Transcript Slide 1

Activity Cost Behavior
7/21/2015
Asst. Prof. Kalyaporn P. Burke
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1
Define cost behavior for fixed,
variable, and mixed costs.
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Cost Behavior
It is the general term for describing whether costs
change as output changes.
A cost that stays the same as output changes is a
fixed cost.
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Fixed Costs
A cost that stays the same as
output changes is a fixed cost.
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Fixed Costs
Cutting machines are
leased for $60,000 per
year and have the capacity
to produce up to 240,000
units a year.
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Total Costs
Total Fixed Cost Graph
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
0
60 120 180 240
Units Produced (000)
Lease of
Machines
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Fixed Costs
F = $60,000
Number of
Units
$60,000
0
60,000
60,000
60,000
120,000
60,000
180,000
60,000Asst. Prof. Kalyaporn
240,000
P. Burke
Units Cost
N/A
$1.00
0.50
0.33
0.25
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Cost per Unit
Unit Fixed Cost Graph
$1.00
$0.50
Fixed Costs
$0.33
$0.25
0
60 120 180 240
Units Produced (000)
Lease of
Machines
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Number of
Units
$60,000
0
60,000
60,000
60,000
120,000
60,000
180,000
60,000Asst. Prof. Kalyaporn
240,000
P. Burke
Units Cost
N/A
$1.00
0.50
0.33
0.25
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A variable cost is a cost that, in total,
varies in direct proportion to changes
in output.
Variable Cost
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Variable Cost
As the cutting machines cut each unit, they use
0.1 kilowatt-hour at $2.00 per kilowatt hour.
Thus, the cost of each unit is $0.20 ($2 x 0.1).
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Total Variable Cost Graph
Total Costs
$48,000
$36,000
Yv = .20x
Variable Cost
$24,000
$12,000
0
60 120 180
240
Units Produced (000)
Cost of
Power
$
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Number of
Units
0
0
12,000
60,000
24,000
120,000
36,000
180,000
48,000Asst. Prof. Kalyaporn
240,000
P. Burke
Units Cost
$ 0
0.20
0.20
0.20
0.20
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Unit Variable Cost Graph
Cost per Unit
$0.40
$0.30
Variable Cost
$0.20
$0.10
0
60 120 180 240
Units Produced (000)
Cost of
Power
$
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Number of
Units
0
0
12,000
60,000
24,000
120,000
36,000
180,000
48,000Asst. Prof. Kalyaporn
240,000
P. Burke
Units Cost
$ 0
0.20
0.20
0.20
0.20
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A mixed cost is a cost that has
both a fixed and a variable
component.
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Sales representatives
often are paid a salary
plus a commission
on sales.
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Total Costs
Mixed Cost Behavior
$130,000
$110,000
$90,000
$70,000
$50,000
$30,000
0
40 80 120 160 180 200
Units Sold (000)
Inserts Sold
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40,000
80,000
120,000
160,000
200,000
Variable
Cost of
Selling
Fixed Cost
of Selling
$ 20,000
$30,000
40,000
30,000
60,000
30,000
80,000
30,000
Asst. Prof. Kalyaporn P. Burke
100,000
30,000
Total Selling
Cost
Selling Cost
per Unit
$ 50,000
70,000
90,000
110,000
130,000
$1.25
0.86
0.75
0.69
0.65 14
Activity Cost Behavior Model
Input:
Materials
Energy
Labor
Activities
Activity
Output
Capital
Changes in
Input Cost
Cost Behavior
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Changes
in Output
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2
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Explain the role of resource
usage model in
understanding cost behavior.
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Capacity: Definition
Capacity for an activity is the amount of
an activity a company can perform.
Practical capacity is the level at which
company can perform efficiently.
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How much capacity does a company
need? What happens if there is
excess capacity?
Need for capacity depends on level of
performance required.
Excess capacity affects cost behavior.
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Flexible resources are resources
acquired as used and needed.
Materials and energy
are examples.
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Committed resources are supplied in
advance of usage. Buying or leasing a
building is an example of this form of
advance resource acquisition.
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A step cost 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
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Step-Cost Behavior
Cost
$500
400
300
200
100
10
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20
30
40
50
Activity Output (units)
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Step-Cost Behavior
Cost
$150,000
Normal
Operating
Range
(Relevant
Range)
100,000
50,000
2,500
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5,000
7,500
Asst. Prof. Kalyaporn
P. Burke
Activity Usage
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3
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Separate mixed costs into fixed
and variable components using
high-low, scatterplot, and least
squares.
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Methods for Separating Mixed Costs
The High-Low Method
The Scatterplot Method
The Method of Least Squares
Variable
Component
Fixed
Component
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The linearity assumption assumes
that variable costs increase in direct
proportion to the number of units
produced (or activity units used).
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Linearity Assumption
Variable cost
assumes a linear
relationship
between cost and
activity driver.
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TOTAL COSTS = Fixed cost + (Variable rate x Output)
Intercept is
fixed cost
Slope is variable cost
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Methods for Separating Mixed Costs
Y = a + bx
Variable
Number
of Units
TotalTotal
CostFixed
Cost Cost
per Unit
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The High-Low Method
Month
January
February
March
April
May
Setup Costs
$1,000
1,250
2,250
2,500
3,750
Setup Hours
100
200
300
400
500
Step 1: Solve for variable cost (b)
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The High-Low Method
Month
January
February
March
April
May
Setup Costs
$1,000
1,250
2,250
2,500
3,750
b=
Setup Hours
100
200
300
400
500
High Cost – Low Cost
High Units – Low Units
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The High-Low Method
Month
January
February
March
April
May
Setup Costs
$1,000
1,250
2,250
2,500
3,750
b=
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Setup Hours
100
200
300
400
500
High
$3,750
Cost –– Low
LowCost
Cost
High Units
500 – –Low
LowUnits
Units
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The High-Low Method
Month
January
February
March
April
May
Setup Costs
$1,000
1,250
2,250
2,500
3,750
b=
Setup Hours
100
200
300
400
500
$3,750
Cost
$3,750 ––Low$1,000
500
500 – –Low Units
100
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The High-Low Method
b=
$3,750 – $1,000
500 –
100
b = $6.875
Step 2: Using either the high cost or low cost, solve for
the total fixed cost (a).
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The High-Low Method
Y = a + b (x)
$3,750 = a + $6.875 (500)
$312.50 = a
Y = a + b (x)
$1,000 =
a + $ 6.875 (100)
$312.50 =
High End
Low End
a
The cost formula using the high-low method is:
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Total cost = $312.50
($6.875
x Setup
Asst. +
Prof.
Kalyaporn
P. Burkehours)
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The Scatterplot Method
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The Scatterplot Method
Nonlinear Relationship
Activity
Cost
*
*
*
*
*
0
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Activity Output
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The Scatterplot Method
Upward Shift in Cost Relationship
Activity
Cost
*
*
0
*
*
*
*
Activity Output
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The Scatterplot Method
Presence of Outliers
Activity
Cost
*
*
Estimated
fixed cost
0
*
*
*
Estimated
regression line
*
Activity Output
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4
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Describe the use of managerial
judgment in determining cost
behavior.
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Managerial judgment is critically important in
determining cost behavior, and it is by far the
most widely used method in practice.
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The End
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