Nama : Yudistira AKUNTANSI MANAJEMEN

NIM : 12030117140152 KELAS - E

CHAPTER 3

Activity Cost Behavior

The Basics of Cost Behavior
Cost behavior is the general term for describing whether costs change as output changes.
Costs react to output changes in many different ways. We will begin by looking at the simplest
possibilities—fixed costs, variable costs, and mixed costs.

Fixed Costs
A cost that stays the same as output changes. More formally, a fixed cost is a cost that, in total,
remains constant within a relevant range as the level of activity output changes. Relevant range is
the range of output over which the assumed cost/output relationship is valid.

Variable Costs
A variable cost is a cost that, in total, varies in direct proportion to changes in output. That is, a
variable cost goes up as output goes up, and it goes down as output goes down.

Mixed Costs
A mixed cost is a cost that has both a fixed and a variable component. For example, sales
representatives are often paid a salary plus a commission on sales.

Time Horizon Determining whether a cost is fixed or variable depends on the time horizon.
According to economics, in the long run, all costs are variable; in the short run, at least one cost is
fixed. But how long is the short run? In the Reddy Heaters example, the leasing cost of the cutting
machines was fixed for a year, so a year was the length of the short run for that cost. The length of
the short run may differ from one cost to another

Resources and Output Measures Every activity needs resources to accomplish the task it has to do.
Resources might include materials, energy or fuel, labor, and capital. These inputs are combined to
produce an output.

Non-Unit-Level Drivers Non-unitlevel drivers explain changes in cost as factors other than units
change. For example, setups are a non-unit-level activity.

Activities, Resource Usage, and Cost Behavior

“Explain the role of the resource usage model in understanding cost behavior.”
Flexible Resources
Flexible resources are supplied as used and needed; they are acquired from outside sources, where
the terms of acquisition do not require any long-term commitment for any given amount of the
resource.

Committed Resources
Committed resources are resources that are supplied in advance of usage; they are acquired by the
use of either an explicit or implicit contract to obtain a given quantity of resource, regardless of
whether the amount of the resource available is fully used or not. The annual expense associated
with the multiperiod category is independent of actual usage of the resource; thus, these expenses
can be defined as committed fixed costs, and they provide long-term activity capacity.

Thus, in the short run, the amount of resource expense remains unchanged even though the
quantity used may vary, and this resource cost category can be treated (cautiously) as a fixed
expense. We may call these shorter-term committed resources discretionary fixed costs

Step-Cost Behavior
A step cost displays a constant level of cost for a range of output and then at some point jumps to a
higher level of cost, where it remains for a similar range of output. The fixed activity rate is simply
the total committed cost divided by the total capacity available.

Implications for Control and Decision Making

The activity-based model just described can improve both managerial control and decision making.
Operational control systems encourage managers to pay more attention to controlling resource
usage and spending.

The equation for a straight line is Total cost = Fixed cost (Variable rate x Output)

This equation is a cost formula. The dependent variable is a variable whose value depends on the
value of another variable. The independent variable is a variable that measures output and explains
changes in the cost. The intercept parameter corresponds to fixed cost. The slope parameter
corresponds to the variable cost per unit of activity.

The High-Low Method

The high-low method is a method of determining the equation of a straight line by preselecting two
points (the high and low points) that will be used to compute the intercept and slope parameters.
The high point is defined as the point with the highest output or activity level.

The Scatterplot Method

The scatterplot method is a method of determining the equation of a line by plotting the data on a
graph. This plot is referred to as a scattergraph. The vertical axis is total setup cost, and the
horizontal axis is number of setup hours.
The Method of Least Squares
To correct for this problem, the method of least squares first squares each single deviation and then
sums these squared deviations as the overall measure of closeness. Squaring the deviations avoids
the cancellation problem caused by a mix of positive and negative numbers.

the best-fitting line. It is the line with the smallest (least) sum of squared deviations. The method of
least squares identifies the best-fitting line.

Reliability of Cost Formulas

R2—The Coefficient of Determination

R2, or the coefficient of determination, is the percentage of variability in the dependent variable that
is explained by an independent variable.

Coefficient of Correlation

Another measure of goodness of fit is the coefficient of correlation, which is the square root of the
coefficient of determination. Since square roots can be negative, the value of the coefficient of
correlation can range between -1 and +1.

Multiple Regression

Fortunately, the extension of the method of least squares is straightforward. Whenever least
squares is used to fit an equation involving two or more explanatory variables, the method is called
multiple regression.

Utilities cost = Fixed cost + (b1 x Machine hours) (b2 x Summer)