ASISTENSI AB

CH 10
Cost Function
 Cost Function—a mathematical description of how a cost
changes with changes in the level of an activity relating to that
cost.
 Variable costs—costs that change in total in relation to some chosen
activity or output.
 Fixed costs—costs that do not change in total in relation to some chosen
activity or output.
 Mixed costs—costs that have both fixed and variable components; also
called semivariable costs.
 Linear Cost Function
y = a + bX
The dependent The independent
variable: variable:
the cost that is the cost driver
being predicted

The slope of
The intercept: the line:
fixed costs variable cost
per unit

Accounting Statistics
Variable Cost Slope
Fixed Cost Intercept
Mixed Cost Linear Cost Function
Cost Estimation Methods
1. Industrial engineering method : estimates cost functions by analyzing the
relationship between inputs and outputs in physical terms
2. Conference method : the basis of analysis and opinions about costs and their
drivers gathered from various departments of a company
3. Account analysis method : classifying various cost accounts as variable, fixed,
or mixed with respect to the identified level of activity
4. Quantitative analysis methods
1. High-low method
2. Regression analysis
These method are not mutually exclusive and often more than one is used.
What are the six steps in estimating a cost function using
quantitative analysis?
1. Memilih Variabel Dependen (biaya yang akan dipredisksi)  Y
2. Mengidentifikasi Biaya Independen (level of activity atau cost driver)  X
3. Mengumpulkan Data Variabel Dependen dan Cost Driver
4. Plotting Data (untuk mengamati hubungan umum antara variable dependen
dan cost driver)
5. Mengestimasi Fungsi Biaya
6. Mengevaluasi Cost Driver dari Estimasi Fungsi Biaya  dengan kriteria
tertentu
Describe three criterias used to evaluate and choose cost
drivers!
1. Economic plausibility (cost driver masuk akal secara ekonomis)
Cause-effect relationship. The correlation between the independent variable and
dependent variable, is it positively related or negatively related?  r2. The bigger the r2
indicates that the regression is better.
2. Goodness of fit
Vertical differences between the actual costs (dots) and predicted costs (regression line).
The closest the gap means that the predicted costs have stronger relationship with the
actual cost à look at the standard error.
3. Significance of the independent variable.
Flat regression line indicates weak relationship between the cost driver and cost.
For one additional X, how can it affect the Y?  look at the t-stat. We can say the
regression has significance result if t-stat > 1.96
Why causality in estimating cost function important?
Causality is a connection between cause and effect. Without a
cause-and-effect relationship, managers will be less confident about
their ability to estimate or predict costs.
Additional note, a high correlation (connection) between activities
and costs does not necessarily mean causality. For example, time
spend for studying doesn’t always reflect the GPA you will earn