Activity Cost Analysis and Planning

1. 2 C hapter Activity Cost Analysis and Planning Prepared by Douglas Cloud Pepperdine University

2. Basic Cost Behavior Patterns Total variable costsincrease in proportion to increases in unit level cost drivers. Total variable costs (Y) 0 0 Total activity (X)

3. Basic Cost Behavior Patterns Total fixed costsincrease in proportion to increases in unit level cost drivers. Total fixed costs (Y) 0 0 Total activity (X)

4. Basic Cost Behavior Patterns Total mixed costs contain fixed and variable cost elements. They increase, but not in direct proportion to increases in unit level cost drivers. Total mixed costs (Y) Sometimes called semi-variable costs 0 0 Total activity (X)

5. Basic Cost Behavior Patterns Total step costs are constant over a range of activity for a unit-level cost driver but move to a different amount at different ranges. Total step costs (Y) 0 0 Total activity (X)

6. Relevant range for which linear patterns are valid Normal activity range Economists’ CurvilinearTotal Cost Pattern Total power costs 0 0 Units produced

7. Fixed Costs Committed costs (Capacity costs) are required to maintain the current service or production capacity to fill previous legal commitments.

8. Fixed Costs Discretionary costs (Program costs) are set at a fixed amount each year at the discretion of management.

9. High activity period Low activity period Variable cost per unit (b) Difference in total costs Difference in activity = $32,000 - $17,000 b = High-Low Cost Estimation Number of Packaging Shipments Costs January 6,000 $17,000 February 9,000 26,000 March 12,000 32,000 April l0,000 20,000 12,000 - 6,000 Continued

10. Variable cost per unit (b) $2.50 = Same answer! High-Low Cost Estimation January a = Total costs - Variable costs $17,000 = a + ($2.50 x 6,000 shipments) a = $2,000 March $32,000 = a + ($2.50 x 12,000 shipments) a = $2,000

11. Total packing department costs Number of shipments High-Low Cost Estimation Y = $2,000 + $2.50 X

12. Variable costs per unit Difference in total costs Difference in activity = Total costs at either the high or low costs activity level Variable costs computed for that level Fixed costs = - High-Low Cost Estimation Difference in total costs $40,000 --- $30,000 --- $20,000 --- $10,000 --- $0 Total Costs Difference in activity level | | | 0 5,000 10,000 15,000 Number of Shipments

13. Least Squares Regression Analysis • Y(成本)X(數量)Y-YbarX-Xbar(Y-Ybar)(X-Xbar) • $17,000 6,000 -6,750 -3,250 21,937,500 • 26,000 9,000 2,250 -250 -562,500 • 32,000 12,000 8,250 2,750 22,687,500 • 20,000 10,000 -3,750 750 -2,812,500 • 41,250,000 Y = a + bxa = ybar – b xbarb = Sigma(x-xbar)(y-ybar)/Sigma(x-xbar)**2 a=23,750 – 2.2*9,250 = $3,400 b = $2.2 Y = $3,400 + $2.2X

14. Manufacturing overhead has increased Direct labor has decreased Direct materials has increased Changing Composition of Total Manufacturing Costs 100 Percent of total manufacturing costs 0 1900 1950 2000 Year

15. Manufacturing Costs Direct materials, the cost of primary raw materials converted into finished goods. The word “direct” indicates costs that are easily or directly traced to a finished product or service. Direct labor, the wages earned by production employees for the time they spend converting raw materials into finished products. Manufacturing overhead includes all manufacturing costs other than direct materials and direct labor.

16. Manufacturing Cost Hierarchy • Unit level activities • Batch level activities • Product level activities • Facility level activities

17. Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost Unit Performed for each level unit product produced or sold • Cost of raw materials • Cost of inserting a component • Utilities cost of operating equipment • Some costs of packaging • Sales commissions

18. Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost Batch Performed for each level batch of product produced or sold • Cost of processing a sales order • Cost of issuing and tracking work order • Cost of equipment setup • Cost of moving batch between workstations • Cost of inspection

19. Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost Product Performed to support level each different product that can be produced • Cost of product development • Cost of product marketing such as advertising • Cost of specialized equipment • Cost of maintaining specialized equipment

20. Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost Facility Performed to level maintaingeneral manufacturing capabilities • Cost of maintaining general facilities • Cost of nonspecialized equipment • Cost of real property taxes • Cost of general advertising • Cost of general administration