1. AMIS 310 Foundations of Accounting
Chapter 12 Module 3
CHAPTER 1 MODULE 1
AMIS 310 Foundations of Accounting
Professor Marc Smith

2. Chapter 12 Module 3: Cost Behaviors
The ideas behind cost behavior analysis
are very useful in management decision-
making.
Why?
Cost behavior analysis allows managers
to develop expectations of costs at any
level of activity.

3. Chapter 12 Module 3: Cost Behaviors
In utilizing cost behavior analysis, managers
should use (work with) variable costs expressed
on a per unit basis and fixed costs in total.
The reason?
Both variable costs per unit and total fixed costs
are considered ‘constant’ at all activity levels.
This assumption of being ‘constant’ allows
managers to make predictions about future costs.

4. Chapter 12 Module 3: Mixed Costs
PROBLEM:
What do we do with mixed costs as they do NOT have a constant component
SOLUTION:
We need a means of separating the mixed cost into its fixed and variable components so that we can isolate these ‘constant components’

5. Chapter 12 Module 3: Mixed Costs
Method used to separate a mixed cost into its fixed and variable components:
HIGH-LOW METHOD

6. Chapter 12 Module 3: High-Low Method
HIGH-LOW METHOD – STEPS
From a set of data, choose 2 data points - the
high and the low ACTIVITY LEVEL
(Note: do not choose your 2 data points based
on the high and low cost)
Calculate the variable cost per unit =
change in cost for 2 data points ÷
change in activity level for 2 data points
Calculate the total fixed cost

7. Chapter 12 Module 3: Example #1
Month Material Handling Costs Units Produced
January $2,
February ,
March ,
April ,
May ,
June 5,
July 4,
August 6,
September 5,
October 6,
Step 1: Choose the two data points

8. Chapter 12 Module 3: Example #1
Month Material Handling Costs Units Produced
January $2,
February ,
March ,
April ,
May ,
June 5,
July 4,
August 6,
September 5,
October 6,
Step 2: Calculate the variable cost per unit
$7, – $2,000 – =
$13.75

9. Chapter 12 Module 3: Example #1
Step 3: Using either the high cost or low activity point, solve for the total fixed cost.
Total Cost = Fixed Cost Variable Cost
High End
$7,500 = F $13.75(500)
$625 = F
Low End
$2,000 = F $13.75(100)
$625 = F

10. Chapter 12 Module 3: Example #1
The cost formula using the high-low method is:
Total cost = $ $13.75X
Where X = activity (in this problem, units produced)
If 150 units are expected to be produced in November, the expected material handling cost would be:
Total cost = (150)
Total cost = ,063
Total cost = $2,688