BUS 108 Lecture Notes - Lecture 3: Historical Cost, Fixed Cost, Variable Cost
Document Summary
This approach determines the physical relationship between inputs and outputs in a manufacturing process from an engineering study. It is useful to estimating the relationship between a prime cost (dm or. Dl) and activity because this relationship can be directly observed or measured. But, it may not be useful in estimating those costs that are not directly associated with the activity level, such as factory overhead costs of utilities, inspection, repairs and maintenance: analysis of historical costs. This approach obtains cost estimates based on the relationship between costs and activity in past periods. The usefulness of this approach depends upon the consistency of the historical relationship between the cost and activity. There are various methods available based on historical cost analysis: the account classification method. This method is based on the accountant s professional judgment to classify each cost item (including mixed costs) in a period into variable and fixed categories.
