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ADMS 3510
Summer 2013

Managerial Cost Accounting and Analysis

Lawrence Shum
[e-mail] ADMS3510@yahoo ca

Analysis of Cost Function
• Correlation
• Orderly association of changes in 1 quantity that explains but not necessarily causes changes in another quantity

• Economic plausibility
• Qualitative assessment of whether relationship between cost driver as predictor variable & indirect costs as outcome variable makes economic sense
Lawrence Shum 10.1

Common Assumptions
• Causality
• Variations in activity level of cost driver explain variations in related total cost

• Linearity
• Costs behave in linear manner within relevant range of activity

• Normality
• Data unbiased
Lawrence Shum 10.2

Exercise
• Determine
• Correlation? • Causality? • Economic plausibility?

1. Stocks li b higher 1 St k climb hi h as women’s skirts get ’ ki t t shorter 2. Number of defective products detected rises as inspection rate increases
Lawrence Shum 10.3

Estimation Procedure
1. Determine costs to be included in cost pool & identify potential cost drivers 2. Gather historical data on potential cost drivers p & cost pools 3. Test data for
• Economic plausibility • Linearity • Continuity

4. Graph data & identify best cost driver 5. Estimate cost function & relevant range
Lawrence Shum 10.4

Estimation Methods… Methods
• Industrial engineering
• Work-measurement method
• Using time-&-motion studies

• Time-consuming & costly

• Conference method
• Using analyses & opinions gathered from various departments • Paralysis by analysis
Lawrence Shum 10.5

…Estimation Methods Estimation
• Account analysis
• Widely used • Possible distortions due to time lag between incurring cost & receiving benefits
• Accruals / billing/payment delays

• Quantitative analysis
• High low method High-low • Regression analysis
Lawrence Shum 10.6

y = a + bx
Algebra x Independent variable Graphics Horizontal axis Cost Cost driver

y