Cost Behavior and Estimation

Topic 6: Cost behavior, estimation, cost allocation, control and activity-based costing
Name
Course
Instructor
Date
Introduction
Understanding cost behavior, allocation and costs is necessary for planning, control and decision-making including making predictions, whereby the Activity-Based Costing has been preferred compared to the traditional costing methods. The case for cost control is that it allows management accountants to compare the actual costs with the budgeted costs, which are predicted depending on the cost behavior (Maher, Stickney, & Weil, 2011). In allocating the costs, there is a need to understand cost behavior where costs are identified and aggregated to cost objects. In any case, to justify the costs, the performance is evaluated using the budgets with the fixed and variable costs having been identified and placed in different pools. This is a review on cost behavior and estimation, cost allocation, control and Activity-based costing.
Cost behavior and estimation
Cost and management accounting focus on cost behavior to inform the management on the decision-making process. The management is responsible for utilizing the cost behavior information through their analysis of financial data (Goosen, 2008). In particular the distinction between the fixed and variable costs is necessary to understand the cost behavior, since only the variable costs vary with the level of output (Goosen, 2008). The management separates the fixed and variable costs from the total costs, highlighting the importance of being knowledgeable. The validity of management accounting information is dependent on the assumptions made, and this has a direct impact on decision made by the management.
There is a direct relationship between the variable costs and total costs in manufacturing as the level of output changes. The variable cost and foxed costs are equal to the total costs, whereby the fixed costs remain unchanged regardless of the level of activities. Hence, the variable cost per unit needs to be known before calculating the total costs of production. Additionally, there are costs that can be fixed in the short run but then behave like variable in the long run. The management then needs to make decisions based on the cost behavior. There is an assumption that the relationship between the activities and variable costs is linear, and this makes it easier to make projections on future costs (Goosen, 2008).
Cost allocation and control and Activity-based costing
Cost allocation relates to assigning the indirect costs to particular cost objects focusing on an allocation base, which represents a business function. The cost object could be products, processes, departments and even activities. The related overhead costs are placed in a cost pool, with the cost driver being the factors that causes the cost pools to increase and the cost driver (Jiambalvo, 2009). Understanding costing techniques is necessary to determine profitability, the value created as well as efficiency and effectiveness of the operational processes (Professional Accountants in Business Committee, 2009). Even though, does project information on past performance it may be beneficial towards motivating the people t...