When Estimating the Cost Function for Each Cost Pool, the Manager

question 26

True/False

When estimating the cost function for each cost pool, the manager must pay careful attention to the cost hierarchy because the cost pool may have more than one cost driver from different levels of the cost hierarchy.

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Definitions:

Depreciation

The allocation of the cost of an asset over its useful life, reflecting the reduction in value owing to wear and tear, age, or obsolescence.

Sensitivity Analysis

The study of how the variation in the output of a model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of a model.

Fixed Costs

Expenses that do not change with the level of production or output over the short term, such as rent or salaries.

Variable Cost

Expenses that change in proportion to the amount of production or output levels.