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Chapter 2

CHapter 2

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School
Ryerson University
Department
Accounting
Course
ACC 406
Professor
George Gekas
Semester
Winter

Description
Lecture2: Cost Functions High Low Regression Analysis Dr. George Andrew Gekas These notes are posted on blackboard to high light and complement certain aspects of the topic, facilitate those students who may have missed my lecture, balance traditional with internet based learning and overall enhance students learning. The notes are not meant to suggest what may be in the exams, replace coming to class, textbook studying andor problem solving. OVERVIEW This chapter presents a discussion on how costs change as levels of an organizations activities change, Cost measurement, cost functions, and the methods for measuring cost functions are presented. Engineering analysis, account analysis, the high-low, visual fit, and least- squares methods are explained and illustrations are provided. Linear Cost behaviour single multi drivers Accountants and managers assume that cost behaviour is linear over some relevant range of activities or change in cost drivers. Linear-Cost Behaviour - graphed with a straight line when a cost changes proportionately with changes in a single cost driver. Volume of a product produced or service provided is the primary driver for some costs (e.g., printing labour, ink, paper, and binding costs of producing the textbook). Other costs are more affected by activities not directly related to volume and often have multiple cost drivers. These costs are not easily identified with or traced to units of output (e.g., the salaries of the editorial staff of the publisher of the text). In practice, many organizations use a single cost driver to describe each cost even though many have multiple causes. Careful use of linear-cost behaviour with a single cost driver often provides cost estimates that are accurate enough for most decisions, though each cost may have a different cost driver. The use of linear cost behaviour may be justified on cost-benefit grounds. Step- and Mixed-Cost Variable costs vary in proportion to changes in their cost drivers and fixed costs as those that are not affected by cost-driver activity. Two types of costs combine characteristics of both fixed and variable cost behaviour. www.notesolution.com
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