1. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 3 COST BEHAVIOR

2. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 3 OBJECTIVES 1.Define and describe fixed, variable, and mixed costs 2.Explain the use of resources and activities and their relationship to cost behavior 3.Explain how several methods of cost estimation can be used 4.Separate mixed costs into their fixed and variable components using the high-low method, the scatterplot method, and the method of least squares

3. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 3 OBJECTIVES 5.Evaluate the reliability of the cost formula 6.Explain how multiple regression can be used to assess cost behavior 7.Define the learning curve, and discuss its impact on cost behavior 8.Discuss the use of managerial judgment in determining cost behavior

4. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. BASICS OF COST BEHAVIOR Cost Behavior The term used to describe whether a cost changes when the level of output changes Fixed costs do not change as output changes Variable costs increase in total with an increase in output and decrease in total with a decrease in output LO-1

5. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. BASICS OF COST BEHAVIOR Cost Objects An item for which managers want cost information For manufacturing or merchandising firms, it is usually the tangible product For service firms, it is usually the service provided LO-1

6. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. BASICS OF COST BEHAVIOR Measures of Output Activity drivers explain changes in activity costs by measuring changes in activity output (usage) The two general categories of activity drivers Unit-level drivers Non-unit-level drivers LO-1

7. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR Fixed costs are costs that in total are constant within the relevant range as the level of the activity driver varies Fixed Costs

8. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR JCM Audio Systems, Inc. produces speakers for home audio systems. One department produces voice coils. There are two production lines that can each make up to 100,000 voice coils per year. The production- line manager is paid $60,000 per year. For production up to 100,000 units only one manager is needed; above that (to 200,000 units) two managers are needed. Fixed Costs

9. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR The total cost of supervision remains the same within the relevant range, but the unit cost decreases as production increases. JCM Audio Systems, Inc.

10. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. BASICS OF COST BEHAVIOR LO-1 The total cost of supervision remains the same within the relevant range, but the unit cost decreases as production increases JCM Audio Systems, Inc.

11. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.1—FIXED COST BEHAVIOR LO-1

12. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR Variable costs are costs that in total vary in direct proportion to changes in an activity driver The total cost of direct materials for each level of production varies, but the unit cost stays the same Variable Costs

13. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR The total cost of supervision remains the same within the relevant range, but the unit cost decreases as production increases. JCM Audio Systems, Inc.

14. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.2—VARIABLE COST BEHAVIOR LO-1

15. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.3—NONLINEARITY OF VARIABLE COSTS LO-1

16. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.4—RELEVANT RANGE FOR VARIABLE COSTS LO-1

17. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR Mixed costs are costs that has both a fixed and a variable component Mixed Costs Y = Fixed cost + Total variable cost Y = F + VX where Y = Total cost (Usually a mixed cost)

18. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR JCM’s sales costs are mixed. There are 10 sales representatives who each earn $30,000 plus receive a commission of $5 per speaker sold. This function can be represented by the following equation Mixed Costs Y = $300,000 + $5 X Fixed - salaries Variable - commission

19. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-1 BASICS OF COST BEHAVIOR JCM Audio Systems, Inc. Fixed Cost of Selling Variable Cost of Selling Total Cost Speakers Sold Selling Cost Per Unit $ 300,000$200,000$ 500,00040,000$12.50 300,000400,000700,00080,0008.75 300,000600,000900,000120,0007.50 300,000800,0001,100,000160,0006.88 300,0001,000,0001,300,000200,0006.50

20. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.5—MIXED COST BEHAVIOR LO-1

21. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RESOURCES, ACTIVITIES, AND COST BEHAVIOR Resources Economic elements that enable one to perform activities When a firm acquires the resources needed to perform an activity, it obtains activity capacity Practical capacity is the activity level where the activity is performed efficiently LO-2

22. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RESOURCES, ACTIVITIES, AND COST BEHAVIOR Flexible Resources Supplied as needed and used Quantity of resource supplied equals quantity demanded No unused capacity LO-2

23. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RESOURCES, ACTIVITIES, AND COST BEHAVIOR Committed Resources Supplied in advance of usage A given quantity is obtained, whether or not that full amount is used Unused capacity is possible LO-2

24. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-2 RESOURCES, ACTIVITIES, AND COST BEHAVIOR A step cost function displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point Step-Cost Behavior

25. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-2 RESOURCES, ACTIVITIES, AND COST BEHAVIOR Step-variable Costs Follow a step-cost behavior with narrow steps Step-fixed Costs Follow a step-cost function Exceed the relevant range, and the costs increase “one step” Step-Cost Behavior

26. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.6— STEP COST FUNCTION LO-2

27. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.7—STEP-FIXED COSTS LO-2

28. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RESOURCES, ACTIVITIES, AND COST BEHAVIOR Activities and Mixed Cost Behavior Many activities have characteristics of both flexible and committed resources For example, a power department acquires long- term capacity for supplying power by investing in a building and equipment It also acquires fuel to produce power on an as- needed basis LO-2

29. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RESOURCES, ACTIVITIES, AND COST BEHAVIOR Need for Cost Separation Sometimes it is easy to spot the variable and fixed portion of a cost Other times it is not; thus there is a need for a method to separate costs into their fixed and variable components LO-2

30. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. METHODS OF DETERMINING COST BEHAVIOR The Industrial Engineering Method A forward-looking method of determining, through physical observation and analysis, just what activities, in what amounts, are needed to complete a process The Account Analysis Method Used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed LO-3

31. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Y = F + VX where Y = Total cost (the dependent variable) F = Fixed cost (the intercept parameter) V = Variable cost per unit (the slope parameter) X = Measure of output (the independent variable)

32. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 Take two points (the high and the low by volume of activity) and determine the slope and intercept Slope is variable rate Intercept is fixed cost The High-Low Method QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS

33. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Advantages It is objective It is simple to calculate Disadvantages The high and low points may be “outliers” Other pairs of points may clearly be more representative The High-Low Method

34. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Uses a scattergraph to visually assess the relationship between cost and output Intercept is fixed cost Slope is variable rate Scatterplot Method

35. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-4 QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Advantages Allows for visual inspection of the data Identifies nonlinearity, outliers, and shifts in the cost relationship Disadvantages It is subjective Scatterplot Method

36. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.8—SCATTERGRAPH FOR ANDERSON COMPANY’S MATERIALS HANDLING COSTS LO-4

37. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.8—SCATTERGRAPH FOR ANDERSON COMPANY’S MATERIALS HANDLING COSTS (CONTINUED) LO-4

38. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.8—SCATTERGRAPH FOR ANDERSON COMPANY’S MATERIALS HANDLING COSTS (CONTINUED) LO-4

39. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.9—SCATTERGRAPH FOR VARIOUS COST BEHAVIOR PATTERNS LO-4

40. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.9—SCATTERGRAPH FOR VARIOUS COST BEHAVIOR PATTERNS (CONTINUED) LO-4

41. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.9—SCATTERGRAPH FOR VARIOUS COST BEHAVIOR PATTERNS (CONTINUED) LO-4

42. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.10—DEVIATIONS OF DATA FROM A LINE LO-4

43. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.11—SPREADSHEET DATA FOR ANDERSON COMPANY’S MATERIALS HANDLING COST LO-4

44. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Using Regression Programs Enter the data Choose the “Tools” menu Choose the “Data Analysis” option If this is not available, you may have to manage add-ins Scroll down to “Regression” Click on “Input Y Range” and highlight the cost cells Click on “Input X Range” and highlight the driver cells Choose your preferred location for output Click ok LO-4

45. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT-3.12— REGRESSION RESULTS FOR ANDERSON COMPANY’S MATERIALS HANDLING COST LO-4

46. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. QUANTITATIVE METHODS FOR SEPARATING MIXED COSTS INTO FIXED AND VARIABLE COMPONENTS Using Regression Programs Interpreting the results Under “coefficients” in the bottom left of the output find the intercept and the slope Write the equation Y = $12.39X + $854.50 Use the equation to make a point estimate At a point of 350 moves, total cost is predicted Y = $12.39(350) + $854.50 Y = $4,336.50 LO-4

47. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RELIABILITY OF COST FORMULAS Three statistical assessments concerning the cost formula’s reliability Hypothesis test of cost parameters Goodness of fit Confidence intervals LO-5

48. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RELIABILITY OF COST FORMULAS Hypothesis Test of Cost Parameters The “t Stat” tests the hypothesis that the parameters are different from zero The “P-value” is the level of significance achieved Generally, a P-value of 0.05 or less is needed for significance LO-5

49. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RELIABILITY OF COST FORMULAS Goodness of Fit Measures The coefficient of determination, or R 2, shows the percentage of variability in the dependent variable explained by the independent variable Since R 2 is the percentage of variability explained, it always has a value between 0 and 1.00 Typically, the Adjusted R Square is used because this value has been adjusted for the number of variables included in the equation LO-5

50. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. RELIABILITY OF COST FORMULAS Coefficient of Correlation It is the square root of the coefficient of determination when there is one independent variable Range between −1 and +1 The higher the magnitude, the greater the correlation A coefficient of correlation value close to zero indicates no correlation LO-5

51. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-5 EXHIBIT 3.13—CORRELATION ILLUSTRATED

52. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-5 RELIABILITY OF COST FORMULAS Confidence Intervals Y f ± tS e This is the formula for calculating the desired level of confidence Y f is the predicted cost for a given level of activity t is the t distribution (get this from the table in your book S e is the standard error shown in the regression output

53. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.14—TABLE OF SELECTED VALUES: T DISTRIBUTION LO-5

54. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MULTIPLE REGRESSION Whenever least squares is used to fit an equation involving two or more independent variables, the method is called multiple regression In the case of two explanatory variables, the linear equation is expanded to include the additional variable Y = F + V1X1 + V2X2 where X1 = Number of moves X2 = Number of pounds moved LO-6

55. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MULTIPLE REGRESSION Adding another independent variable might increase the explanatory power of our model Performing the regression is very similar to simple regression Input the data – make sure the two independent variables are side by side. Follow the same directions, but select both independent variable columns for the “input X range” LO-6

56. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MULTIPLE REGRESSION LO-6 MonthMaterials Handling Cost Number of Moves Pounds Moved January $2,0001006,000 February3,09012515,000 March2,7801757,800 April1,990200600 May7,50050029,000 June5,30030023,000 July4,30025017,000 August6,30040025,000 September5,60047512,000 October6,24042522,400

57. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-6 EXHIBIT 3.15—MULTIPLE REGRESSION RESULTS FOR ANDERSON COMPANY’S MATERIALS HANDLING COST

58. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MULTIPLE REGRESSION Interpreting the results Under “coefficients” in the bottom left of the output find the intercept and the slope Write the equation Y = $507.31 + $7.84X1 + $0.11X2 Examine reliability of the new model Adjusted R2 is 99% - a significant improvement The p-values are all very good as well the t statistic drops to 7 degrees of freedom because another independent variable is used LO-6

59. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE LEARNING CURVE AND NONLINEAR COST BEHAVIOR The learning curve shows how labor hours per unit decreases as units produced increases The experience curve relates cost to increased efficiency – the more you perform a task the lower the cost is of doing it LO-7

60. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE LEARNING CURVE AND NONLINEAR COST BEHAVIOR Cumulative Average-Time Learning Curve States that the cumulative average time per unit decreases by a constant percentage The learning rate is expressed as a percent LO-7

61. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. THE LEARNING CURVE AND NONLINEAR COST BEHAVIOR Incremental Unit-Time Learning Curve The incremental unit-time learning curve model decreases by a constant percentage each time the cumulative quantity of units produced doubles LO-7

62. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 3.16—SPREADSHEET FOR CUMULATIVE AVERAGE-TIME LEARNING MODEL LO-7

63. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LO-7 EXHIBIT 3.17—GRAPH OF CUMULATIVE TOTAL HOURS REQUIRED AND THE CUMULATIVE AVERAGE TIME PER UNIT

64. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MANAGERIAL JUDGMENT The most widely used method in practice Managers may just use their experiences and observations to determine fixed and variable costs Managers may identify mixed costs and use experience to determine what part is fixed – thus denoting the rest as variable LO-8

65. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MANAGERIAL JUDGMENT This is a simple method and can yield good results when the manager has a good understanding of the processes However poor judgment yields poor results LO-8

66. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. END OF CHAPTER 3