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- Tendency to classify costs for all time.
This is a tendency to classify costs, without too much regard to their actual behavior, as fixed or
variable according to conventions. An example of this tendency is to classify labour costs as purely
variable, whereas labour costs have a fixed element.
- Uncritical use of historical data
If past cost data are to be used for prediction purposes, care must be taken to ensure that they are
reasonably representative and not subject to special conditions. Past data should be adjusted to
take account of non- volume factors.
- Linearity assumption. Cost display a variety of forms and the too ready assumption of linearity
for all variable costs may introduce inaccuracies
- Use of statistical methods.
Providing that the data are sound, a gain in accuracy may be obtained by the use of appropriate
statistical methods
It requires persons with adequate skills to apply these methods.
- Oversimplification.
Conventionally it is assumed that all variable costs vary according to a single activity indicator.
In a manufacturing company, this is typically taken to be production volume.
This is a gross over – simplification.
Different costs vary with different activity indicators.
- Cost unit definition.
Ideally the costs units used for product and service costing and cost behavior prediction should be
standardized units, each identical with one another. In some cases, this presents few problems
Where product units are not identical, cost estimation is different
- Lack of available data for predictions.
marto answered the question on February 26, 2019 at 09:32
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