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Cost Behavior and Cost Estimation Cost Estimation
Cost Behavior and Cost Estimation Cost Estimation
Cost Behavior and Cost Estimation Cost Estimation
and
Cost Estimation
In Total
Per Unit
VC
Total VC is
proportional to the activity
level within the RR.
RR
FC
Machine
hours
A measure off what
h t
causes the
i
incurrence
off a VC
Miles
driven
Labor
hours
3
True VC Example
Total Phone
e Bill $$
$
Minutes Talked
Total DM Co
ost $$
Volume
P Min
Per
nute
Phon
ne Cha
arge $$
$
Minutes Talked
A manufacturing company
will often have many
VCs.
A service company
will normally have a high
proportion of VCs.
A merchandising company
usually will have a high
proportion of VCs,
like cost of sales.
7
Total C
T
Cost $$
Step-Variable Costs
Volume
9
Tota
al Phon
ne Bill $
$$
Number of Calls
10
Phone Ch
harge p
per Call $$
Average FCs per unit decrease as the activity level increases. The
FC per local call decreases as more local calls are made
made.
11
Committed
Discretionary
y
Long-term, cannot be
g
y reduced
significantly
in the short term.
Examples
Examples
Depreciation on
Equipment and
R lE
Real
Estate
t t T
Taxes
Advertising and
Research and
D
Development
l
t
12
Tottal Cos
st $$
Relevant
Range
R
Activity
13
Total
$ 100,000
60 000
60,000
$ 40,000
Less: FC
Net Income
30,000
$ 10,000
Unit
$ 50
30
$ 20
Used primarily by
management
management.
16
Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where:
Y
Tota
al Utilitty Cost
b = the VC p
per unit of activity
y
(the slope of the line)
X = the level of activity
Variable
C t per KW
Cost
X
Activity (Kilowatt Hours)
Fixed Monthly
Utility Charge
17
Y = a + bX
Y = $40 + ($0.03 2,000)
Y = $100
18
Scattergraph Method
Mainte
enance Cost
1,000s
s of Do
ollars
* *
* *
10
* ** *
**
Patient-days
Patient
days in 1,000
1,000s
s
Patient days = 800
19
Scattergraph Method
Make a quick estimate of VC per unit and determine the
cost equation.
Total maintenance at 800 patients
Less: Fixed cost
Estimated total variable cost for 800 patients
VC per unit =
$1,000
800
$ 11
11,000
000
10,000
$ 1,000
= $1.25/patient
$1 25/patient25/patient-day
Y = $10
$10,000
000 + $1
$1.25X
25X
Total maintenance cost
High-Low Method
The VC per hour of
maintenance is equal to
the change in cost divided
y the change
g in hours.
by
$2,400
$2
400
= $8.00/hour
300
21
High-Low Method
High-Low Method
Y = $3,400
$3 400 + $8
$8.00
$8.00X
00X
00X
23
Regression Method
A method used to analyze mixed costs if a scattergraph plot reveals
an approximately linear relationship between the X and Y variables.
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
Regression also provides a statistic, called the R2,
which is a measure of the goodness of fit of the
regression line to the data points.
25
Regression Method
R2 is
i the
th percentage
t
off the
th variation
i ti in
i total
t t l costt
explained by the activity.
Y
Total Cost
20
* *
* *2
10
* ** *
**
0
0
2
3
Activity
X
26