to Service providers
This document discusses different types of cost behavior and methods for analyzing costs. It begins by defining fixed costs as those that remain constant despite changes in output, and variable costs as those that vary directly with changes in output. Mixed costs have both fixed and variable components. The document then examines step-cost behavior and different methods for separating fixed and variable costs, including the high-low method, scatterplot method, and method of least squares. It concludes by discussing multiple regression analysis and the importance of managerial judgment in determining cost behavior.
Cost accounting book of 3 rd sem mba @ bec domsBabasab Patil
The document provides an overview of cost accounting including:
1. Definitions of cost accounting and elements of cost accounting such as cost concepts, material costs, labor costs, overhead costs, and process costing.
2. Descriptions of different costing techniques including standard costing, variance analysis, and cost ledger accounting.
3. Explanations of key cost accounting terms like cost centers, cost units, and classifications of costs according to elements, functions, nature, controllability, and relevance to decision making.
PPCE unit 3 (ME8793 – PROCESS PLANNING AND COST ESTIMATION) TAMILMECHKIT
UNIT III - INTRODUCTION TO COST ESTIMATION
Importance of costing and estimation –methods of costing-elements of cost estimation –Types of estimates – Estimating procedure- Estimation labor cost, material cost- allocation of over head charges- Calculation of depreciation cost
Cost management involves planning and controlling a project's budget to help ensure it is completed within approved funding. It includes processes like resource planning, cost estimating, cost budgeting, and cost control. Resource planning determines what resources like people, equipment, and materials are needed. Cost estimating develops cost approximations for project activities. Cost budgeting allocates overall estimates to specific work items to establish a cost baseline. Cost control monitors performance against the baseline and manages any changes to keep costs on track. Maintaining and improving productivity is important for cost management and completing projects successfully within budget.
Cost estimation involves determining the relationship between costs and activity levels using historical data. There are several types of cost behaviors such as variable, fixed, and semi-variable costs. Managers must understand these cost behaviors to predict how costs will change with activity levels. Common cost estimation methods include account classification, regression analysis, visual fitting, high-low analysis, and engineering estimates. These methods analyze past cost and activity data to develop cost behavior models. Accurate cost estimation requires high quality source data without issues like missing information, outliers, or inconsistent time periods.
This document discusses accounting for factory overhead costs. It covers identifying variable and fixed overhead costs, budgeting overhead, accumulating actual overhead costs, applying overhead to production using predetermined overhead rates, and accounting for differences between actual and applied overhead. Methods discussed include direct labor cost rate, direct labor hour rate, and activity-based costing. The document also addresses distributing service department costs and treating under- or over-applied overhead.
Cost Accounting : Determining How Cost Behavesmingxinlu
This document discusses how to determine cost behavior by estimating cost functions based on the relationship between costs and activity levels. It outlines the key steps in estimating cost functions, including choosing a dependent cost variable and independent cost driver, collecting data, and evaluating the fit of linear and nonlinear models. Common issues with data collection like inconsistent time periods or unreliable measurements are also addressed.
Okay, here are the steps:
1) Change in activity level = High - Low = 9,000 - 5,000 = 4,000 units
2) Change in total cost = High cost - Low cost = $9,700 - $6,100 = $3,600
3) Variable cost per unit = Change in total cost / Change in activity
= $3,600 / 4,000 units = $0.90 per unit
4) Total fixed cost = High total cost - (Variable cost per unit x High activity level)
= $9,700 - ($0.90 x 9,000 units) = $9,700 - $8,100 = $1,600
So
CA Ch.18-Process Costing-part 1-Nureni.pdfsandiibrahim3
The document provides information about process costing, including:
1) Process costing is a system used to calculate unit costs by dividing total costs by units of output, with each unit receiving similar amounts of direct materials, labor, and overhead costs.
2) There are five steps to process costing: summarizing physical units, computing equivalent units, summarizing costs, computing cost per equivalent unit, and assigning costs.
3) The document includes examples demonstrating the weighted average and FIFO methods of process costing, as well as explaining how transferred-in costs from previous departments are treated.
Cost accounting book of 3 rd sem mba @ bec domsBabasab Patil
This document provides an overview of cost accounting concepts and techniques. It defines cost accounting and discusses its objectives. It also covers elements of cost like direct and indirect costs. Key cost accounting techniques discussed include standard costing, marginal costing, absorption costing and direct costing. The document also describes different methods of costing like job costing, process costing and contract costing. It defines important cost classification criteria and cost centers and cost units.
This document provides an overview of project cost management for an IT project management course. It defines key cost management terms and processes including cost estimation, budgeting, and controlling costs. It discusses tools for cost estimation like analogous estimates, bottom-up estimates, and parametric modeling. It also explains earned value management (EVM) as a tool for cost control, defining terms like planned value, earned value, actual cost, and calculating values like cost performance index (CPI) and estimate at completion (EAC).
Here are the key steps of the high-low method without inflation:
1) Select the highest and lowest levels of activity from the available cost and activity data. In this case, the highest activity level is 20 units and the lowest is 10 units.
2) Calculate the change in total cost between the highest and lowest activity levels. Here, the change in total cost is Rs. 200 (Rs. 600 - Rs. 400).
3) Calculate the change in activity level between the highest and lowest points. Here, the change in activity is 10 units (20 units - 10 units).
4) Calculate the variable cost per unit by dividing the change in total cost by the change in activity level. Here, the
The document discusses methods for determining how costs behave and estimating cost functions. It explains that total costs can often be explained by changes in a single activity level and that cost behavior is commonly approximated by linear functions within a relevant range. It then outlines different types of linear cost functions and approaches to estimating cost functions, including the industrial engineering method, conference method, account analysis, and quantitative regression analysis. Key steps in estimation include selecting a dependent cost variable and driver, collecting data, plotting relationships, and evaluating estimated functions.
This document provides information about costing and cost accounting. It defines key terms like costing, cost accounting, cost center, cost unit. It explains different types of costing like pre-costing, current costing and post-costing. It also discusses responsibility centers, different classifications of costs and cost sheets.
This document discusses tools for economic justification of projects, including cost estimating, economic measures of merit, and setting project priorities. It provides formulas for estimating various costs associated with a project such as materials, labor, utilities, maintenance, overhead, depreciation, taxes, and administrative costs. It also discusses economic measures used to analyze projects, including net present value, discounted payback period, and internal rate of return. An example is provided to illustrate how these tools and measures can be used to prioritize projects based on available funding.
This document presents a managerial accounting project on standard costs and variances. It defines standard costs and variances, and explains how to calculate variances for direct materials, direct labor, and variable manufacturing overhead. Variances identify areas for cost reduction and efficiency improvements. The document outlines the calculation methods and significance of price and quantity variances for direct materials, rate and efficiency variances for direct labor, and rate and efficiency variances for variable manufacturing overhead. Responsibilities for variances and limitations of standard costing are also discussed.
The document discusses activity-based costing (ABC) and activity-based management (ABM). It provides examples of how ABC can more accurately assign costs in a manufacturing company. ABC involves identifying key activities, tracing costs to those activities, and assigning costs to cost objects like products using cost drivers. This provides more accurate product costs than a traditional single-rate system. ABM then uses the ABC information for decisions to improve profits.
This document provides lecture notes on production and operation management. It covers topics such as productivity, production systems, forecasting, facilities planning, motion study, production planning and control, project management, and modern manufacturing trends. The notes are organized into 38 lectures intended to be delivered over one semester. Key concepts to be covered include productivity measurement, models of production systems, product vs service systems, forecasting methods, facility layout types, principles of motion study, and production scheduling techniques.
Production and Operation Management Lecture NotesFellowBuddy.com
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We connect Students who have an understanding of course material with Students who need help.
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# Students can catch up on notes they missed because of an absence.
# Underachievers can find peer developed notes that break down lecture and study material in a way that they can understand
# Students can earn better grades, save time and study effectively
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Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
Activity based costing is considered to be useful only for Manufacturing Organizations whereas reality is that it is equally usefull to Service providers
This document discusses different types of cost behavior and methods for analyzing costs. It begins by defining fixed costs as those that remain constant despite changes in output, and variable costs as those that vary directly with changes in output. Mixed costs have both fixed and variable components. The document then examines step-cost behavior and different methods for separating fixed and variable costs, including the high-low method, scatterplot method, and method of least squares. It concludes by discussing multiple regression analysis and the importance of managerial judgment in determining cost behavior.
Cost accounting book of 3 rd sem mba @ bec domsBabasab Patil
The document provides an overview of cost accounting including:
1. Definitions of cost accounting and elements of cost accounting such as cost concepts, material costs, labor costs, overhead costs, and process costing.
2. Descriptions of different costing techniques including standard costing, variance analysis, and cost ledger accounting.
3. Explanations of key cost accounting terms like cost centers, cost units, and classifications of costs according to elements, functions, nature, controllability, and relevance to decision making.
PPCE unit 3 (ME8793 – PROCESS PLANNING AND COST ESTIMATION) TAMILMECHKIT
UNIT III - INTRODUCTION TO COST ESTIMATION
Importance of costing and estimation –methods of costing-elements of cost estimation –Types of estimates – Estimating procedure- Estimation labor cost, material cost- allocation of over head charges- Calculation of depreciation cost
Cost management involves planning and controlling a project's budget to help ensure it is completed within approved funding. It includes processes like resource planning, cost estimating, cost budgeting, and cost control. Resource planning determines what resources like people, equipment, and materials are needed. Cost estimating develops cost approximations for project activities. Cost budgeting allocates overall estimates to specific work items to establish a cost baseline. Cost control monitors performance against the baseline and manages any changes to keep costs on track. Maintaining and improving productivity is important for cost management and completing projects successfully within budget.
Cost estimation involves determining the relationship between costs and activity levels using historical data. There are several types of cost behaviors such as variable, fixed, and semi-variable costs. Managers must understand these cost behaviors to predict how costs will change with activity levels. Common cost estimation methods include account classification, regression analysis, visual fitting, high-low analysis, and engineering estimates. These methods analyze past cost and activity data to develop cost behavior models. Accurate cost estimation requires high quality source data without issues like missing information, outliers, or inconsistent time periods.
This document discusses accounting for factory overhead costs. It covers identifying variable and fixed overhead costs, budgeting overhead, accumulating actual overhead costs, applying overhead to production using predetermined overhead rates, and accounting for differences between actual and applied overhead. Methods discussed include direct labor cost rate, direct labor hour rate, and activity-based costing. The document also addresses distributing service department costs and treating under- or over-applied overhead.
Cost Accounting : Determining How Cost Behavesmingxinlu
This document discusses how to determine cost behavior by estimating cost functions based on the relationship between costs and activity levels. It outlines the key steps in estimating cost functions, including choosing a dependent cost variable and independent cost driver, collecting data, and evaluating the fit of linear and nonlinear models. Common issues with data collection like inconsistent time periods or unreliable measurements are also addressed.
Okay, here are the steps:
1) Change in activity level = High - Low = 9,000 - 5,000 = 4,000 units
2) Change in total cost = High cost - Low cost = $9,700 - $6,100 = $3,600
3) Variable cost per unit = Change in total cost / Change in activity
= $3,600 / 4,000 units = $0.90 per unit
4) Total fixed cost = High total cost - (Variable cost per unit x High activity level)
= $9,700 - ($0.90 x 9,000 units) = $9,700 - $8,100 = $1,600
So
CA Ch.18-Process Costing-part 1-Nureni.pdfsandiibrahim3
The document provides information about process costing, including:
1) Process costing is a system used to calculate unit costs by dividing total costs by units of output, with each unit receiving similar amounts of direct materials, labor, and overhead costs.
2) There are five steps to process costing: summarizing physical units, computing equivalent units, summarizing costs, computing cost per equivalent unit, and assigning costs.
3) The document includes examples demonstrating the weighted average and FIFO methods of process costing, as well as explaining how transferred-in costs from previous departments are treated.
Cost accounting book of 3 rd sem mba @ bec domsBabasab Patil
This document provides an overview of cost accounting concepts and techniques. It defines cost accounting and discusses its objectives. It also covers elements of cost like direct and indirect costs. Key cost accounting techniques discussed include standard costing, marginal costing, absorption costing and direct costing. The document also describes different methods of costing like job costing, process costing and contract costing. It defines important cost classification criteria and cost centers and cost units.
This document provides an overview of project cost management for an IT project management course. It defines key cost management terms and processes including cost estimation, budgeting, and controlling costs. It discusses tools for cost estimation like analogous estimates, bottom-up estimates, and parametric modeling. It also explains earned value management (EVM) as a tool for cost control, defining terms like planned value, earned value, actual cost, and calculating values like cost performance index (CPI) and estimate at completion (EAC).
Here are the key steps of the high-low method without inflation:
1) Select the highest and lowest levels of activity from the available cost and activity data. In this case, the highest activity level is 20 units and the lowest is 10 units.
2) Calculate the change in total cost between the highest and lowest activity levels. Here, the change in total cost is Rs. 200 (Rs. 600 - Rs. 400).
3) Calculate the change in activity level between the highest and lowest points. Here, the change in activity is 10 units (20 units - 10 units).
4) Calculate the variable cost per unit by dividing the change in total cost by the change in activity level. Here, the
The document discusses methods for determining how costs behave and estimating cost functions. It explains that total costs can often be explained by changes in a single activity level and that cost behavior is commonly approximated by linear functions within a relevant range. It then outlines different types of linear cost functions and approaches to estimating cost functions, including the industrial engineering method, conference method, account analysis, and quantitative regression analysis. Key steps in estimation include selecting a dependent cost variable and driver, collecting data, plotting relationships, and evaluating estimated functions.
This document provides information about costing and cost accounting. It defines key terms like costing, cost accounting, cost center, cost unit. It explains different types of costing like pre-costing, current costing and post-costing. It also discusses responsibility centers, different classifications of costs and cost sheets.
This document discusses tools for economic justification of projects, including cost estimating, economic measures of merit, and setting project priorities. It provides formulas for estimating various costs associated with a project such as materials, labor, utilities, maintenance, overhead, depreciation, taxes, and administrative costs. It also discusses economic measures used to analyze projects, including net present value, discounted payback period, and internal rate of return. An example is provided to illustrate how these tools and measures can be used to prioritize projects based on available funding.
This document presents a managerial accounting project on standard costs and variances. It defines standard costs and variances, and explains how to calculate variances for direct materials, direct labor, and variable manufacturing overhead. Variances identify areas for cost reduction and efficiency improvements. The document outlines the calculation methods and significance of price and quantity variances for direct materials, rate and efficiency variances for direct labor, and rate and efficiency variances for variable manufacturing overhead. Responsibilities for variances and limitations of standard costing are also discussed.
The document discusses activity-based costing (ABC) and activity-based management (ABM). It provides examples of how ABC can more accurately assign costs in a manufacturing company. ABC involves identifying key activities, tracing costs to those activities, and assigning costs to cost objects like products using cost drivers. This provides more accurate product costs than a traditional single-rate system. ABM then uses the ABC information for decisions to improve profits.
This document provides lecture notes on production and operation management. It covers topics such as productivity, production systems, forecasting, facilities planning, motion study, production planning and control, project management, and modern manufacturing trends. The notes are organized into 38 lectures intended to be delivered over one semester. Key concepts to be covered include productivity measurement, models of production systems, product vs service systems, forecasting methods, facility layout types, principles of motion study, and production scheduling techniques.
Production and Operation Management Lecture NotesFellowBuddy.com
FellowBuddy.com is an innovative platform that brings students together to share notes, exam papers, study guides, project reports and presentation for upcoming exams.
We connect Students who have an understanding of course material with Students who need help.
Benefits:-
# Students can catch up on notes they missed because of an absence.
# Underachievers can find peer developed notes that break down lecture and study material in a way that they can understand
# Students can earn better grades, save time and study effectively
Our Vision & Mission – Simplifying Students Life
Our Belief – “The great breakthrough in your life comes when you realize it, that you can learn anything you need to learn; to accomplish any goal that you have set for yourself. This means there are no limits on what you can be, have or do.”
Like Us - https://www.facebook.com/FellowBuddycom
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3. Judgment based method
1. Industrial Engineering Method
Physical observation and analysis
Time and motion study
Very expensive to implement
Seldom updated once they are done
Mostly used in manufacturing process where there is a
direct link between materials and labour inputs with
the outputs.
Can be applied to new processes and designs
Less useful in case of costing services
4. 2. Account analysis method
Costs are classified into fixed, variable and mixed
costs
Accountant uses judgment and experience to separate
the accounts into two categories – Fixed and variable
Once the fixed categories are known, the monthly cost
can be computed and this is the fixed amount.
The variable categories need to be further separated
into categories according to the driver the accountant
wishes to associate with the account
5. Eg. Accounts that are variable with respect of direct
labour can be separated, their average cost
determined, and then that total divided by the average
amount of direct labour hours to obtain the variable
rate per direct labour hour.
Accounts driven by machine hours, purchase orders
etc can be separated
6. Quantitative methods
1. High-Low method:
The high-low method preselects the two points that
are used to compute the parameters F ( Fixed cost) and
V ( variable cost).
High point is the point with the highest output or
driver level.
Low point is the point with the lowest output or driver
level.
High and low point determined by the independent
variable.
7. Company data for material handling cost
and number of moves
Month Material Handling cost Number of Moves
Jan $2,000 100
Feb $3090 125
Mar $2780 175
Apr $1990 200
May $7500 500
June $5300 300
July $4300 250
Aug $6300 400
Sept $5600 475
Oct $6240 425
8. 1.Determine high and low point
The high number of moves is in May and the low
number of moves is in January.
2. Calculate the variable rate for materials handling
based on the number of moves.
Variable rate = ( High cost – Low cost)/ ( High moves-
Low moves)
= ($7,500- $2,000)/ (500-100)
= $13.75 per move
9. 3. Calculate the fixed monthly cost of material handling
Fixed cost= Total cost – ( Variable rate * moves)
= $7500 –($13.75*500)
=$625
4. Write the cost formula for the material handling
activity showing the fixed cost and the variable rate.
Total cost = Fixed cost + Variable cost (X)
X= No of moves
Total cost = $625+$13.75(x)
10. 5. If company estimates that Nov. will have 350 moves,
what is the total estimated materials handling cost for
that month?
Material handling cost = $625 +$13.75(350)
= $ 5,437.50
6. If the company wants to estimate the materials
handling cost for the coming year and expects 3,940
moves, what will be the material handling cost?
12($625)+$13.75(3940)
= $61,675
11. 2. Scatter plot method
Plot the data points so that the relationship between
materials handling costs and activity output can be
seen.
Scatter point can provide insight concerning the
relationship between cost and output by allowing one
to visually fit a line to the points on the scatter graph.
13. 3. Method of Least Square
Method of least square identifies the best-fitting line.
With the help of this line cost can be estimated.
Method of least square is also statistically called as
regression model.
14. Learning curve and Nonlinear cost
behaviour
Learning curve is an important type of nonlinear cost
curve.
The basis of the learning curve is almost intuitive –as
we perform an action over and over, we improve, and
each additional performance takes less time than the
preceding ones.
This effect was first documented in aircraft industry.
One common form of the learning curve model is the
cumulative average-time learning curve model.
15. Cumulative Average-Time Learning
Curve
The cumulative average-time learning curve model states
that the cumulative average time per unit decreases by a
constant percentage, each time cumulative quantity of
units produced doubles.
Expression for cumulative average time learning model:
Y=pXq
Y= cumulative average time per unit
X= cumulative number of units produced
P= Time in labour hours required to produce the first unit
q = Rate of learning
16. Cumulative average-time learning
Cumulative No.
Of units
(1)
Cumulative
average time per
unit in
Hours
(2)
Cumulative total
time : Labour
hours
(3) = (1) x (2)
Individual Unit
time for nth
Unit: Labour
Hours
(4)
1 100 100 100
2 80 160 60
3 70.21 210.63 50.63
4 64 256 45.37
5 59.57 297.85 41.85
6 56.17 337.02 39.17
7 53.45 374.15 37.13
8 51.20 409.60 35.45
16 40.96 655.36 28.06
32 32.77 1048.64
17. References:
Liming Guan, Don R. Hansen, and Maryanne M.
Mowen (2014). Corner Stones of Cost Management,
2/e; New Delhi: Cengage Learning
Leslie G. Eldenburg and Susan K. Wolcott (2011). Cost
management: Measuring, Monitoring and Motivating
Performance, 2/e: Wiley.
