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

Exercise 10

Why might an experienced executive prefer account analysis to statistical cost estimation methods?

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.

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.