This module expands on the principle of accumulating costs. It also covers using cost data to make important decisions as they pertain to investment decisions. It explores two different methods that can be used to accumulate costs: the variable costing system and the absorption costing system. You will learn to differentiate between each system as well as understand the different uses for each type of costing system presented.
Cost estimation is the process of estimating the relationship between costs and cost drivers that are responsible for the costs. There are three main reasons why companies estimate costs. These are:
To manage costs
To make decisions
To plan and set standards
There is a simple way and a complex way to break down costs. The simple way is to break down costs into fixed and variable costs. The complex way is to make cost patterns, such as step costs and mixed costs.
There are three commonly used methods when it comes to cost estimation. These methods are:
Statistical methods using regression analysis
Statistical methods using regression analysis employ cost drivers, which are independent variables and costs, which are dependent variables. When simple regression is used, there is one independent variable. When multiple regression is used, there is more than one independent variable.
With account analyses, the analyst separates costs from the accounting records into categories and their corresponding cost drivers. With the engineering estimates method, engineers create estimates based on the data derived from current practices. These estimates are found by measuring the amount of work involved to complete the activity and then assigning a cost to each activity. It is important to note that statistical methods require the least amount of data as costs are not divided into categories with cost drivers. Engineering estimates are the most expensive and time consuming as identifying activities and their costs is difficult.