CHAPTER10DeterminingHowCostsBehave

Chapter10learningobjectivesDescribelinearcostfunctionsandthreecommonwaysinwhichtheybehaveExplaintheimportanceofcausalityinestimatingcostfunctionsUnderstandvariousmethodsofcostestimationOutlinesixstepsinestimatingacostfunctionusingquantitativeanalysisDescribethreecriteriausedtoevaluateandchoosecostdrivers10-2

Chapter10learningobjectives,concludedExplainnonlinearcostfunctions,inparticularthosearisingfromlearningcurveeffectsBeawareofdataproblemsencounteredinestimatingcostfunctions10-3

CostFunction,defined Acostfunctionisamathematicaldescriptionofhowacostchangeswithchangesinthelevelofanactivityrelatingtothatcost.Managersoftenestimatecostfunctionsbasedontwoassumptions:Variationsinthelevelofasingleactivity(thecostdriver)explainthevariationsintherelatedtotalcosts,andCostbehaviorisapproximatedbyalinearcostfunctionwithintherelevantrange.10-4

CostTerminologyFrompriorchapters,wearefamiliarwiththedistinctionbetweenvariableandfixedcostsandinthischapterintroducemixedcosts.Variablecosts—coststhatchangeintotalinrelationtosomechosenactivityoroutput.Fixedcosts—coststhatdonotchangeintotalinrelationtosomechosenactivityoroutput.Mixedcosts—coststhathavebothfixedandvariablecomponents;alsocalledsemivariablecosts.10-5

LinearCostFunctiony=a+bXThedependentvariable:thecostthatisbeingpredictedTheindependentvariable:thecostdriverTheintercept:fixedcostsTheslopeoftheline:variablecostperunit10-6

BridgingAccountingandStatisticalTerminologyAccountingStatisticsVariableCostSlopeFixedCostInterceptMixedCostLinearCostFunction10-7

LinearCostFunctionsIllustrated10-8

CriteriaforClassifyingVariableandFixedComponentsofaCostChoiceofcostobject—differentobjectsmayresultindifferentclassificationofthesamecost.Timehorizon—thel