The correct answer is: D. cost hierarchy
A cost hierarchy is a classification of costs based on the different types of costs incurred by an organization. The cost hierarchy is used to identify the appropriate cost driver for each cost pool. The cost driver is the factor that causes a cost to change. For example, the cost of direct materials is driven by the number of units produced, while the cost of indirect labor is driven by the number of hours worked.
The cost hierarchy is important for cost estimation because it allows organizations to identify the appropriate cost driver for each cost pool. This information is then used to develop cost formulas, which are used to estimate the cost of each product or service.
The other options are incorrect because they are not relevant to cost estimation.
- A. cost object hierarchy is a classification of costs based on the different types of products or services that an organization produces.
- B. management hierarchy is a classification of costs based on the different levels of management in an organization.
- C. price hierarchy is a classification of costs based on the different types of prices that an organization charges for its products or services.