Cost Behavior ppt.ppt isa pa to ano kasi naman hays lazada lazada no no

Cost Behavior:
Analysis and Use
Chapter
5

© The McGraw-Hill Companies, Inc., 2002
Irwin/McGraw-Hill 2
Types of Cost Behavior Patterns
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remains
proportional to the activity the same over wide ranges
level within the relevant range. of activity.
Fixed Total fixed cost remains the Fixed cost per unit goes
same even when the activity down as activity level goes up.
level changes within the
relevant range.
Recall the summary of our cost behavior
discussion from Chapter 1.

Irwin/McGraw-Hill 3
Total Variable Cost Example
Your total long distance telephone bill is
based on how many minutes you talk.
Minutes Talked
Total
Long
Distance
Telephone
Bill

Irwin/McGraw-Hill 4
Variable Cost Per Unit Example
Minutes Talked
Per
Minute
Telephone
Charge
The cost per minute talked is constant. For
example, 10 cents per minute.

Irwin/McGraw-Hill 5
Total Fixed Cost Example
Your monthly basic telephone bill is probably
fixed and does not change when you make
more local calls.
Number of Local Calls
Monthly
Basic
Telephone
Bill

Irwin/McGraw-Hill 6
Fixed Cost Per Unit Example
Number of Local Calls
Monthly
Basic
Telephone
Bill
per
Local
Call
The fixed cost per local call decreases as
more local calls are made.

Irwin/McGraw-Hill 7
Cost Behavior
Merchandisers
Cost of Goods Sold
Manufacturers
Direct Material, Direct
Labor, and Variable
Manufacturing Overhead
Merchandisers and
Manufacturers
Sales commissions and
shipping costs
Service Organizations
Supplies and travel
Examples of normally variable costs
Examples of normally fixed costs
Merchandisers, manufacturers, and
service organizations
Real estate taxes, Insurance, Sales salaries
Depreciation, Advertising

Irwin/McGraw-Hill 8
The Activity Base
Machine
hours
Labor
hours
Miles
driven
A measure of the event
causing the incurrence of a
variable cost – a cost driver
Units
produced

Irwin/McGraw-Hill 9
Step-Variable Costs
Activity
Cost
Total cost remains
constant within a
narrow range of
activity.

Irwin/McGraw-Hill 10
Step-Variable Costs
Activity
Cost
Total cost increases to a
new higher cost for the
next higher range of
activity.

Activity
Total
Cost
Economist’s
Curvilinear Cost
Function
The Linearity Assumption and the
Relevant Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
Total
Cost
Relevant
Range
The Linearity Assumption and the
Relevant Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Economist’s
Curvilinear Cost
Function
A straight line
closely
approximates
a curvilinear
variable cost
line within the
relevant
range.

Examples
Advertising and
Research and
Development
Examples
Depreciation on
Buildings and
Equipment
Types of Fixed Costs
Fixed Costs
Discretionary
May be altered in the
short-term by current
managerial decisions
Committed
Long-term, cannot be
reduced in the short
term.

Trend Toward Fixed Costs
Increased automation.
Increase in salaried knowledge workers
who are difficult to train and replace.
Implications
Managers are more “locked-in” with fewer decision
alternatives.
Planning becomes more crucial because fixed costs are
difficult to change with current operating decisions.

Example: Office space
is available at a rental
rate of $30,000 per year
in increments of 1,000
square feet. As the
business grows more
space is rented,
increasing the total cost.
Fixed Costs and Relevant Range
Continue

Rent
Cost
in
Thousands
of
Dollars
0 1,000 2,000 3,000
Rented Area (Square Feet)
0
30
60
90
Relevant
Range
Total cost doesn’t
change for a wide
range of activity,
and then jumps to a
new higher cost for
the next higher
range of activity.

Quick Check 
Which of the following statements about cost
behavior are true?
a. Fixed costs per unit vary with the level of
activity.
b. Variable costs per unit are constant within
the relevant range.
c. Total fixed costs are constant within the
relevant range.
d. Total variable costs are constant within the
relevant range.

How does this type
of fixed cost differ
from a step-variable
cost?
Step-variable costs
can be adjusted more
quickly and . . .
The width of the
activity steps is much
wider for the fixed
cost.

A mixed cost
has both fixed
and variable
components.
Mixed Costs
Consider the
following electric
utility example.

Fixed Monthly
Utility Charge
Variable
Utility Charge
Activity (Kilowatt Hours)
Total
Utility
Cost
Mixed Costs
X
Y
Total mixed cost

Total mixed cost
Y = a + bX
Fixed Monthly
Utility Charge
Variable
Utility Charge
Total
Utility
Cost
Mixed Costs
X
Y
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where: Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity

Fixed Monthly
Utility Charge
Variable
Utility Charge
Total
Utility
Cost
Total mixed cost
Y = a + bX
Mixed Costs
bX
a
X
Y

The Analysis of Mixed Costs
Engineering Approach
Account Analysis
Scattergraph Method
Least-Square Regression Method
High-Low Method

Account Analysis
Each account is classified as either
variable or fixed based on the analyst’s
knowledge of how the account behaves.

Engineering Estimates
Cost estimates are based on an evaluation
of production methods, and material, labor
and overhead requirements.

WiseCo recorded the following production activity and
maintenance costs for two months:
Using these two levels of activity, compute:
 the variable cost per unit;
 the fixed cost; and then
 express the costs in equation form Y = a + bX.
The High-Low Method
Units Cost
High activity level 9,000 9,700
$
Low activity level 5,000 6,100
Change 4,000 3,600
$

 Unit variable cost =
Changein cost
Change in units
Units Cost
$
Change 4,000 3,600
$
The High-Low Method

Units Cost
$
Change 4,000 3,600
$
The High-Low Method
 Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

Units Cost
$
Change 4,000 3,600
$
The High-Low Method
 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600

 Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600
 Total cost = Fixed cost + Variable cost (Y = a + bX)
Y = $1,600 + $0.90X
Units Cost
$
Change 4,000 3,600
$
The High-Low Method

If sales salaries and commissions are $10,000
when 80,000 units are sold and $14,000 when
120,000 units are sold, what is the variable
portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
Quick Check 

If sales salaries and commissions are $10,000
when 80,000 units are sold and $14,000 when
120,000 units are sold, what is the fixed portion
of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Quick Check 

Note
How does the high-low method work when you
have data for more than two periods?
Select the two periods with the lowest and
highest level of activity.
Patients
Admitted
Costs of
Admitting
March 2,510 15,204
$
April 2,550 14,976
$
May 2,480 14,680
$
June 2,590 15,108
$
July 2,670 15,060
$
Low
High

Quick Check 
Using the high-low method, estimate the cost
formula Y = a +bX for the patient admitting costs
on the previous page.
a. Y = $9,720 + $2.00X
b. Y = $7,050 + $3.00X
c. Y = $8,385 + $2.50X
d. Y = $8,480 + $2.50X

The Scattergraph Method
Plot the data points on a
graph (total cost vs. activity).
0 1 2 3 4
*
Total
Cost
in
1,000’s
of
Dollars
10
20
0
*
*
*
*
*
*
*
*
*
Activity, 1,000’s of Units Produced
X
Y

Draw a line through the data points with about an
equal numbers of points above and below the line.
0 1 2 3 4
*
Total
Cost
in
1,000’s
of
Dollars
10
20
0
*
*
*
*
*
*
*
*
*
X
Y

Estimated fixed cost = $10,000
0 1 2 3 4
*
Total
Cost
in
1,000’s
of
Dollars
10
20
0
*
*
*
*
*
*
*
*
*
X
Y
The slope of this line is the variable unit
cost. (Slope is the change in total cost
for a one unit change in activity).

Slope =
Change in cost
Change in units
Horizontal distance is
the change in activity.
0 1 2 3 4
*
Total
Cost
in
1,000’s
of
Dollars
10
20
0
*
*
*
*
*
*
*
*
*
X
Y
Vertical
distance
is the
change
in cost.

Software can be used to fit
a regression line through
the data points.
The cost analysis objective
is the same: Y = a + bx
Least-Squares Regression Method
Least-squares regression also provides a statistic, called
the adjusted R2
, that is a measure of the goodness
of fit of the regression line to the data points.

0 1 2 3 4
Total
Cost
10
20
0
Activity
*
*
*
*
*
*
*
*
*
*
Least-Squares Regression Method
R2
is the percentage of the variation
in total cost explained by the activity.
R2
for this relationship is near
100% since the data points are
very close to the regression line.
X
Y

Note
Let’s plot the data for patient admitting costs.
$14,000
$14,200
$14,400
$14,600
$14,800
$15,000
$15,200
$15,400
2,450 2,500 2,550 2,600 2,650 2,700
Patients Admitted
Patient
Admitting
Costs

Note
Problems with the high-low method:
Throws away information contained in all of the data
other than the low and the high points.
The low and high levels of activity tend to be
unusual.
You should always plot the data if you have
more than two points to make sure it even
makes sense to be using the high-low method.

Let’s put our
knowledge of cost
behavior to work by
preparing a
contribution format
income statement.
The Contribution Format

Total Unit
Sales Revenue 100,000
$ 50
$
Less: Variable costs 60,000 30
Contribution margin 40,000
$ 20
$
Less: Fixed costs 30,000
Net income 10,000
$
The contribution margin format emphasizes cost
behavior. Contribution margin covers fixed costs
and provides for income.

Used primarily for
external reporting.
Used primarily by
management.

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