Transcript Slide 1
AMIS 310 Foundations of Accounting Professor Marc Smith
Chapter 12 Module 3: Cost Behaviors
The ideas behind cost behavior analysis are very useful in management decision making.
Why?
Cost behavior analysis allows managers to develop expectations of costs at any level of activity.
Chapter 12 Module 3: Cost Behaviors
In utilizing cost behavior analysis, managers should use (work with) variable costs expressed on a per unit basis and fixed costs in total.
The reason?
Both variable costs per unit and total fixed costs are considered ‘constant’ at all activity levels.
This assumption of being ‘constant’ allows managers to make predictions about future costs.
Chapter 12 Module 3: Mixed Costs
PROBLEM: What do we do with mixed costs as they do NOT have a constant component SOLUTION: We need a means of separating the mixed cost into its fixed and variable components so that we can isolate these ‘constant components’
Chapter 12 Module 3: Mixed Costs
Method used to separate a mixed cost into its fixed and variable components:
HIGH-LOW METHOD
Chapter 12 Module 3: High-Low Method
HIGH-LOW METHOD – STEPS 1. From a set of data, choose 2 data points - the high and the low ACTIVITY LEVEL (Note: do not choose your 2 data points based on the high and low cost) 2.
Calculate the variable cost per unit = change in cost for 2 data points ÷ change in activity level for 2 data points 3.
Calculate the total fixed cost
Chapter 12 Module 3: Example #1
Month Material Handling Costs Units Produced
January $2,000 100 February March 3,090 2,780 125 175 April May June 1,990 7,500 5,300 200 500 300 July August September October 4,300 6,300 5,600 6,240 250 400 475 425 Step 1: Choose the two data points
Chapter 12 Module 3: Example #1
Month Material Handling Costs Units Produced
January $2,000 100 February March 3,090 2,780 125 175 April May June 1,990 7,500 5,300 200 500 300 July August September October 4,300 6,300 5,600 6,240 250 400 475 425 Step 2: Calculate the variable cost per unit $7,500 – $2,000 500 – 100 = $13.75
Chapter 12 Module 3: Example #1
Step 3: Using either the high cost or low activity point, solve for the total fixed cost.
Total Cost
=
Fixed Cost
+
Variable Cost
$7,500 =
F
$625 =
F
+ $13.75(500) $2,000 =
F
+ $13.75(100) $625 =
F
High End Low End
Chapter 12 Module 3: Example #1
The cost formula using the high-low method is:
Total cost = $625 + $13.75X
Where X = activity (in this problem, units produced) If 150 units are expected to be produced in November, the expected material handling cost would be: Total cost = 625 + 13.75(150) Total cost = 625 + 2,063 Total cost = $2,688