Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 11

When preparing cost estimates for account analysis purposes, should the costs be extracted from the historical accounting records?

Step 1 of 2

Cost estimation

Cost estimation is an important exercise because it helps managers in decision making. Correct cost estimates result in cost saving and making business successful. Cost estimates helps managers to evaluate and choose the best alternative. It is important for managers to capture the correct cost for each alternative.

There different methods used for cost estimation like engineering, accounting and statistical analysis.

Accounting method

This method identifies the relationship between cost and activity. Each cost is classified as fixed and variable and then cost is identified for each activity. For example, a company wants to manufacture 100 music system in its manufacturing plant, so the cost of material, labor, electricity, fuel etc. is identified as variable cost which per unit based and cost or rent of building is fixed cost.