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    Costing For Decision Making: Cost Behavior Analysis

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    Bee L
    This document discusses cost behavior analysis and different methods for determining fixed and variable costs from mixed costs. It begins by defining fixed costs as those that do not change with activity level, variable costs as those that change proportionally with activity level, and semi-variable or mixed costs as having both fixed and variable elements. The relevant range of activity is introduced, where a cost maintains its fixed or variable nature. Methods for separating fixed and variable costs from mixed costs are then described, including the high-low method using two data points, scattergraph/least squares regression analysis using multiple data points, and the least squares method using mathematical formulas. Understanding cost behavior is important for planning, analysis, control and decision making.

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    Costing For Decision Making: Cost Behavior Analysis

    Uploaded by

    Bee L
    34 views31 pages
    This document discusses cost behavior analysis and different methods for determining fixed and variable costs from mixed costs. It begins by defining fixed costs as those that do not change with activity level, variable costs as those that change proportionally with activity level, and semi-variable or mixed costs as having both fixed and variable elements. The relevant range of activity is introduced, where a cost maintains its fixed or variable nature. Methods for separating fixed and variable costs from mixed costs are then described, including the high-low method using two data points, scattergraph/least squares regression analysis using multiple data points, and the least squares method using mathematical formulas. Understanding cost behavior is important for planning, analysis, control and decision making.

    Original Description:

    ACC 2024

    Original Title

    Lecture Costs Ch03

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    This document discusses cost behavior analysis and different methods for determining fixed and variable costs from mixed costs. It begins by defining fixed costs as those that do not change with activity level, variable costs as those that change proportionally with activity level, and semi-variable or mixed costs as having both fixed and variable elements. The relevant range of activity is introduced, where a cost maintains its fixed or variable nature. Methods for separating fixed and variable costs from mixed costs are then described, including the high-low method using two data points, scattergraph/least squares regression analysis using multiple data points, and the least squares method using mathematical formulas. Understanding cost behavior is important for planning, analysis, control and decision making.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    34 views31 pages

    Costing For Decision Making: Cost Behavior Analysis

    Uploaded by

    Bee L
    This document discusses cost behavior analysis and different methods for determining fixed and variable costs from mixed costs. It begins by defining fixed costs as those that do not change with activity level, variable costs as those that change proportionally with activity level, and semi-variable or mixed costs as having both fixed and variable elements. The relevant range of activity is introduced, where a cost maintains its fixed or variable nature. Methods for separating fixed and variable costs from mixed costs are then described, including the high-low method using two data points, scattergraph/least squares regression analysis using multiple data points, and the least squares method using mathematical formulas. Understanding cost behavior is important for planning, analysis, control and decision making.

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    of 31

    COSTING FOR DECISION

    MAKING
    Chapter 3 Cost Behavior Analysis
    LEARNING OBJECTIVES

    1. Distinguish fixed, variable, and semivariable costs


    2. Define relevant range
    3. Determine fixed and variable costs from mixed cost using
    High Low method
    Scattergraph method
    Least square method
    RECAP :

     Cost Accounting System


     Job and Process Costing
     Descriptive analysis
     Costs
     Production Costs: Prime, Conversion, non production
     Accumulation and allocation: Direct, Indirect
     Cost accountability

     Predictive Analysis
     Decisions
     Costs
     Behaviour : Variable, Fixed, Mixed
    PRODUCTION COSTS

     Materials, Labour and Overhead


    DIRECT AND INDIRECT COST
    LO1: DEFINE FIXED COST

     Fixed Cost
     A fixed cost is defined as one that does not change in total as
    business activity increases or decreases.
     Many factory overhead costs such as straight-line depreciation are
    classified as fixed costs.
    FIXED COST GRAPHS
    FIXED COSTS

    • Assume that Minton Inc. manufactures, bottles, and distributes perfume.


    The production supervisor is Jane Sovissi, who is paid $75,000 per year.
    For the relevant range of 50,000 to 300,000 bottles of perfume, the total
    fixed cost of $75,000 does not vary as production increases. As a result,
    the fixed cost per bottle decreases as the units produced increase. This
    is because the fixed cost is spread over a larger number of bottles, as
    follows:

    • As shown, fixed costs have the following characteristics:


    o Cost per unit decreases as the activity level increases and increases as the activity
    level decreases.
    o Total cost remains the same regardless of changes in the activity base.
    LO1: DEFINE VARIABLE COST

     A cost that increases in total proportionately with an increase in


    activity and decreases proportionately with a decrease in activity.
     The relationship between a activity and the variable cost is
    linear
     increase by a constant amount for each unit increase in activity.
    VARIABLE COST GRAPHS
    VARIABLE COSTS

    • Assume that Jason Sound Inc. produces stereo systems. The parts for
    the stereo systems are purchased from suppliers for $10 per unit and
    are assembled by Jason Sound. For Model JS-12, the direct materials
    costs for the relevant range of 5,000 to 30,000 units of production are
    as follows:

    • As shown, variable costs have the following characteristics:


    o Cost per unit remains the same regardless of changes in the activity base.
    o Total cost changes in proportion to changes in the activity base.
    LO1: SEMIVARIABLE COST (MIXED
    COST)
     A semivariable cost is defined as one that displays both fixed and
    variable characteristics.
     Example
     A minimum quantity of supplies or services may need to be consumed, to
    maintain readiness to operate. Beyond this minimum level of cost, which
    is essentially fixed, additional cost varies with volume.
     E.g. Handphone charges
    SEMI VARIABLE COSTS
    SEMI VARIABLE COST

    • Assume that Simpson Inc. manufactures sails,


    using rented machinery. The rental charges are
    as follows:

    • The rental charges for various hours used within


    the relevant range of 8,000 hours to 40,000 hours
    are as follows:
    LO 2 RELEVANT RANGE

     The relevant range


     Refers to a range of activity (number of units, hours)
     over which a fixed cost remains constant in total or
     a variable cost remains constant per unit of activity.
     A linear relationship between cost and activity
     Outside the relevant range of activity.
     The cost becomes
     Step
     Non linear
    RELEVANT RANGE
    RELEVANT RANGE STEPPED FIXED
    COST
    LO3 : DETERMINE FIXED AND VARIABLE
    COSTS FROM MIXED COST
    Slope is
    variable cost
    per unit
    of activity.
    Electicity Cost

    Variable
    Utility Charge

    Fixed Monthly
    Utility Charge
    Activity (Labour Hours)
    LO3: DETERMINE FIXED AND
    VARIABLE COSTS FROM MIXED COST
    LO3: HIGH LOW METHOD

     High and Low Points Method


     In the high and low points method, the fixed and variable elements
    of a cost are computed from two data points.
    RATE OF CHANGE
    THE HIGH-LOW METHOD
    If sales commissions are $10,000 when
    80,000 units are sold and $14,000 when
    120,000 units are sold, what is the variable
    portion of sales commission per unit sold?

    a. $0.08 per unit


    b. $0.10 per unit
    c. $0.12 per unit
    d. $0.125 per unit
    THE HIGH-LOW METHOD
    If sales commissions are $10,000 when
    80,000 units are sold and $14,000 when
    120,000 units are sold, what is the fixed
    portion of the sales commission?
    a. $ 2,000
    b. $ 4,000
    c. $10,000
    d. $12,000
    LO3 : SCATTERGRAPH METHOD

     the cost being analyzed is called the dependent variable and is


    plotted on a vertical line called the y-axis.
     The associated activity is called the independent variable—for
    example, direct labor dollars, direct labor hours, machine hours,
    units of output, or percentage of capacity—and is plotted along
    a horizontal line called the x-axis.
    SCATTERGRAPH
    SCATTERGRAPH
    METHOD OF LEAST SQUARES

     The method of least squares, sometimes called regression analysis,


    determines mathematically a line of best fit, or linear regression line,
    through a set of points.
    EXHIBIT 3-2
    LEAST SQUARE METHOD

     The variable rate for electricity cost, b, is computed as follows:


    ( xi  x )( yi  y ) Column 6 total $2, 270,000
    b    $.0044 per direct labor hour
    ( xi  x ) 2
    Column 5 total 512,000,000
     The fixed cost, a, can be computed using the formula for a
    straight line as follows:
    COST BEHAVIOR AND DECISIONS

     Cost behavior is the manner in which a cost changes as a related


    activity changes.
     The separation of fixed and variable costs is necessary to plan,
    analyse, control, measure and evaluate costs at different levels
    of activity.

    1. Direct costing and contribution margin analysis.


    2. Break-even and cost-volume-profit analysis.
    TUTORIAL QUESTIONS

     E3-1

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