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Chapter 6

Chapter 6. Activity Analysis, Cost Behavior, and Cost Estimation. Cost behavior. Cost prediction. Relationship between cost and activity. Using knowledge of cost behavior to forecast level of cost at a particular activity. Focus is on the future. Introduction. Cost estimation.

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Chapter 6

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  1. Chapter 6 Activity Analysis, Cost Behavior, and CostEstimation

  2. Costbehavior Costprediction Relationshipbetweencost andactivity. Using knowledgeof cost behaviorto forecastlevel of cost ata particularactivity. Focusis on the future. Introduction Costestimation Process ofdeterminingcost behavior,often focusingon historicaldata.

  3. Total Variable Cost Example Your total Pay Per View bill is based on how many Pay Per View shows that you watch. Total Pay Per View Bill Number of Pay Per View shows watched

  4. Variable Cost Per Unit Example The cost per Pay Per View show is constant. For example, $4.95 per show. Cost per Pay Per Viewshow Number of Pay Per View shows watched

  5. Step-Variable Costs Total cost remainsconstant within anarrow range ofactivity. Cost Activity

  6. Total Fixed Cost Example Your monthly basic cable TV bill probably does not change no matter how many hours you watch. Monthly BasicCable Bill Number of hours watched

  7. Fixed Cost Per Unit Example The average cost per hour decreases as more hours are spent watching cable television. Monthly Basic cable Bill per hour watched Number of hours watched

  8. Step-Fixed Costs Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. 90 60 Rent Cost in Thousands of Dollars 30 0 1,000 2,000 3,000 Rented Area (Square Feet)

  9. Slope isvariable costper unitof activity. Semivariable Cost Total semivariable cost Variable Utility Charge Total Utility Cost Fixed MonthlyUtility Charge Activity (Kilowatt Hours)

  10. CurvilinearCost Function A straight-line(constant unit variable cost) closely approximates a curvilinear line withinthe relevant range. Total Cost Relevant Range Curvilinear Cost CurvilinearCost Function Activity

  11. CurvilinearCost Function A straight-Line(constant unit variable cost) closely approximates a curvilinear line withinthe relevant range. Total Cost Curvilinear Cost CurvilinearCost Function Relevant Range Activity

  12. Depreciation on Buildings and equipment Advertising and Research and Development Direct Materials Engineered, Committed and Discretionary Costs Committed Long-term, cannot be reduced in the short term. Discretionary May be altered in the short term by current managerial decisions. Engineered Physical relationship with activity measure.

  13. Estimated fixed cost = $10,000 20 * * * * * * * Vertical distance is total cost, approximately $16,000. * Total Cost in1,000’s of Dollars * * 10 0 0 1 2 3 4 Activity, 1,000’s of Units Produced Visual-Fit Method A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.

  14. The High-Low Method OwlCo recorded the following production activity and maintenance costs for two months: Using these two levels of activity, compute: • the variable cost per unit. • the total fixed cost.

  15. The High-Low Method • Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit • Fixed cost = Total cost – Total variable cost • Fixed cost = $9,700 – ($.90 per unit × 9,000 units) • Fixed cost = $9,700 – $8,100 = $1,600

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