BUS 108 Chapter Notes - Chapter 3: Fixed Cost, Historical Cost, Variable Cost
Document Summary
Legend: yellow= book teal= examples pink=discussion: the engineering approach. 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. Pros: used when no past experience is available, estimating relationships between prime cost and activity. Cons: estimating costs with activity base: utilities, supervision, repairs and maintenance, expensive method (extensive analysis needed to see relationship between production factors and units produced: 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.
