Transcript Managerial Accounting

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
1
Cost Behavior
Chapter 6
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
2
Learning Objective 1
Describe key characteristics and
graphs of various cost behaviors
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
3
Cost Behavior
Cost behavior—how costs change as volume
change
There are three common cost behaviors:
1. Variable costs
2. Fixed costs
3. Mixed costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4
Key Characteristics of Variable Costs
• Total variable costs change in direct
proportion to changes in volume
• Variable cost per unit remains constant
• Slope
Total variable cost (y) =
Variable cost per unit of activity (v) x Volume of activity (x)
or
y=vx
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
5
Total Variable Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
6
Key Characteristics of Fixed Costs
• Total fixed costs stay constant over relevant
range*
• Fixed costs per unit of activity vary inversely
with changes in volume
*Relevant range is the normal operating range of activity
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
7
Total Fixed Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
8
Key Characteristics of Mixed Costs
• Total mixed costs increase as volume increases
• Total mixed costs can be expressed as a combination of
the variable and fixed cost equations:
Total mixed cost = total variable cost + total fixed cost
or Y = vx + f
Where
Y = total mixed cost
v = variable cost per unit of activity
x = volume of activity
f = fixed cost over a given period of time
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
9
Mixed Costs
Variable
Fixed
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
10
S6-7 Classify Cost Behavior
___
____
____
____
____
___
____
a. Depreciation on equipment used to cut
wood enclosures
b. Wood for speaker enclosures
c. Patents on crossover relays (internal
components)
d. Crossover relays
e. Grill cloth
f. Glue
g. Quality inspector’s salary
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
11
S6-1 Identify cost behavior
Cost A
Cost B
Cost C
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
12
Learning Objective 2
Use cost equations to express and
predict costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
13
Cost Equation
• Is a mathematical equation for a straight line
predict total cost
Total cost = total variable cost + total fixed cost
or Y = vx + f
Where
Y = total mixed cost
v = variable cost per unit of activity
x = volume of activity
f = fixed cost over a given period of time
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
14
Cost Graphs
• Vertical (y-axis) always shows total costs
• Horizontal axis (x-axis) shows volume of activity
Note that the
variable cost
per customer
remains
constant in
each of the
graphs.
Total
Costs
Total volume of activity
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
15
Costs and Decisions
• Committed fixed costs
• Discretionary fixed costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
16
Relevant Range
• Band of volume where total fixed costs remain
constant at a certain level
• Variable costs per unit remain constant at a
certain level
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
17
Other Cost Behaviors
Step Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
18
Other Cost Behaviors
Curvilinear Costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
19
E6-21A: Forecast Costs at Different
Volumes
Garments
Total Variable Costs
Total Fixed Costs
Total Operating Costs
Variable Cost/garment
Fixed Cost/garment
Average cost/garment
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
20
E6-21A (continued)
2. While variable cost remains the same over the
relevant range shown, fixed cost per unit changes as
the volume increases or decreases.
3. Actual costs at 2,000 garments
Total predicted costs
($2.15 × 2,000 garments)
Underestimated costs
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
21
E6-24A (continued)
Mailbox Magic produces decorative mailboxes. The
company’s average cost per unit is $26.43 when it
produces 1,000 mailboxes.
a. 1,000 x $26.43
b. Total costs
Less total fixed costs
Total variable costs
Variable cost per mailbox
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
22
E6-24A (continued)
c. y = ?
d. ?
e. y = ?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
23
E6-24A (continued)
f.
Using average at 1,000
Using cost equation
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
24
Learning Objective 3
Use account analysis and scatter
plots to analyze cost behavior
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
25
Cost Behavior Analysis
• Three methods to analyze cost behavior
• Scatter Plots
• High-Low Method
• Regression Analysis
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
26
Account Analysis
• Use of judgment to classify each general
ledger account as variable, fixed, or mixed
• Subjective
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
27
Scatter Plots
• Use historical data to determine a cost’s
behavior
• Scatter plot is the graph of historical cost data
on the y-axis and volume data on the x-axis
• Helps managers visually determine how strong
the relationship is between the cost and the
volume of the chosen activity base
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
28
Scatter Plot Example
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
29
Learning Objective 4
Use the high-low method to analyze
cost behavior
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
30
High-Low Method
Step 1: Find variable cost per unit (slope) of cost
line
Step 2: Find the fixed costs (vertical intercept)
Step 3: Create the cost equation
Advantage: Easy to use
Disadvantage: Only uses 2 data points
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
31
High-Low Method: E6-26A
Step 1: Find slope of the mixed cost line
(variable cost/unit) =
Δ in cost (y) / Δ in volume (x)
The slope represents the variable cost per unit
of activity
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
32
E6-26A (continued)
Step 2: Find the vertical intercept (fixed costs) =
Total mixed cost – Total variable cost
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
33
E6-26A (continued)
Step 3: Create and use an equation to show the
behavior of a mixed cost
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
34
Learning Objective 5
Use regression analysis to analyze cost behavior
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
35
Regression Analysis
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
• Statistical procedure to find the line that best
fits data (cost equation)
• Uses all data points
• R-square, Intercept, X Variable 1
36
R-Square Value
• “Goodness of fit”
• How well does the line fit the data points?
• Ranges from 0 to 1
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
37
Predicting Costs and Data Concerns
• Data Concerns
•
•
•
•
Only valid within relevant range
Seasonal variations
Inflation
Outliers – abnormal data points
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
38
Learning Objective 6
Prepare contribution margin income statements
for service firms and merchandising firms
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
39
Traditional Income Statement
Sales
- Cost of Goods Sold
Gross Margin
- Selling,general & administrative costs
Operating Income
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
40
Contribution Margin Income Statement
Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Operating Income
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
41
S6-15
Pam’s Quilt Shoppe
Traditional Income Statement
Month Ended February 28
Sales revenue (80 × $350)
Less: Cost of goods sold (80 × $250)
Gross profit
Less: Operating expenses:
Sales commissions (5% × $28,000)
Payroll costs
Lease
Operating income
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
42
S6-15 (continued)
Pam’s Quilt Shoppe
Contribution Margin Income Statement
Month Ended February 28
Sales revenue (80 × $350)
Less: Variable costs:
Cost of goods sold (80 × $250)
Sales commissions (5% × $28,000)
Contribution margin
Less: Fixed costs:
Payroll costs
Lease
Operating income
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
43
End of Chapter 6
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
44