Cost Accounting For Dummies

Chapter 10

Cost Drivers and Cost Estimation Methods

In This Chapter

Understanding cost behavior assumptions

Reviewing how costs behave

Using steps to estimate a cost function

Choosing cost drivers

Comparing linear and nonlinear cost functions

If you can understand cost behavior, you can understand and forecast costs. A cost driver measures how much cost an activity generates. I’ve described a cost object in other chapters as a “sponge” that’s full of costs. The cost driver adds to the size of the sponge or subtracts from its size.

Cost behavior links an activity (such as sales or production) to a cost. Cost functions relate a cost to an activity level using a mathematical formula. You use a cost function formula to build a better cost/activity relationship.

This chapter helps you understand cost drivers and the activities that create them. You can use that knowledge to reduce costs and increase your profit. (Ah, that marvelous bottom line — again!) It guides you through the steps ...