Hartgraves, Managerial Accounting
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Transcript Hartgraves, Managerial Accounting
Module 14
Cost Behavior,
Activity Analysis,
and Cost Estimation
Variable Costs
Increases as activity increases
Equals zero dollars when activity is zero
Example: Materials
Variable cost: Y = bX
Higher variable
costs per unit
create a
steeper line
slope.
Total
variable
costs (Y)
0
Total activity (X)
b = Variable cost per unit
Fixed Costs
Fixed cost: Y = a
Slope is zero,
represented by
a flat line.
Total
fixed
costs (Y)
0
Total activity (X)
a = Total fixed costs
No change as activity increases or decreases
Example: Depreciation
Mixed Costs
Increase in a linear fashion when activity increases
Positive in amount when activity is zero
Example: Maintenance
Mixed cost: Y = a + bX
Contains both
fixed and
variable cost
elements.
Total
mixed
costs (Y)
Variable portion
Fixed portion
0
Total activity (X)
b = Variable cost per unit
Step Costs
Increase in a step like fashion as activity increases
Example: Supervisors
Step cost: Y = ai
Total
step
costs (Y)
0
Total activity (X)
Total Cost Behavior
Total Cost Equation =
Total Fixed Costs + (Variable Costs per Unit × Number of Units)
Relevant Range
A portion of a range of activity associated with
the fixed cost of the current or expected
capacity
A normal range of activity in which a company
expects to operate, where the fixed costs remain
linear, i.e., total cost remains the same
Example:
During normal operations, factory space is adequate for Mattel.
However, during the three months preceding the holiday season,
Mattel’s operations are out of the relevant range and storage trailers
must be rented for the additional merchandise.
Unit Variable Costs
Costs
per
Unit
$-
Unit variable costs
stay the same at all
activity levels.
$$$$-
0
100
200
300
Activity
400
500
Average Unit Costs
Average
costs
Average cost graph is useful if a manager
wants to know the cost of serving a customer
$35 --
Number of
Customers
100
300
500
$30 --
$25 -$20 --
Average Cost
Per customer
$35.00
$15.00
$11.00
$15 -$10 -$5 -$0
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100
200
300
400
500
Number of customers served
Classifying Fixed Costs
Classification depends on the immediate impact if
the company attempts to change the fixed costs.
Committed fixed costs,
known also as capacity
costs, are required to
maintain the current service
or production capacity or to
fill previous legal
Depreciation
Real-estate taxes
commitments.
Training
Advertising
Discretionary
fixed costs ,
known also as
managed fixed
costs, are set at a
fixed amount each
period by
management.
Cost Estimation
What is it?
The determination of the relationship between
activity and cost
An important part of cost management
Identifying variable or fixed costs
Analyzing available accounting records
Interviews
Purpose of cost estimation
Cost prediction
i.e., forecasting future costs
Estimating
Mixed Cost Components
Methods of estimating fixed and variable
cost components
High-low method
Scatter diagrams
Least-squares
regression analysis
Variable
Costs
Mixed
Costs
Fixed
Costs
High-Low Cost Estimation
Utilizes data from two time periods
A high activity period, and a low activity period
Step 1: Select a representative high point and a
representative low activity point.
Step 2: Determine variable costs per unit:
Variable Costs
=
Per Unit
Difference in total costs
Difference in activity
Step 3: Subtract total variable costs from total fixed
costs using either the high or low point:
Total Fixed Costs =
Total costs – [Variable cost per unit × number of units]
High-Low Example:
Variable Costs
Number of
Shipments
Low activity period
High activity period
January
February
March
April
8,600
9,800
11,600
11,200
Variable cost
$31,600 – $25,000
per unit (b) = 11,600 – 8,600
Packaging
Costs
$25,000
26,000
31,600
33,000
= $2.20
The variable cost of each unit produced is $2.20.
High Low Example Fixed Costs
Calculate fixed costs:
Variable cost per unit (b) = $2.20 per unit
a
=
Total costs – Variable costs
January
$25,000 = a + ($2.20 × 8,600 units)
a = $6,080
March
$31,600 = a + ($2.20 × 11,600 units)
a = $6,080
The same total fixed costs result using
either the high or low activity point.
High-Low Cost Estimation
Variable Costs =
per Unit
$30,000
$25,000
Difference in total costs
Difference in activity
$10,000
0
8600
11,600
Total Fixed Costs =
Total costs – [Variable cost per unit × number of units]
Total Cost Equation:
Y = $2.20X + 6,080
Scatter Diagrams
A graph of past activity and cost data, with individual
observations represented by dots
When used
alone to
estimate
costs,
professional
judgment is
required.
Least-Squares Regression
Also known as simple regression (one variable)
A mathematical technique to fit a costestimating equation to observed data
Minimizes the vertical squared difference
between the estimated and actual costs at each
data point
Accomplished using
Microsoft Excel®
Statistical software
Some calculators
Time consuming math calculations
Least-Squares Criterion
The least-squares method minimizes the sum of all
squared vertical deviations between individual
observations and the cost-estimating line.
Cautions in Developing
Cost Estimate Equations
Managers are responsible for making decisions
Mathematical models do not make decisions; they
are tools to aid decision making
Not all data are based on normal operating
conditions
Nonlinear relationships may exist
Results should make sense
Production Costs
Direct Materials
Cost of primary raw materials
converted into finished goods
“Direct” costs = easily or
directly traceable to a
finished product/service
Direct Labor
Wages earned by
production employees
for the time they
spend converting raw
materials into finished
products
Production Overhead
All manufacturing costs other than direct materials and
direct labor
Changing Composition of Total
Manufacturing Costs
Changing Composition
of Total Production Costs
The problem
Past tendency was to ignore overhead and focus on
direct materials, direct labor, and units produced
Units produced is no longer adequate in explaining
costs
Must deal with overhead causing activities
Including:
Batches, products, facilities, customers, markets
Manufacturing Cost Hierarchy
Unit level activities
Batch level activities
Product level activities
Facility level activities
A separate
cost driver
is selected
for each
level of
cost.
Unit Level Activity
This activity is performed for each
unit of product produced or sold.
Examples:
Cost of raw materials
Cost of cutting a component
Cost of a box to package cereal
Sales commission
Cost of paint brushes used to paint an office
building
Batch Level Activity
This activity is performed for each
batch of product produced or sold.
Examples:
Cost of processing sales orders
Cost of tracking work orders
Cost of equipment setup
Cost of moving a batch between work stations
Cost of inspecting batches
Product Level Activity
This activity is performed to
support the production of each
different type of product.
Examples:
Cost of product development
Cost of product marketing such as
product-related advertising
Cost of specialized equipment
Cost of maintaining specialized equipment
Facility Level Activity
This activity is performed to maintain
general capabilities.
Examples:
Cost of maintaining factory building
and grounds
Cost of real property taxes
Cost of non-specialized equipment
Cost of general advertising
Cost of factory supervisor