Sometimes analysts wish to estimate costs for activities that are new, greatly changed, or when the organization’s information system does not allow objective classification of costs into activities. Many tradjtional information systems report costs by functions (e.g., administration, manufacturing, and marketing), but we know frofn Chapters 4 and 5 that activities often cut across functions. It might be possible to subjectively cut and sort many months of functional costs into activity accounts, but this can be a formidable task for even a small organization. When activity account information is available, account analysis estimates costs by measuring fixed and variable costs for each activity account.

However, the benefits of doing this analysis for many months might not justify the costs, particularly if the effort is highly subjective. Fortunately, the method of account analysis can be useful for estimating costs with even a few observations of activity accounts.

The account analysis method follows three steps:

1. Identify the activity accounts (unit, batch, product, customer, and facility).

2. Gather cost and cost-driver amounts for each activity account for each time period.

3. Compute the average cost-driver rate for each activity account.