1. Activity Analysis, Cost Behavior, and Cost Estimation
Chapter 6
Activity Analysis, Cost Behavior, and Cost Estimation

2. Learning Objective 1

3. Relationship between cost and activity.
Introduction
Cost estimation
Cost behavior
Relationship between cost and activity.
Cost prediction
Using knowledge of cost behavior to forecast level of cost at a particular activity. Focus is on the future.
Process of determining cost behavior, often focusing on historical data.

4. Learning Objective 2

5. Total Variable Cost Example
Your total Pay Per View bill is based on how many Pay Per View shows that you watch.
Total Pay Per View Bill
Number of Pay Per View shows watched

6. Variable Cost Per Unit Example
The cost per Pay Per View show is constant. For example, $4.95 per show.
Cost per Pay Per View show
Number of Pay Per View shows watched

7. Total cost remains constant within a narrow range of activity.
Step-Variable Costs
Total cost remains constant within a narrow range of activity.
Cost
Activity

8. Total Fixed Cost Example
Your monthly basic cable TV bill probably does not change no matter how many hours you watch.
Monthly Basic Cable Bill
Number of hours watched

9. Fixed Cost Per Unit Example
The average cost per hour decreases as more hours are spent watching cable television.
Monthly Basic cable Bill per hour watched
Number of hours watched

10. Rent Cost in Thousands of Dollars
Step-Fixed Costs
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. 90 60
Rent Cost in Thousands of Dollars 30
0 1, , , Rented Area (Square Feet)

11. Slope is variable cost per unit of activity.
Semivariable Cost
Slope is variable cost per unit of activity.
Total semivariable cost
Variable Utility Charge
Total Utility Cost
Fixed Monthly Utility Charge
Activity (Kilowatt Hours)

12. Curvilinear Cost Total Cost Curvilinear Cost Function
A straight-line (constant unit variable cost) closely approximates a curvilinear line within the relevant range.
Relevant Range
Activity

13. Learning Objective 3

14. Curvilinear Cost Total Cost Curvilinear Cost Function
A straight-Line (constant unit variable cost) closely approximates a curvilinear line within the relevant range.
Relevant Range
Activity

15. Learning Objective 4

16. Engineered, Committed and Discretionary Costs
Long-term, cannot be reduced in the short term.
Discretionary
May be altered in the short term by current managerial decisions.
Depreciation on Buildings and equipment
Advertising and Research and Development
Direct Materials
Engineered
Physical relationship with activity measure.

17. Learning Objective 5

18. Account Classification Method
Cost estimates are based on a review of each account making up the total cost being analyzed.

19. Visual-Fit Method * Estimated fixed cost = $10,000 20
A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.
Vertical distance is total cost, approximately $16,000. *
Total Cost in 1,000’s of Dollars 10 20
Activity, 1,000’s of Units Produced
Estimated fixed cost = $10,000

20. The High-Low Method
OwlCo recorded the following production activity and maintenance costs for two months:
Using these two levels of activity, compute:
the variable cost per unit.
the total fixed cost.

21. The High-Low Method
Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600

22. Learning Objective 5 cont., 6 and 7 can be found in the Text Book

23. End of Chapter 6