Quick Answer: What Are The Advantages Of Using The High Or Low Estimates?

What exactly is a cost driver?

A cost driver is the unit of an activity that causes the change in activity’s cost.

Activity Based Costing is based on the belief that activities cause costs and therefore a link should be established between activities and product.

The cost drivers thus are the link between the activities and the cost of the product..

What is an example of a cost driver?

An example is a change in the cost of warehousing or a change in the level of production. More technical cost drivers are machine hours, the number of engineering change orders, the number of customer contacts, the number of product returns, the machine setups required for production, or the number of inspections.

What is the advantage of using regression analysis to determine the cost equation?

What is the advantage of using regression analysis to determine the cost equation? It will generally be more accurate that the high-low method. True statement about regression analysis: The R-square generated by the regression analysis is a measure of how well the regression analysis cost equation fits the data.

What are cost disadvantages?

A cost disadvantage means your business is unable to create, produce, acquire, transport or distribute goods to customers at rates equal to or better than competitors.

What are the advantages of cost sheet?

Advantages of Cost SheetIt is a simple and useful medium of communication which gives information about costs to all levels of management in a simple and lucid form.It helps in comparative study of the various elements of costs with the past results and standard cost. … It helps the management in fixing up the selling price more accurately.More items…•

How do you separate mixed costs?

Use the High-Low Method to Separate Mixed Costs into Variable and Fixed ComponentsBased on a table of total costs and activity levels, determine the high and low activity levels. … Use the high and low activity levels to compute the variable cost. … Figure out the total fixed cost.

What is the main drawback of the high low method of cost estimation?

Disadvantages of the Method The high-low method assumes that fixed and unit variable costs are constant, which is not the case in real life. Because it uses only two data values in its calculation, variations in costs are not captured in the estimate.

How do you calculate fixed costs?

Calculate fixed cost per unit by dividing the total fixed cost by the number of units for sale. For example, say ABC Dolls has 6,000 dolls available for customer purchase. To determine the average fixed cost, divide $85,200 (the total fixed cost) by 6,000 (the number of units for sale).

What makes a good cost driver?

Cost drivers are the elements of a business that cause an overhead cost against the goods manufactured or services provided. Some cost drivers are necessary and unchangeable while others place a high than needed overhead cost against production.

How do you calculate cost drivers?

Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. Multiply the cost driver rate by the number of cost drivers.

Why is regression analysis better than high low method?

The high low method uses a small amount of data to separate fixed and variable costs. It takes the highest and lowest activity levels and compares their total costs. On the other hand, regression analysis shows the relationship between two or more variables. It is used to observe changes in the dependent variable.

What are the advantages of costing?

Companies can capitalize on a cost advantage in one of two ways: They can price their products the same as their competitors but make more profit because their costs are lower. They can lower their prices below those charged by competitors to attract more customers and gain market shares.

Is Depreciation a fixed cost?

Depreciation is one common fixed cost that is recorded as an indirect expense. Companies create a depreciation expense schedule for asset investments with values falling over time. For example, a company might buy machinery for a manufacturing assembly line that is expensed over time using depreciation.

What are the 4 types of cost?

Following this summary of the different types of costs are some examples of how costs are used in different business applications.Fixed and Variable Costs.Direct and Indirect Costs. … Product and Period Costs. … Other Types of Costs. … Controllable and Uncontrollable Costs— … Out-of-pocket and Sunk Costs—More items…•

What is needed to separate mixed costs as variable and fixed costs?

Methods for separating mixed costs Management usually needs to know what fixed and variable costs are included in mixed costs. This is required for budgeting and planning purposes, among others. Using the total costs and the associated activity level, it is possible to break out the fixed and variable components.

What is the advantage of using regression analysis for cost estimating purposes rather than the high low method?

Regression analysis is more accurate than the high-low method because the regression equation estimates costs using information from ALL observations whereas the high-low method uses only TWO observations. estimates the relationship between the dependent variable and TWO OR MORE independent variables.

What is high and low point method?

High-low point method is a technique used to divide a mixed cost into its variable and fixed components. … Under high-low point method, an estimated variable cost rate is calculated first using the highest and lowest activity levels and mixed costs associated with them.

What is the High Low method of cost estimation?

What Is the High-Low Method? In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

Why is regression analysis used for cost estimation?

Answer: Regression analysis tends to be most accurate because it provides a cost equation that best fits the line to the data points. … The high-low method was ruled out because it only uses two data points and Eric would prefer a more accurate estimate.

How do you calculate the breakeven point?

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

What are the advantages of high low method?

One advantage of the high-low method is the lack of formality required. The accountant can analyze these numbers using data from the monthly expenses and the activity level. He does not need to contact anyone outside of the company to determine the fixed expenses or the variable rate per unit.