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CHAPTER
1 0
D
ETERMINING HOW COSTS BEHAVE
LEARNING
OBJECTIVES
1. Explain the two assumptions frequently used in cost-behavior estimation 2. Describe linear cost functions and three common ways in which they behave 3. Understand various methods of cost estimation 4. Outline six steps in estimating a cost function using quantitative analysis 5. Describe three criteria used to evaluate and choose cost drivers 6. Explain and give examples of nonlinear cost functions 7. Distinguish the cumulative average-time learning model from the incremental unittime learning model 8. Be aware of data problems encountered in estimating cost functions
What is the value of looking at the past? Perhaps it is to recall fond memories or to extend your knowledge of historical events. Maybe your return to the past is done to better understand and predict the future. When an organization looks at the past, it’s typically done to analyze the results of decisions made so that, in the future, the best outcomes are repeated and the mistakes avoided. When Elegant Rugs’ general manager, Wendy Stevens, called her management accountant, Julio Colon, into her office, she had both the past and the future on her mind. Wendy: Julio, I’ve been thinking about our manufacturing operations and some of our recent successes. The new contemporary designs have been a huge success for the company. Yet I know that we can’t expect to repeat our success without an understanding of how we got there. I’d like to see how we can use actual costs to predict costs in the future. Can you help me with this? Julio: Sure. We have a number of techniques at our disposal, all of which require that we separate fixed costs from variable costs.
CHAPTER
1 0
D
ETERMINING HOW COSTS BEHAVE
LEARNING
OBJECTIVES
1. Explain the two assumptions frequently used in cost-behavior estimation 2. Describe linear cost functions and three common ways in which they behave 3. Understand various methods of cost estimation 4. Outline six steps in estimating a cost function using quantitative analysis 5. Describe three criteria used to evaluate and choose cost drivers 6. Explain and give examples of nonlinear cost functions 7. Distinguish the cumulative average-time learning model from the incremental unittime learning model 8. Be aware of data problems encountered in estimating cost functions
What is the value of looking at the past? Perhaps it is to recall fond memories or to extend your knowledge of historical events. Maybe your return to the past is done to better understand and predict the future. When an organization looks at the past, it’s typically done to analyze the results of decisions made so that, in the future, the best outcomes are repeated and the mistakes avoided. When Elegant Rugs’ general manager, Wendy Stevens, called her management accountant, Julio Colon, into her office, she had both the past and the future on her mind. Wendy: Julio, I’ve been thinking about our manufacturing operations and some of our recent successes. The new contemporary designs have been a huge success for the company. Yet I know that we can’t expect to repeat our success without an understanding of how we got there. I’d like to see how we can use actual costs to predict costs in the future. Can you help me with this? Julio: Sure. We have a number of techniques at our disposal, all of which require that we separate fixed costs from variable costs.