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

Exercise 28

Methods of Estimating Costs: Scattergraph

Prepare a scattergraph based on the overhead and labor-hour data in Exercise 5-26.

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.

Statistical method

Statistical is more accurate method of cost estimation as compared to engineering and accounting analysis method as they have certain limitations. Under this method, random events are separated from while analyzing relationship between cost and activity. While using statistical method for cost estimation it is important to confirm that past activity levels are related to current estimation.

Scatter graph

This graph indicates the relationship between cost and volume which based on past knowledge. Scatter graph considers all data points and develops a pattern of data points and provide rough estimation of cost. This graph also indicates fixed and variable of costs with activity level. It also shows the activity level where the relationship between cost activity level changes.