Select the cost driver-cost estimating relationship, Managerial Accounting

Select the cost driver(s):

This might also be termed to as independent, explanatory or predictor variable. A cost driver can be stated as any factor whose change causes a change in the net cost of an activity.

Illustrations of potential cost driver:

•    Direct labor hours
•    Machine hours
•    Number of units
•    Number of production runs
•    Number of orders, and so on.

The potential cost driver must be plausible (that is, make economic logic) and must be precisely measured.

In choosing potential cost drivers for CER development Consider the factors as follows:

(i) Variables must be quantitatively measurable. Parameters like maintainability are hard to use in estimating since they are hard to measure quantitatively.

(ii) Data availability is also significant. When you cannot acquire historical data, it will be not possible to analyze and use the variable as a predictive tool. For illustration, an independent variable like physical dimensions or parts count would be of little value throughout the conceptual stage of system development whenever the values of the independent variables are not identified. Be specifically cautious of any CER based on 2 or 3 data interpretation.

When there is a choice among developing a CER based on performance or physical characteristics, performance characteristics is generally the better choice, since performance characteristics are generally identified before design characteristics.

Posted Date: 12/4/2012 7:31:15 AM | Location : United States

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