CHAPTER Activity Cost Behavior

Transcription

1 3-1 CHAPTER Activity Cost Behavior

2 Objectives Define cost behavior After studying for fixed, this variable, and mixed costs. chapter, you should 2. Explain the role be of the able resource to: usage model in understanding cost behavior. 3. Separate mixed costs into their fixed and variable components using the high-low method, the scatterplot method, and the method of least squares. continued

3 Objectives Evaluate the reliability of a cost equation. 5. Discuss the role of multiple regression in assessing cost behavior. 6. Describe the use of managerial judgment in determining cost behavior.

4 3-4 Fixed Costs A cost that stays the same as output changes is a fixed cost.

5 3-5 Fixed Costs Cutting machines are leased for $60,000 per year and have the capacity to produce up to 240,000 units a year.

6 Total Costs Total Fixed Cost Graph 3-6 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 F = $60, Units Produced (000) Fixed Costs Lease of Machines Number of Units Units Cost $60,000 0 N/A 60,000 60,000 $ , , , , , ,

7 Cost per Unit Unit Fixed Cost Graph 3-7 $1.00 $0.50 $0.33 $ Units Produced (000) Fixed Costs Lease of Machines Number of Units Units Cost $60,000 0 N/A 60,000 60,000 $ , , , , , ,

8 A variable cost is a cost that, in total, varies in direct proportion to changes in output. 3-8 Variable Cost

9 Variable Cost 3-9 As the cutting machines cut each unit, they use 0.1 kilowatt-hour at $2.00 per kilowatt hour. Thus, the cost of each unit is $0.20 ($2 x 0.1).

10 Total Costs Total Variable Cost Graph 3-10 $48,000 $36,000 $24,000 Y v =.20x Variable Cost $12, Units Produced (000) Cost of Power Number of Units Units Cost $ 0 0 $ 0 12,000 60, , , , , , ,

11 Cost per Unit Unit Variable Cost Graph 3-11 $0.40 $0.30 $0.20 $ Units Produced (000) Variable Cost Cost of Power Number of Units Units Cost $ 0 0 $ 0 12,000 60, , , , , , ,

12 A mixed cost is a cost that has both a fixed and a variable component. 3-12

13 Sales representatives often are paid a salary plus a commission on sales. 3-13

14 Total Costs Mixed Cost Behavior 3-14 $130,000 $110,000 $90,000 $70,000 $50,000 $30, Units Sold (000) Inserts Sold Variable Cost of Selling Fixed Cost of Selling Total Selling Cost Selling Cost per Unit 40,000 $ 20,000 $30,000 $ 50,000 $ ,000 40,000 30,000 70, ,000 60,000 30,000 90, ,000 80,000 30, , , ,000 30, ,

15 Activity Cost Behavior Model 3-15 Input: Materials Energy Labor Changes in Input Cost Capital Activities Cost Behavior Activity Output Changes in Output

16 Flexible resources are resources acquired as used and needed. Materials and energy are examples. 3-16

17 Committed resources are supplied in advance of usage. Buying or leasing a building is an example of this form of advance resource acquisition. 3-17

18 A step cost displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point Step-Cost Behavior

19 3-19 Step-Cost Behavior Cost $ Activity Output (units)

20 3-20 Step-Fixed Costs Cost $150, ,000 50,000 Normal Operating Range (Relevant Range) 2,500 5,000 7,500 Activity Usage

21 Step-Cost Behavior 3-21 Three engineers hired at $50,000 each Each engineer is capable of processing 2,500 change orders $90,000 was spent on supplies for the engineering activity There were 6,000 orders processed The company could process as many as 7,500 orders

22 Step-Cost Behavior 3-22 Available orders = Orders used + Orders unused 7,500 orders = 6,000 orders + 1,500 orders Fixed engineering rate = $150,000/7,500 = $20 per change order Variable engineering rate = $90,000/6,000 = $15 per change order

23 Step-Cost Behavior 3-23 The relationship between resources supplied and resources used is expressed by the following equation: Resources available = Resources used + Unused capacity

24 Step-Cost Behavior 3-24 Cost of orders supplied = Cost of orders used + Cost of unused orders = [($20 + $15) x 6,000] + ($20 x 1,500) = $240,000 The $30,000 of excess engineering capacity means that a new product could be introduced without increasing current spending on engineering. Equal to the $150,000 spent on engineers and the $90,000 spent on supplies.

25 3-25 Methods for Separating Mixed Costs The High-Low Method The Scatterplot Method The Method of Least Squares Variable Component Fixed Component

26 The linearity assumption assumes that variable costs increase in direct proportion to the number of units produced (or activity units used). 3-26

27 3-27 Methods for Separating Mixed Costs Y = a + bx Total Cost Total Fixed Variable Number of Cost Cost Units per Unit

28 3-28 The High-Low Method Month Setup Costs Setup Hours January $1, February 1, March 2, April 2, May 3, Step 1: Solve for variable cost (b)

29 3-29 The High-Low Method Month Setup Costs Setup Hours January $1, February 1, March 2, April 2, May 3, b = High Cost Low Cost High Units Low Units

30 3-30 The High-Low Method Month Setup Costs Setup Hours January $1, February 1, March 2, April 2, May 3, b = High $3,750 Cost Low Cost High 500 Units Low Units

31 3-31 The High-Low Method Month Setup Costs Setup Hours January $1, February 1, March 2, April 2, May 3, b = $3,750 Low $1,000 Cost 500 Low 100 Units

32 The High-Low Method 3-32 b = $3,750 $1, b = $6.875 Step 2: Using either the high cost or low cost, solve for the total fixed cost (a).

33 3-33 The High-Low Method Y = a + b (x) $3,750 = a + $6.875(500) $ = a Y = a + b (x) $1,000 = a + $6.875(100) $ = a High End Low End The cost formula using the high-low method is: Total cost = $ ($6.875 x Setup hours)

34 The Scatterplot Method 3-34

35 The Scatterplot Method 3-35 Nonlinear Relationship Activity Cost * * * * * 0 Activity Output

36 The Scatterplot Method 3-36 Upward Shift in Cost Relationship Activity Cost * * * * * * 0 Activity Output

37 The Scatterplot Method 3-37 Presence of Outliers Activity Cost Estimated fixed cost * * * * * * Estimated regression line 0 Activity Output

38 The Method of Least Squares 3-38 Month Setup Costs Setup Hours Jan 1, Feb 1, Mar 2, Apr 2, May 3, Spreadsheet Data for Larson Company

39 The Method of Least Squares 3-39 Regression Output: Constant 125 Std. Err of Y Est R Squared No. of Observation 5 Degrees of Freedom 3 X Coefficient(s) 6.75 Std. Err of Coef Regression Output for Larson Company

40 The Method of Least Squares 3-40 The results give rise to the following equation: Setup costs = $125 + ($6.75 x Setup hours) R 2 =.944, or 94.4 percent of the variation in setup costs is explained by the number of setup hours variable.

41 Coefficient of Correlation 3-41 Positive Correlation r approaches +1 Machine Hours Utilities Costs Machine Hours Utilities Costs

42 Coefficient of Correlation 3-42 Negative Correlation r approaches -1 Hours of Safety Training Industrial Accidents Hours of Safety Training Industrial Accidents

43 Coefficient of Correlation 3-43 No Correlation r ~ 0 Hair Length Accounting Grade Hair Length Accounting Grade

44 Multiple Regression 3-44 TC = b 0 + ( b 1 X 1) + (b 2 X 2) +... b 0 = the fixed cost or intercept b 1 = the variable rate for the first independent variable X 1 = the first independent variable b 2 = the variable rate for the second independent variable X 2 = the second independent variable

45 Multiple Regression 3-45 Month Mhrs Summer Utilities Cost Jan 1,340 0 $1,688 Feb 1, ,636 Mar 1, ,734 April 1, ,770 May 1, ,390 June 1, ,304 July 1, ,166 August 1, ,284 Sept 1, ,730 Oct 1, ,991 Nov 1, ,840 Dec 1, ,833 Data for Phoenix Factory Utilities Cost Regression

46 Multiple Regression 3-46 Constant Std Err of Y Est R Squared No. of Observation 12 Degrees of Freedom 9 X Coefficient(s) Std Err of Coef Multiple Regression for Phoenix Factory Utilities Cost

47 Multiple Regression 3-47 The results gives rise to the following equation: Utilities cost = $ $1.097(Machine hours) + ($ x Summer) R 2 =.967, or 96.7 percent of the variation in utilities cost is explained by the machine hours and summer variables.

48 3-48 Managerial Judgment Managerial judgment is critically important in determining cost behavior, and it is by far the most widely used method in practice.

49 3-49 Chapter Three The End

50 3-50