Transcript Hansen and Mowen - Gunadarma University

COST MANAGEMENT
Don R. Hansen
Maryanne M. Mowen
PPT 3 -1
Chapter Three
Activity Cost
Behavior
PPT 3 -2
Learning Objectives
 Define and describe fixed, variable, and mixed
costs.
 Explain the use of resources and activities and
their relationship to cost behavior.
 Separate mixed costs into their fixed and variable
components using the high-low method, the
scatterplot method, and the method of least
squares.
PPT 3 -3
Learning Objectives (continued)
 Evaluate the reliability of the cost formula.
 Explain how multiple regression can be used to
assess cost behavior
 Discuss the use of managerial judgment in
determining cost behavior.
PPT 3 -4
Cost Behavior
Fixed Cost Behavior
$
Variable Cost Behavior
$
Relevant Range
Activity
Activity
PPT 3 -5
The Behavior of a Mixed Cost
Linearity Assumption
Total Costs
$Cost
Fixed Costs
Variable Costs
Number of Units Produced
Y = F + VX
PPT 3 -6
Basic Terms
Activity capacity is the ability to perform activities.
Practical capacity is the efficient level of activity
performance.
Resources are economic inputs that are consumed in
performing activities.
PPT 3 -7
Types of Fixed Resources
 Flexible Resources
 Committed Resources
 Discretionary Fixed Costs
PPT 3 -8
Flexible Resources
Flexible resources are supplied as used and needed.
They are acquired from outside sources, where the terms of
acquisition do not require any long-term commitment for
any given amount of the resource.
Example:
Materials and energy
PPT 3 -9
Committed Resources
Committed resources are supplied in advance of
usage.
They are acquired by the use of either an explicit or implicit
contract to obtain a given quantity of resource, regardless of
whether the amount of the resource available is fully used
or not. Committed resources may have unused capacity.
Example:
Buying or leasing a building or equipment
PPT 3 -10
Committed Resources (continued)
Committed fixed expenses are costs incurred for the
acquisition of long-term capacity.
Example: Plant, equipment, warehouses, vehicles, and salaries of
top employees
Discretionary fixed expenses are shorter-term
committed resources.
Example: The hiring of new receiving clerks
PPT 3 -11
Resource Relationships
The relationship between resources supplied and
resources used is expressed by the following
equation:
Resources available = Resources used + Unused capacity
PPT 3 -12
Example
Available orders = Orders used + Orders unused
7,500 orders = 6,000 orders + 1,500 orders
Fixed engineering rate
= $150,000/7,500
= $20 per change order
Variable engineering rate
= $90,000/6,000
= $15 per change order
PPT 3 -13
Example (continued)
Cost of orders supplied = Cost of orders used + Cost of unused orders
= [($20 + $15) x 6,000] + ($20 x 1,500)
= $240,000
Of course, the $240,000 is precisely equal to the $150,000 spent on engineers
and the $90,000 spent on supplies.
The $30,000 of excess engineering capacity means that a new product could
be introduced without increasing current spending on engineering.
PPT 3 -14
Step-Variable Costs
Linearity Assumption
$Cost
Narrow Width
Number of Units Produced
PPT 3 -15
Step-Fixed Costs
Linearity Assumption
$Cost
Wider Width
Number of Units Produced
PPT 3 -16
Methods for Measuring the Fixed and
Variable Components of a Mixed Cost
 The High-Low Method
 Scatterplot Method
 The Method of Least Squares
PPT 3 -17
High-Low Method: An Example
Month
January
February
March
April
May
Utility Costs
$2,000
2,500
4,500
5,000
7,500
Units Produced
200
400
600
800
1,000
PPT 3 -18
The High-Low Method (continued)
Y = F + VX
Variable Cost Rate (V)= (Y2 - Y1)/(X2 - X1)
V = ($7,500-$2,000)/(1,000-200)
V = $5,500/800
V = $6.875 per unit
PPT 3 -19
The High-Low Method (continued)
Y
$7,500
F
F
= F + VX
= F + $6.875 (1,000)
= $7,500 - $6,875
= $625
The cost formula using the high-low method is:
Y = $625 + $6.875 (X)
PPT 3 -20
Utility
Cost
Scatterplot Method
$8,000
6,000
Important: Cost function is only
relevant within relevant range
.
.
4,000
.
.
.
Analyst can fit line
based on his or her
experience
2,000
200
0
400
600
800
Units Produced
1,000
PPT 3 -21
Nonlinear Relationship
Activity
Cost
*
*
*
*
*
0
Activity Output
PPT 3 -22
Upward Shift in Cost Relationship
Activity
Cost
*
*
0
*
*
*
*
Activity Output
PPT 3 -23
Presence of Outliers
Activity
Cost
*
*
*
0
*
*
*
Activity Output
PPT 3 -24
Least Squares
Constant
250
Std Err of Y Est
299.304749934466
R squared
0.944300518134715
No. of Observations
5
Degrees of Freedom
3
X Coefficient(s)
6.75
Std Err of Coef.
0.9464847243
PPT 3 -25
Least Squares (continued)
The results gives rise to the following equation:
Utility Costs = $250 + ($6.75 x # of units produced)
R2 = .944, or 94.4 percent of the variation in setup costs is explained by the number
of setup hours variable.
PPT 3 -26
Least Squares (continued)
Using Confidence Intervals:
Given:
*T-value for sample size of 5 at 95% confidence level is 3.182 (two-tale
test and 3 degrees of freedom)
*Standard error of estimate for this sample at the 95% confidence level
is 598.6
The confidence interval for 300 units is:
TC = $250 + 6.75 (300) + (3.192 x $598.6)
= $2275 + $1911
PPT 3 -27
Multiple Regression
TC = b0 + b1X1 + b2X2 + . . .
b0 = the fixed cost or intercept
bi = the variable rate for the ith independent variable
Xi = the ith independent variable
PPT 3 -28
Multiple Regression (continued)
Month
January
February
March
April
May
June
July
August
September
October
November
December
MHrs
1,340
1,298
1,376
1,405
1,500
1,432
1,322
1,416
1,370
1,580
1,460
1,455
Summer
0
0
0
0
1
1
1
1
1
0
0
0
Utility
Cost
$1,688
1,636
1,734
1,770
2,390
2,304
2,166
2,284
1,730
1,991
1,840
1,833
PPT 3 -29
Multiple Regression (continued)
Constant
243.1115
Std Err of Y Est
55.5083
R squared
0.9672
No. of Observations
12
Degrees of Freedom
9
X Coefficient(s)
1.0972
510.4907
Std Err of Coef.
0.2102
32.5490
PPT 3 -30
Multiple Regression (continued)
The results gives rise to the following equation:
Utilities cost = $243.11 + $1.097(MH) + $510.49(Summer)
R2 = 0.967, or 96.7 percent of the variation in utilities cost is
explained by the machine hours and summer variables.
PPT 3 -31
Cost Behavior and Managerial
Judgment
Some Tips



Use past experience
Try to confirm results with operating personal
Use common sense to confirm statistical studies
PPT 3 -32
End of Chapter 3
PPT 3 -33