Chapter 3, Cost Behavior & Estimation (Deck 3.1)

Question 1

What kind of cost is it if when the activity level changes, the total cost go up or down.

Given an Example in a Restaurant Scenario.

Answer 1

This is a Variable Cost as cost goes up or down along with activity level.

An Example of a Variable Cost in a Restaurant Scenario would be if it costs you $20 to eat out at a restaurant, you’d just multiply 20 but the amount of time you ate out and this would equal your total cost.

Question 2

What kind of cost is it if when the cost driver changes, the total costs stay the same?

Give an Example in a Rent Scenario.

Answer 2

This would be a Fixed Cost because as the cost driver changes, the total costs stay the same.

An Example of a Fixed Cost in a Rent Scenario would be if your total rent is $, per quarter regardless of the number of days you stayed in your apartment.

Question 3

What kind of cost contains both Variable and Fixed Components?

Give an Example in a Car Operating Scenario.

Answer 3

A Mixed Cost contains both Variable and Fixed Cost Components.

An Example of a Mixed Cost in a Car Operating Scenario would be:
- Cost per mile: Gas and Maintenance
- Car Payment: Set amount each month

Question 4

What are the 3 ways to estimate total costs?

Answer 4

The 3 ways to estimate total costs are:
1. Account Analysis Method
2. High-Low Method
3. Regression

Question 5

Can you describe the Account Analysis Method?

Answer 5

The Account Analysis Method is when you are basically using your expert knowledge to evaluate costs. This would be when the costs are not very complex.

Basically looking at the data and coming up with a formula that we can use to estimate the total costs.

Question 6

Can you Describe the High-Low Method?

Answer 6

The High-Low Method is when we have Fixed and Variable Costs buried within total cost and then regression.