Chapter 3
Cost Behavior Analysis
Types of Cost Behavior
Patterns
Recall the summary of our cost behavior
discussion from Chapter 2.
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remains
proportional to the activity the same over wide ranges
level within the relevant range. of activity.
Fixed Total fixed cost remains the Fixed cost per unit goes
same even when the activity down as activity level goes up.
level changes within the
relevant range.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Activity Base
Units
Machine
produce
hours
d
A measure of the
event that causes
the incurrence of a
variable cost – a
cost driver
Miles Labor
driven hours
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
True Variable Cost Example
Your total long distance telephone bill is
based on how many minutes you talk.
Total Long Distance
Telephone Bill
Minutes Talked
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Variable Cost Per Unit Example
The cost per minute talked is constant. For
example, 10 cents per minute.
Telephone Charge
Per Minute
Minutes Talked
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Step-Variable Costs
Total cost remains
constant within a
narrow range of
activity.
Cost
Activity
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Step-Variable Costs
Total cost increases to a
new higher cost for the
next higher range of
activity.
Cost
Activity
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Linearity Assumption and
the Relevant Range
Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
Total Cost
relevant range.
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Activity
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Total Fixed Cost Example
Your monthly basic telephone bill is
probably fixed and does not change when
you make more local calls.
Monthly Basic
Telephone Bill
Number of Local Calls
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Fixed Cost Per Unit Example
The fixed cost per local call decreases as
more local calls are made.
Monthly Basic Telephone
Bill per Local Call
Number of Local Calls
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Cost Behavior
Examples of normally variable costs
Merchandisers Service Organizations
Cost of Goods Sold Supplies and travel
Manufacturers Merchandisers and
Direct Material, Direct Manufacturers
Labor, and Variable Sales commissions and
Manufacturing Overhead shipping costs
Examples of normally fixed costs
Merchandisers, manufacturers, and
service organizations
PBB taxes, Insurance, Sales salaries
Depreciation, Advertising
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Types of Fixed Costs
Committed Discretionary
Long-term, cannot be May be altered in the
reduced in the short short-term by current
term. managerial decisions
Examples Examples
Depreciation on Advertising and
Buildings and Research and
Equipment Development
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Fixed Costs and Relevant
Range
Example: Office space
is available at a rental
rate of $30,000 per year
in increments of 1,000
square feet. As the
business grows more
space is rented,
increasing the total cost.
Continue
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Fixed Costs and Relevant
Range
90
Thousands of Dollars
Total cost doesn’t
Rent Cost in
Relevant change for a wide
60 range of activity,
Range and then jumps to a
new higher cost for
the next higher
30 range of activity.
00 1,000 2,000 3,000
Rented Area (Square Feet)
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Fixed Costs and Relevant
Range
Step-variable costs
can be adjusted more
How does this type quickly and . . .
of fixed cost differ The width of the
from a step-variable activity steps is much
cost? wider for the fixed
cost.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Semivariable Costs
A semivariable cost has both fixed and variable
components. Consider the example of utility cost.
Y
Total Utility Cost
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Semivariable Costs
The total semivariable cost line can be expresse
as an equation: Y = a + bX
Where: Y = the total mixed cost
a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
Y activity (the slope of the line)
Total Utility Cost
X = the level of activity
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Analysis of Semivariable
Costs
1. High-Low Method
2. Scattergraph Method
3. Least-Square Regression Method
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Scattergraph Method
Plot the data points on a
Y graph (total cost vs. activity).
1,000’s of Dollars
20
* ** *
Total Cost in
* *
**
10 * *
0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Scattergraph Method (2)
Draw a line through the data points with about an
equal numbers of points above and below the line.
Y
1,000’s of Dollars
20
* ** *
Total Cost in
* *
* **
10 * Intercept is the estimated
fixed cost (a) = $10,000
0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Scattergraph Method (3)
The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
Y
1,000’s of Dollars
20
* ** *
Total Cost in
* *
* **
10 *Horizontal
distance is Vertical distance is
the change in the change in cost.
activity.
0 X
0 1 2 3 4
Activity, 1,000’s of Units Produced
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The High-Low Method
WiseCo recorded the following production activity and
maintenance costs for two months:
Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Using these two levels of activity, compute:
the variable cost per unit;
the fixed cost; and then
express the costs in equation form Y = a + bX.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The High-Low Method
Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Variable cost per unit = ChangeChange in cost in units
in cost ÷ change
Change in units
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The High-Low Method
Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Variable cost per unit = $2,400 ÷ 3,000 units
= $0.80 per unit
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The High-Low Method
Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The High-Low Method
Units Cost
High activity level 8,000 $ 9,800
Low activity level 5,000 7,400
Change 3,000 $ 2,400
Variable cost = $2,400 ÷ 3,000 units = $0.80 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,800 – ($0.80 per unit × 8,000 units)
Fixed cost = $9,800 – $6,400 = $3,400
Total cost = Fixed cost + Variable cost (Y = a + bX)
Y = $3,400 + $0.80X
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Least-Squares Regression
Method
Software can be used to fit
a regression line through
the data points.
The cost analysis objective
is the same: Y = a + bx
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Least-Squares Regression
Method
R2 is the percentage of the variation in total cost
explained by the activity.
Y
20
* ** *
Total Cost
* * **
10 * * R2 for this relationship is near
100% since the data points are
very close to the regression line.
0 X
0 1 2 3 4
Activity
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Cost Estimation Methods
Regression Analysis
A statistical method used to create an
equation relating independent (or X)
variables to dependent (or Y) variables.
Past data is used to estimate relationships
between costs and activities.
Independent variables Dependent variables are
are the cost drivers that caused by the
are correlated with the independent variables.
dependent variables.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Cost Estimation Methods
Regression Analysis
The simple cost model is actually a
regression model:
TC = F + VX
Caution: Before doing
This model will only the analysis, take time
be useful within a to determine if a
relevant range of logical relationship
activity. between the variables
exists.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Cost Estimation Methods
Regression Analysis
A set of data can be regressed using several
techniques:
•Manual computations
•SPSS or SAS Statistical Software
•Excel or other spreadsheet
The result of the Each regression model
regression process is a has an R-square (R2)
regression model: measure of how good the
model is.
TC = F + VX Range of R2 = 0 to 1.0
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Simple Regression Analysis
Example
Month Total Costs Units (Meals)
January $6,720 1,280
Fasco wants to February 7,260 1,810
know its average March 7,270 1,620
fixed cost and April 11,060 2,830
May 12,580 3,630
variable cost per June 8,660 2,610
unit. July 8,580 2,460
August 9,550 2,640
Using the data to September 13,050 3,620
the right, let’s see October 11,060 2,840
November 7,320 1,820
how to do a December 7,370 1,650
regression using January 6,790 1,260
Excel. February 7,480 1,850
March 6,990 1,710
April 11,400 2,940
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Simple Regression Analysis
Example
You will need three pieces Month Total Costs Units (Meals)
of information from your January $6,720 1,280
regression analysis: February 7,260 1,810
March 7,270 1,620
1. Estimated Variable Cost April 11,060 2,830
per Unit (line slope) May 12,580 3,630
2. Estimated Fixed Costs June 8,660 2,610
(line intercept) July 8,580 2,460
3. Goodness of fit, or R2 August 9,550 2,640
September 13,050 3,620
October 11,060 2,840
To get these three pieces November 7,320 1,820
of information we will December 7,370 1,650
need to use THREE January 6,790 1,260
different excel functions. February 7,480 1,850
March 6,990 1,710
LINEST, INTERCEPT, & RSQ April 11,400 2,940
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
Let’s put our
knowledge of cost
behavior to work by
preparing a
contribution format
income statement.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Contribution Format
Total Unit
Sales Revenue $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net operating income $ 10,000
The contribution margin format emphasizes cost
behavior. Contribution margin covers fixed costs
and provides for income.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
The Contribution Format
Used primarily for Used primarily by
external reporting. management.
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
End of Session 3
Cost Accounting – Third Sesion I Made R. Natawidnyana, Ak., CPMA
