Presentation is loading. Please wait.

Presentation is loading. Please wait.

Cost Behavior: Analysis and Use Chapter 5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Recall the summary of our cost behavior discussion.

Similar presentations


Presentation on theme: "Cost Behavior: Analysis and Use Chapter 5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Recall the summary of our cost behavior discussion."— Presentation transcript:

1 Cost Behavior: Analysis and Use Chapter 5

2 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Recall the summary of our cost behavior discussion from Chapter 2. Types of Cost Behavior Patterns

3 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Activity Base A measure of the event that causes the incurrence of a variable cost – a cost driver Units produce d Miles driven Labor hours Machine hours

4 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Minutes Talked Total Long Distance Telephone Bill True Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk.

5 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Minutes Talked Per Minute Telephone Charge Variable Cost Per Unit Example The cost per minute talked is constant. For example, 10 cents per minute.

6 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Step-Variable Costs Activity Cost Total cost remains constant within a narrow range of activity.

7 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Step-Variable Costs Activity Cost Total cost increases to a new higher cost for the next higher range of activity.

8 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economists Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountants Straight-Line Approximation (constant unit variable cost) Exh. 5-4

9 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Number of Local Calls Monthly Basic Telephone Bill Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Exh. 5-5

10 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed Cost Per Unit Example The fixed cost per local call decreases as more local calls are made. Exh. 5-5

11 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Cost Behavior Merchandisers Cost of Goods Sold Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers Sales commissions and shipping costs Merchandisers and Manufacturers Sales commissions and shipping costs Service Organizations Supplies and travel 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 Merchandisers, manufacturers, and service organizations Real estate taxes, Insurance, Sales salaries Depreciation, Advertising

12 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment Examples Depreciation on Buildings and Equipment Types of Fixed Costs Discretionary May be altered in the short-term by current managerial decisions Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be reduced in the short term. Committed Long-term, cannot be reduced in the short term.

13 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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

14 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) Fixed Costs and Relevant Range 90 Relevant Range Total cost doesnt change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. Exh. 5-6

15 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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. Fixed Costs and Relevant Range

16 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Quick Check Which of the following statements about cost behavior are true? aFixed costs per unit vary with the level of activity. bVariable costs per unit are constant within the relevant range. cTotal fixed costs are constant within the relevant range. dTotal variable costs are constant within the relevant range. Which of the following statements about cost behavior are true? aFixed costs per unit vary with the level of activity. bVariable costs per unit are constant within the relevant range. cTotal fixed costs are constant within the relevant range. dTotal variable costs are constant within the relevant range.

17 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y A mixed cost has both fixed and variable components. Consider the example of utility cost. Mixed Costs Total mixed cost

18 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Mixed Costs Total mixed cost Y = a + bX

19 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Analysis of Mixed Costs Engineering Approach Account Analysis High-Low Method Least-Square Regression Method Scattergraph Plot

20 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Account Analysis & Engineering Estimates Each account is classified as either variable or fixed based on the analysts knowledge of how the account behaves. Cost estimates are based on an evaluation of production methods, and material, labor and overhead requirements.

21 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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

22 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Change in cost Change in units The High-Low Method Variable cost per unit = Change in cost ÷ change in units

23 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The High-Low Method Variable cost per unit = $2,400 ÷ 3,000 units = $0.80 per unit

24 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The High-Low Method Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units) Fixed cost = $9,800 – $6,400 = $3,400

25 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,800 – ($0.80 per unit × 8,000 units) Fixed cost = $9,800 – $6,400 = $3,400 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $3,400 + $0.80X The High-Low Method

26 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, 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 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, 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 $4,000 ÷ 40,000 units = $0.10 per unit

27 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check

28 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Lets put our knowledge of cost behavior to work by preparing a contribution format income statement.

29 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Contribution Format The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.

30 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin The Contribution Format Used primarily for external reporting. Used primarily by management.

31 © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin End of Chapter 5


Download ppt "Cost Behavior: Analysis and Use Chapter 5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Recall the summary of our cost behavior discussion."

Similar presentations


Ads by Google