cost behavior: analysis and use chapter 5 mcgraw-hill/irwin copyright © 2010 by the mcgraw-hill...
TRANSCRIPT
Cost Behavior: Analysis and Use
Chapter 5
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
The Activity Base (also called a cost driver)
A measure of what causes the
incurrence of a variable cost
A measure of what causes the
incurrence of a variable cost
Unitsproduced
Unitsproduced
Miles drivenMiles driven
Machine hours
Machine hours
Labor hoursLabor hours
5-2
Minutes Talked
Tot
al O
vera
ge
Cha
rges
on
Cel
l P
hone
Bill
True Variable Cost – An ExampleAs an example of an activity base, consider
overage charges on a cell phone bill. The activity base is the number of minutes used above the
allowed minutes in the calling plan.
5-3
Minutes Talked
Per
Min
ute
Ove
rage
Cha
rge
Variable Cost Per Unit – An Example
Referring to the cell phone example, the cost per overage minute is constant, for example 45 cents per
overage minute.
5-4
Examples of Variable Costs
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labor, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labor, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
5-5
Volume
Cos
t
True Variable Costs
The amount of a true variable cost used during the period varies in direct proportion to the activity level. The overage charge on a cell phone bill was one example of a true variable cost.
Direct material is another example of a cost that behaves in a true variable pattern.
5-6
Step-Variable CostsA step-variable coststep-variable cost is a resource that is obtainable only in large chunks (such as maintenance workers) and whose costs change only in response to fairly
wide changes in activity.
Volume
Cos
t
5-7
RelevantRange
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
Activity
Tot
al C
ost
Economist’sCurvilinear Cost
Function
The Linearity Assumption and the Relevant Range
Accountant’s Straight-Line Approximation (constant
unit variable cost)
5-8
Number of Minutes Used within Monthly Plan
Mon
thly
Bas
ic
Cel
l Pho
ne B
illTotal Fixed Cost – An Example
For example, your cell phone bill probably includes a fixed amount related to the total minutes allowed in
your calling plan. The amount does not change when you use more or less allowed minutes.
5-9
Number of Minutes Used within Monthly Plan
Cos
t Per
Cel
l Pho
ne C
all
Fixed Cost Per Unit Example
For example, the fixed cost per minute used decreases as more allowed minutes are used.
5-10
Is Labor a Variable or a Fixed Cost?The behavior of wage and salary costs can differ across countries, depending on labor regulations,
labor contracts, and custom.
In France, Germany, China, and Japan, management has little flexibility in adjusting the size of the labor force.
Labor costs are more fixed in nature.
In France, Germany, China, and Japan, management has little flexibility in adjusting the size of the labor force.
Labor costs are more fixed in nature.
In the United States and the United Kingdom, management has greater latitude. Labor costs are more variable in nature.In the United States and the United Kingdom, management has greater latitude. Labor costs are more variable in nature.
Within countries managers can view labor costs differentlydepending upon their strategy. Most companies in the
United States continue to view direct labor as a variable cost.
Within countries managers can view labor costs differentlydepending upon their strategy. Most companies in the
United States continue to view direct labor as a variable cost.
5-11
Ren
t C
ost
in T
hous
ands
of
Dol
lars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and the Relevant Range
90
Relevant
Range
The relevant range of activity for a fixed cost is the range of activity over which the graph of the
cost is flat.
The relevant range of activity for a fixed cost is the range of activity over which the graph of the
cost is flat.
5-12
Mixed Costs
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
Tot
al U
tility
Cos
t
X
Y
Total mixed cost
5-13
The Scattergraph Method
Use one data point to estimate the total level of activity and the total cost.
Use one data point to estimate the total level of activity and the total cost.
Intercept = Fixed cost: $10,000
0 1 2 3 4
*
Mai
nten
ance
Cos
t1,
000’
s of
Dol
lars
10
20
0
***
**
**
*
*
Patient-days in 1,000’s
X
Y
Patient days = 800
Total maintenance cost = $11,000
5-14
The High-Low Method – An Example
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
= $6.00/hour$6.00/hour$2,400
400
5-15
The High-Low Method – An Example
Total Fixed Cost = Total Cost – Total Variable CostTotal Fixed Cost = Total Cost – Total Variable Cost
Total Fixed Cost = $9,800 – ($6/hour Total Fixed Cost = $9,800 – ($6/hour × 850 hours)× 850 hours)
Total Fixed Cost = $9,800 – $5,100Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = Total Fixed Cost = $4,700$4,7005-16
The High-Low Method – An Example
YY = $4,700 + $6.00 = $4,700 + $6.00XXThe Cost Equation for Maintenance
5-17
Least-Squares Regression Method
A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear
relationship between the X and Y variables.
This method uses This method uses allall of the of thedata points to estimatedata points to estimatethe fixed and variablethe fixed and variablecost components of acost components of a
mixed cost.mixed cost.
This method uses This method uses allall of the of thedata points to estimatedata points to estimatethe fixed and variablethe fixed and variablecost components of acost components of a
mixed cost.mixed cost.The goal of this method isThe goal of this method isto fit a straight line to theto fit a straight line to thedata that data that minimizes theminimizes the
sum of the squared errorssum of the squared errors..
The goal of this method isThe goal of this method isto fit a straight line to theto fit a straight line to thedata that data that minimizes theminimizes the
sum of the squared errorssum of the squared errors..
5-18
Least-Squares Regression Method
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 also provides a statistic, called
the R2, which is a measure of the goodness
of fit of the regression line to the data points.
Least-squares regression also provides a statistic, called
the R2, which is a measure of the goodness
of fit of the regression line to the data points.
5-19
End of Chapter 5
5-20