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Measurement of Cost Behavior

Q: Which algebraic equation do managers often use to describe the relationship between a cost and its cost driver(s)?

This algebraic equation is called a cost function . All the different cost-functions are together the mixed-cost function and it is written down like: Y = F + VX Y = monthly facilities maintenance department cost F = monthly fixed maintenance cost V = variable cost per patient-day X = cost-driver activity in number of patient days per month

Q: What is a plausible cost function?

A cost function is plausible if a knowledgeable analyst can make sound economic justifications why a particular cost driver could cause the cost in question.

Q: What is a reliability cost funtion?

A ' reliable ' cost function is one that accurately and consistently describes actual cost behavior, past and future.

16 important questions on Measurement of Cost Behavior

How does management influence cost behavior throughout product and service decisions and the value chain?

They influence cost behavior throughout the value chain through their choices of process and product design, quality levels, product features, distribution channels, and so on.

How does management influence cost behavior through capacity decisions?

They influence cost behavior throughout capacity decisions because they capacity costs go along with capacity decisions, capacity costs are fixed costs of being able to achieve a desired level of production or service while maintaining product or service attributes, such as quality.

Most companies make a capacity decision infrequently, has serious consequences for the competitiveness of a company. When making frequently capacity decisions it becomes highly structured.

How does management influence cost behavior throughout committed fixed costs?

Management influences cost behavior throughout committed fixed costs (costs arising from the possession of facilities, equipment, lease contracts, and so on) because the capacity of the facilities maintenance department was a management decision.

e.g. When the decision determined the magnitude of the equipment cost.

How does management influence cost behavior throughout discretionary fixed costs?

Discretionary fixed costs are costs determined by management as part of the periodic planning process in order to meet the organization's goals. Management will determine how much to spend on discretionary items such as advertising and promotion costs, etc. These costs become fixed until the next planning period.

How does management influence cost behavior throughout technology decisions?

Managers choose the type of technology the organization will use to produce its products or deliver its products or deliver its services. So they make a decision on which technology, how much they pay, they want.

How does management influence cost behavior throughout cost-control incentives?

The incentives that management creates for employees can affect future costs. Managers use their knowledge of cost behavior to set cost expectations, and employees may receive compensation or other rewards that are tied to meeting these expectations.

Which algebraic equation do managers often use to describe the relationship between a cost and its cost driver(s)?

This algebraic equation is called a cost function. All the different cost-functions are together the mixed-cost function and it is written down like:

Y = F + VX

Y = monthly facilities maintenance department cost
F = monthly fixed maintenance cost
V = variable cost per patient-day
X = cost-driver activity in number of patient days per month

Which two criteria should managers apply to obtain useful and accurate cost functions?

Plausibility and reliability.

What is a plausible cost function?

A cost function is plausible if a knowledgeable analyst can make sound economic justifications why a particular cost driver could cause the cost in question.

What is a reliability cost funtion?

A "reliable" cost function is one that accurately and consistently describes actual cost behavior, past and future.

What analysis do managers use to identify appropriate cost drivers and their effects on the costs of making a product or providing a service?

Activity analysis

What is the engineering analysis about?

The systematic review of materials, supplies, labor, support services, and facilities needed for products and services; measuring cost behavior according to what costs should be, not by what costs have been. Then use Y = F + VX

What is the account analysis about?

When using an account analysis, a company classifies each account as a variable cost or as a fixed cost with respect to a selected cost driver. When you know what variable is and what fixed, you can use the formula Y = F + VX

What is the high-low method about?

It is a simple method for measuring a linear-cost function from past cost data, focusing on the highest-activity and lowest-activity points, and fitting a line through these two points.

What is the visual-fit method about?

A method in which the cost analyst visually fits a straight line through a plot of all the available data.

What is the least-squares regression about (regression analysis)?

Measuring a cost function objectively by using statistics to fit a cost function to all the data.

The question on the page originate from the summary of the following study material:

Introduction to Management Accounting Global Edition | 9780273790013 | Charles T Horngren

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Measurement of Cost Behavior

16 important questions on Measurement of Cost Behavior

How does management influence cost behavior throughout product and service decisions and the value chain?

How does management influence cost behavior through capacity decisions?

How does management influence cost behavior throughout committed fixed costs?

How does management influence cost behavior throughout discretionary fixed costs?

How does management influence cost behavior throughout technology decisions?

How does management influence cost behavior throughout cost-control incentives?

Which algebraic equation do managers often use to describe the relationship between a cost and its cost driver(s)?

Which two criteria should managers apply to obtain useful and accurate cost functions?

What is a plausible cost function?

What is a reliability cost funtion?

What analysis do managers use to identify appropriate cost drivers and their effects on the costs of making a product or providing a service?

What is the engineering analysis about?

What is the account analysis about?

What is the high-low method about?

What is the visual-fit method about?

What is the least-squares regression about (regression analysis)?

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