Chapter 10 introduces cost estimation methods. Managers use cost estimation to m

Question

Chapter 10 introduces cost estimation methods. Managers use cost estimation to measure relationships based on previous costs incurred for the same production activity levels.

On pages 376-379, four basic cost estimation methods are introduced:

Industrial Engineering Method

Conference Method

Account Analysis Method

Quantitative Analysis Method

Please respond to all of the following prompts:

Choose one of these four methods to discuss in detail. In your main response posting, be sure to address the following elements for the method chosen:

Important information provided

Assumptions used

Advantages and/or disadvantages associated with the method

Explanation / Answer

The account analysis method is a cost accounting method for estimating the different costs associated with producing a product.

When a manager is trying to figure out how much it costs to make a product, he will divide the costs into three categories: variable, fixed, and mixed. Variable costs are the costs that increase as more products are produced like materials. Fixed costs are the costs that remain the same no matter how many products are produced like property taxes on the manufacturing plant. Mixed costs are a variety of fixed and variable costs that can't be separated. The purpose of the account analysis method is to estimate the costs of producing a product relating these three categories together using linear algebra. This method takes experience and knowledge of the company's processes and production.

Let's assume that Apple uses a CNC machine to cut out the body of their iPads in one of their factories. This machine runs of 500 hours and incurs total indirect manufacturing costs of $5,000. Using the account analysis method, a manager could determine that out of the total costs, the fixed costs equal $2,000. Once the manager has identified the fixed costs, he can calculate the variable costs per machine hour or $3,000 / 500 hours. Now all the data can be put into the account analysis formula.

Indirect manufacturing costs = $2,000 of fixed costs + ($6 per machine hour X the total number of machine hours used in production)

Y= B+MX

Management can use this formal to plan what products will be produced and what it will cost.

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