Question

1- What kind of effects do the cost estimation methods have on employee behavior? (HINTS: cost estimates are used to support budgetary allocations to various departments; cost estimates are used in bidding for contracts (e.g., cost-plus contracts); learning phenomenon).

Answer 1

1. ESTIMATE COSTS USING ACCOUNT ANALYSIS, THE HIGH-LOW METHOD, THE SCATTERGRAPH METHOD, AND REGRESSION ANALYSIS.

FOUR COMMON APPROACHES ARE USED TO ESTIMATE FIXED AND VARIABLE COSTS:

· ACCOUNT ANALYSIS

· HIGH-LOW METHOD

· SCATTERGRAPH METHOD

· REGRESSION ANALYSIS

ACCOUNT ANALYSIS

THE ACCOUNT ANALYSIS APPROACH IS PERHAPS THE MOST COMMON STARTING POINT FOR ESTIMATING FIXED AND VARIABLE COSTS. THIS APPROACH REQUIRES THAT AN EXPERIENCED EMPLOYEE OR GROUP OF EMPLOYEES REVIEW THE APPROPRIATE ACCOUNTS AND DETERMINE WHETHER THE COSTS IN EACH ACCOUNT ARE FIXED OR VARIABLE. TOTALING ALL COSTS IDENTIFIED AS FIXED PROVIDES THE ESTIMATE OF TOTAL FIXED COSTS. TO DETERMINE THE VARIABLE COST PER UNIT, ALL COSTS IDENTIFIED AS VARIABLE ARE TOTALED AND DIVIDED BY THE MEASURE OF ACTIVITY.

HIGH-LOW METHOD

ANOTHER APPROACH TO IDENTIFYING FIXED AND VARIABLE COSTS FOR COST ESTIMATION PURPOSES IS THE HIGH-LOW METHOD.

SCATTERGRAPH METHOD

MANY ORGANIZATIONS PREFER TO USE THE SCATTERGRAPH METHOD TO ESTIMATE COSTS. ACCOUNTANTS WHO USE THIS APPROACH ARE LOOKING FOR AN APPROACH THAT DOES NOT SIMPLY USE THE HIGHEST AND LOWEST DATA POINTS. THE SCATTERGRAPH METHOD CONSIDERS ALL DATA POINTS, NOT JUST THE HIGHEST AND LOWEST LEVELS OF ACTIVITY.

REGRESSION ANALYSIS

REGRESSION ANALYSIS IS SIMILAR TO THE SCATTERGRAPH APPROACH IN THAT BOTH FIT A STRAIGHT LINE TO A SET OF DATA POINTS TO ESTIMATE FIXED AND VARIABLE COSTS. REGRESSION ANALYSIS USES A SERIES OF MATHEMATICAL EQUATIONS TO FIND THE BEST POSSIBLE FIT OF THE LINE TO THE DATA POINTS AND THUS TENDS TO PROVIDE MORE ACCURATE RESULTS THAN THE SCATTERGRAPH APPROACH. THE HIGH-LOW METHOD VARIES SIGNIFICANTLY FROM THE OTHER THREE APPROACHES, LIKELY BECAUSE ONLY TWO DATA POINTS ARE USED TO ESTIMATE UNIT VARIABLE COST AND TOTAL FIXED COSTS.