Cost Estimation
                                                                       Chapter 5
           PowerPoint Authors:
                     Susan Coomer Galbreath, Ph.D., CPA
                     Jon A. Booker, Ph.D., CPA, CIA
                     Cynthia J. Rooney, Ph.D., CPA
                                              Copyright © 2017 by The McGraw-Hill Companies, Inc. All rights reserved.
                                                                              5-3
     Learning Objectives
     LO 5-1 Understand the reasons for estimating fixed and variable costs.
     LO 5-2 Estimate costs using engineering estimates.
     LO 5-3 Estimate costs using account analysis.
     LO 5-4 Estimate costs using statistical analysis.
     LO 5-5 Interpret the results of regression output.
     LO 5-6 Identify potential problems with regression data.
     LO 5-7 Evaluate the advantages and disadvantages of alternative
              cost estimation methods.
     LO 5-8 (Appendix A)
              Use Microsoft Excel to perform a regression analysis.
     LO 5-9 (Appendix B)
              Understand the mathematical relationship describing
              the learning phenomenon.
                                                                      5-4
     Why Estimate Costs?
            Managers make decisions and need to compare
             costs and benefits among alternative actions. 
             Cost estimates can be an important element
                 In helping managers make decisions.
  LO                                                                              5-5
  5-1
      Basic Cost Behavior Patterns
     LO 5-1 Understand the reasons for estimating fixed and variable costs.
                                       Costs
               Fixed costs                             Variable costs
          Total fixed costs do not                    Total variable costs
          change proportionately                    change proportionately
           as activity changes.                       as activity changes.
            Per unit fixed costs                     Per unit variable cost
           change inversely as                        remain constant as
             activity changes.                         activity changes.
  LO                                                                  5-6
  5-1 Methods Used to Estimate
     Cost Behavior
        Charlene, owner of Charlene’s Computer Care
              (3C), wants to estimate the cost of a
                   new computer repair center.
                     1.Engineering estimates
                     2.Account analysis
                     3.Statistical methods