Cost Management

10th Meeting

Cost Estimation

Muhammad Taufik, S.E., M.A., M.Ak.,

Diterapkan di mata kuliah: Cost Management, SAP AC040 Cost Management Akuntansi Keuangan I & II
(Intermediate), Sustainability Reporting, Akuntansi Industri Khusus (Syariah), Teori Akuntansi, Seminar Akuntansi,
Metodologi Penelitian.

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 Learning Objectives (LO) in 6th Meeting

• LO 1 Arguing the strategic role of cost estimation

• LO 2 Arguing the six steps of cost estimation
• LO 3 Apply the high-low method as cost estimation

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LO 1 Cost Estimation

Cost estimation is the development of the functional

relationship between a cost object and its cost drivers for
the purpose of predicting the cost

• Cost estimates based on activity-based, volume-

based

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LO 1 The critical of cost estimation
1. To facilitate strategy
development and
implementation.
• Cost estimates are particularly
important for firms competing
on the basis of cost leadership.
• Cost estimates guide
management in determining
which management techniques
—such as target costing
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1) Cost leadership is applied
both ABC / Volume
2) Job costing utilize ABC
3) Process costing utilize ABC
4) Job costing utilize VBC
5) Process costing utilize VBC
Give an example for all of
scenario in above.
LO 1 The critical of cost estimation (cont…)

2. Determine the value 1) Value Chain

chain

• Estimations of costs
provide a critical
understanding of how
reshaping the value chain
can reduce costs.
2) Reshaping the value chain to
determine whether to buy
(external procurement) the goods
from suppliers or manufacture
them in-house (internal
procurement), for example

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LO 1 The critical of cost estimation
3. Facilitate cost
calculations based on
targets
• Profit = sales – cost
• Target Profit = sales –
cost
Management uses cost estimates
of different product designs as
part of the process of selecting
the particular design that provides
the best value to the customer
while reducing manufacturing and
other costs.
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(cont…)
4. Facilitate effective
measurement, evaluation, and
compensation
• Cost estimates play a key role
in determining costs in
business units, which affect
division managers’ financial
performance and opportunity
for promotion and
compensation and the ability to
attract capital investment to
their division.
LO 1 Question?

Who is most practical in Perancang produk, teknisi,

identifying costs? karyawan produksi

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 LO 2 Steps in Cost Estimation
1. Define the Cost Object to Be Estimated
Although it might seem elementary, defining the particular cost to be estimated requires
care.
• For example, if the goal is to estimate product costs to improve product pricing, the
relevant cost objects are the products manufactured in the plant.
• In contrast, if the goal is to reward managers for reducing cost, the most appropriate
cost objects are the individual manufacturing departments in the plant

2. Determine the Cost Drivers

Fuel expense for a large delivery truck, for example, might be primarily a function of
miles traveled, but it is also affected by the average weight delivered, the number of
hours of operation, and the nature of the delivery area.

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 LO 2 Steps in Cost Estimation (cont…)
3. Collect Consistent and Accurate Data
Once the cost drivers have been Consistent (time) Financial Acc:
selected, the management Adding knowledge (time)
accountant collects data on the Accurate (source) Valid (source - evidence)
cost object and cost drivers.
Using biweekly data for some variables and monthly Do not apply short/ long
data for other variables causes errors in estimates. period

4. Graph the Data

The objective of graphing data is to identify unusual patterns
• For example, a week’s downtime to install new equipment causes unusual production
data for that week; such data should be excluded when developing a cost estimate.

Apa maksud Prof Blocher? Bagaimana jika biayanya adalah

Apakah berarti biaya …. tidak harus ada? perawatan mesin?
Jadi, biaya apa (…..) dalam kalimat di atas?
Apakah yang anda pahami dari
Give an example both for industrial and data ini?
offfices purposes

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LO 2 Steps in Cost Estimation (cont…)
5. Select and Employ the Estimation Method

1. High-Low Method
2. Regression Method

6. Assess the Accuracy of the Cost Estimate

A critical final step in cost estimation is to consider the potential for error when the
estimate is prepared.
This involves considering:
 The completeness and appropriateness of cost drivers selected in step 2,
 The consistency and accuracy of data selected in step 3,
 The study of the graphs in step 4, and
 The precision of the method selected in step 5.

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 LO 3 Cost Estimation Method
• There are two cost estimation methods • Baca (Remember:
discussed in this chapter: define)
– The High-Low method • Pahami (Understand:
identify)
– Regression analysis (both linear and
nonlinear models)
• Analisis (Analyze:
experiment)
• Tentukan (evaluate:
• The High-Low method is simpler but less judge/ weigh)
accurate than the regression method.

• The method chosen by the cost analyst will

depend on:
– the level of accuracy desired and
– any limitations on cost, time, and effort

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 LO 3 Cost Estimation, An Example
Bill Garcia, a management accountant, wants to estimate future
maintenance costs for a large manufacturing company; recent monthly
cost data ($) are as follows:

Based on above
information, Garcia
feels that
maintenance costs
for August will likely
be between $22,500
and $23,500, but he
wants to be
accurate so he
considers cost
estimation.

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LO 3 Cost Estimation, An Example (cont..)

• Total maintenance costs are likely to include both variable and

fixed costs.
• The fixed cost (FC) portion is the planned (preventive)
maintenance that is performed regardless of the plant’s volume of
activity.
• Also, a part of maintenance cost varies with the number of
operating hours (VC); more operating hours mean more wear on
the machines and thus more maintenance costs.
• Garcia collects the additional operating-hours information as
follows:

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LO 3 Cost Estimation, An Example (cont..)

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LO 3 High-Low Method
The high-low method uses algebra to determine a unique
estimation line (equation) between representative high and low
points in the data
 The high-low equation is as follows:

Y = a + (bX)

Where Y = the value of the estimated cost

X = the cost driver
a = a fixed quantity that represents Y when X is zero
b = the slope of the line (unit variable cost)

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LO 3 High-Low Method (Cont…)

 Using the graph, Garcia picks two data points, one

representative of the lower points and one representative
of the higher points.

 Let us assume that Garcia picks from the data set

February (low point) and April (high point)

 The next step is to calculate the equation of the line

connecting these two points

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LO 3 High-Low Method (Cont…)

b = Unit variable cost (VC) = $520 ÷ 289 hours = $1.80/hour

a = Fixed cost (FC) = Total cost – Estimated variable cost

Fixed cost = $23,030 – ($1.80/hour × 3,614 hours)
Fixed cost = $23,030 – $6,505 = $16,525

Estimated cost function:

Total cost = Fixed cost + Variable cost
Y = a + (b × X)
Y = $16,525 + ($1.80 × X)

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LO 3 High-Low Method (Cont…)

For values of the cost driver (operating hours) within the

“relevant range,” the preceding equation can be used to
estimate monthly maintenance costs. For example, for
the month of August:
Suppose that 3,600 operating hours are expected
in August:

Y = 16,525 + (1.80 x X)
Y = 16,525 + (1.80 x 3,600)
Y = 16,525 + 6,480
Y = $23,005 in maintenance costs

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LO 3 Lest begin to build the Lab

Susunlah scenario
1. Define the Cost Object to Be Estimated
2. Determine the Cost Drivers
3. Collect Consistent (waktu/ period) and Accurate
Data
4. Graph the Data (ada idle capacity, FC, VC)
5. Select and Employ the Estimation Method
6. Assess the Accuracy of the Cost Estimate

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 Thank You

Reference:
• Blocher, Edward J, David E. Stout, Paul E. Juras. (2019). Cost
Management: A Strategic Emphasis (8th ed). New York: New York:
McGraw Hill

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