UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Second Semester
A.Y. 2021-2022

ONLINE LEARNING MODULE

ACCT 1033- Cost Accounting and Control

Lesson 3: Cost Behavior, Analysis, and Use

For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish.
Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE 😊

Date Topics Activities or Tasks

February 22, Cost Behavior: Read Lessons from books and handouts
23 a. Variable Cost
February 24 b. Fixed Cost Online discussion
February 25 c. Separation Accomplish the drills and exercises
February 26 Submission of Assessments
Participate in the scheduled Quiz

Learning After reading this chapter you should be able to:

Outcomes: ⚫ Describe and apply the concept of fixed and variable costs.
⚫ Apply methods in segregation of cost.

LEARNING CONTENT

INTRODUCTION
Companies must earn profit to stay in business. Managers want to increase profitability and therefore need to
predict how their actions will affect profit.

Classifying cost according to behavior is distinctive to managerial use of accounting information. In financial
accounting reports prepared for external use, costs are normally grouped according to the functional areas of
business: production (cost of goods sold), marketing (selling expense), administration (general and
administrative expenses), and financing ( interest expense). A functional classification does not provide
necessary information to predict what is likely to happen to cost and profits if circumstances change, and a
manager must plan for a change and take actions to make changes

COST BEHAVIOR

A cost is classified as either fixed cost or variable, according to whether the total amount of the cost changes
as activity changes. Activity, is a general term denoting anything that the company does; example of activity
include units of product sold or produced, hour worked, invoices prepared, and parts inspected. Volume is
commonly measure of activity.

ACTIVITY BASE

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Activity base is a measure of the event that causes the incurrence of a variable cost- a cost driver

Example:

Unit Produced
Labor Hours
Machine Hours
Miles Driven

TOTAL Variable Cost and TOTAL Fixed Cost

Variable cost - cost that varies with the level of output

-variable cost change, in total, in direct proportion to change in volume (meaning, if the volume
of the product increases the total variable cost also increases)

Fixed cost - constant whatever the quantity of goods or services produced.

- remain the same in total over a wide range of volume

Let’s say for example you are studying here in University of Saint Louis - Tuguegarao. Because you are from
Calayan, an island between Appari and Batanes, you decided to rent an apartment for Php 2,000 monthly.
Let’s say you go to school everyday and paying a total of Php 50 ( Php 25 from apartment to school and Php
25 from school to your apartment). For the month of February, you went to school for 19 days because
February 25 is a holiday. For the month of February you incurred a total of Php 950 ( Php 50 x 19 days) for
transportation and Php 2,000 monthly rental. For the month of March you went to school for 23 days, therefore
you incurred Php 1,150 (Php 50 x 23 days) for transportation and Php 2,000 monthly rental.

As observed in the illustration you paid more on transportation expense in March than in February because
you went to school for 23 days in March as compared to 19 days in February. Your transportation therefore is a
variable cost. Of course you should have realized that your monthly rental in February is equal to your rental in
March. Your rental, therefore, is a fixed cost.

Let’s have another example, but this time it would be in a business setting.

Ballad Company, a wholesaler of backpack. The following schedule shows data for Ballad Company.

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The Activity base would be the unit purchased.

For 2020 the total variable cost is Php 720,000 ( 5,000 units x 12 months x Php 12 total unit variable cost)
For 2021 the total variable cost is Php 576,000 ( 4,000 units x 12 months x Php 12 total unit variable cost)

For 2020 the total fixed cost is Php 480,000 ( Php 40,000 x 12 months)
For 2021 the total fixed cost is Php 480,000 ( Php 40,000 x 12 months)

Notice that the total variable cost vary in each year while total fixed cost is the same.

Variable Cost PER UNIT and Fixed Cost PER UNIT

Variable cost per unit- remains the same over wide range of activity
Fixed cost per unit -goes down as activity level goes up.

Cost per unit means the cost of a single unit of a product

Let’s use Ballad Company again as example:

The variable cost per unit of backpack is Php 12. We can also get the variable cost per unit by dividing the
TOTAL variable cost by the TOTAL units purchase.

For 2020:

If the variable cost per unit is not given you can use the solution above in getting the variable cost per unit.

For 2021: try to compute it by yourself. Let’s see if you can arrive at Php 12 variable cost per unit

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The fixed cost per unit of backpack is computed by dividing the TOTAL fixed cost by the TOTAL units
purchased (just like the variable cost per unit)

For 2020:

For 2021:

Notice that the variable cost per unit is the same in 2020 and 2021 (that is 12 per unit). While the fixed cost
vary in each year (that is Php 8 for 2020 and Php for 2021), this is because the total units produced in 2020 is
not the same with the total units produced in 2021.

Notice also that for variable cost, as the TOTAL units purchase/produce increases the TOTAL Variable cost
increases, while the the Variable Cost PER UNIT remains constant, and as the TOTAL units purchased/
produce decreases the TOTAL Variable cost also decreases while the Variable Cost PER UNIT remains
constant.

For Fixed Cost, as the TOTAL units purchased/ produce increases the TOTAL Fixed Cost remains the same,
while the FIxed Cost PER UNIT decreases, and as the TOTAL units purchased or produce decreases the
TOTAL Fixed Cost will be constant while the Fixed Cost PER UNIT increases.

Summary:

Formula Summary:

TOTAL VARIABLE COST = Variable Cost per unit x Activity Level or Volume
VARIABLE COST PER UNIT = Total Variable Cost ÷ Activity Level or Volume
FIXED COST PER UNIT = Total Fixed Cost ÷ Activity Level or Volume

MIXED COST

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A mixed cost has both fixed and variable components.

TOTAL COST= Total variable cost + Total fixed cost

If we get the sum of total variable cost and total fixed cost we get the total cost which is a mixed cost

What if Total Cost is given, how can we segregate the variable cost from fixed cost?

In our example Ballad Company, what if the only given data is as follows:

How can we get the total variable cost, the variable cost per unit, the total fixed cost, and the fixed cost per
unit?

Cost Segregation Methods

1. Account Analysis
- Each is account is classified as either variable or fixed based on the analyst’s knowledge of how the
account behaves

2. Engineering Estimate
- Cost estimate are based on an evaluation of production methods, material labor and overhead
requirements.

For Account Analysis and Engineering Estimate the amount of variable cost and fixed cost will be based on
their report.

3. The High Low method

4. Scattergraph Plot

5. Least Square Regression Method

HIGH LOW METHOD

- considers the highest and lowest point of activity

Steps:
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 1. Determine the lowest point of activity and the corresponding cost, and the highest
point of activity and its corresponding cost.
2. Get the change in cost and divide it by the change in activity level.

Formula:

3. The answer in step two would be the variable cost per unit. Multiply the variable cost
per unit by the number of units at the highest level to get the total variable cost

Formula:
Total Variable Cost= Variable cost per unit x Number of units at the
highest level

4. Subtract the total Variable cost from the Cost of the highest activity to get the total
FIxed cost

Formula:
Total Fixed Cost = Cost of highest activity - total variable cost

For step 3 you may also multiply the variable cost per unit (computed in step 2) by the
number of units at the lowest level but make sure that for step 4 you should use the cost
of lowest activity.

So for Ballad Company, since there are only two levels of activity presented we will use the 2020 as highest
activity level and 2021 as the lowest.

Step 1: Highest level:

Number of units: 60,000 (5,000 units per month x 12 months)
Cost- Highest level: Php 1,200,000

Lowest level:
Number of units: 48,000 ( 4,000 x 12)
Cost- Lowest level: Php 1,056,000

Step 2:

Solution:

Step 3:
Solution:
Variable cost per unit x number of units at highest level= Total Variable cost

Php 12 x 60,000 units = Php 720,000

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Step 4:
Solution:
Cost of highest activity - total variable cost = Total Fixed Cost
Php 1,200,000- Php 720,000 = Php 480,000

Answer:
Variable Cost per unit = 12
Fixed Cost= 480,000

Getting the highest level and lowest level (another example)

Answer:
Remember that when figuring out the highest and lowest data points, we should
not look at cost, but rather at unit volumes, as they are the driver behind the cost.

Highest level is 60,000 and corresponding cost is Php 1,200,000

Lowest level is 47,000 and corresponding cost is Php 1,044, 000

Outlier
In cost accounting, an outlier could be a cost or its related level of activity that is out of line with other
observations.

Example:

The activity in 2023 is an outlier so it should be ignored in getting the highest and lowest value.
The highest activity level is 60,000 units and lowest activity level is 47,000 units.

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SCATTERGRAPH METHOD
-is a visual technique used in accounting for separating the fixed and variable elements of a mixed cost
in order to estimate and budget for future costs. A semi-variable expense is more complicated to analyze since
it is made up of both fixed and variable factors.

Example:

Step 1
Plot the data points on a graph

Step 2
Draw line through the data points with about an equal numbers of points above and below the line.

Step 4
The slope is the estimated cost per unit.
Slope = Change in cost ÷ Change in units

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LEAST-SQUARE REGRESSION METHOD

Linear regression is basically a mathematical analysis method which considers the relationship between all the
data points in a simulation. All these points are based upon two unknown variables – one independent and one
dependent. The dependent variable will be plotted on the y-axis and the independent variable will be plotted to
the x-axis on the graph of regression analysis. In literal manner, least square method of regression minimizes
the sum of squares of errors that could be made based upon the relevant equation.

The least squares regression method follows the same cost function as the other methods used to segregate a
mixed or semi variable cost into its fixed and variable components. Let’s assume that the activity level varies
along x-axis and the cost varies along y-axis. The following equation should represent the the required cost
line:

y = a + bx

Where,
y = total cost
a = total fixed cost
b = fixed cost
x = number of units

The values of ‘a’ and ‘b’ may be found using the following formulas.

Example:

Banera Chemicals produces bottles of a cleaning lubricant. The activity levels and the attached costs are
shown below:

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On the basis of above data, let’s determine the cost function using the least squares regression method and
calculate the total cost at activity levels of 6,000 and 10,000 bottles.

Solution:

In our example:
n=7
∑x = 17,310
∑y = 306,080
x2 = 53,368,900
xy = 881,240,300
We can find the values of ‘a’ and ‘b’ by putting this information in the above formulas:

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 *** END of LESSON 1***

REFERENCES

Textbooks

1. Louderback, J. (2003). Managerial Accounting. Thompsom Learning

Online Reference

1 https://www.assignmentpoint.com/business/accounting/cost-behavior-analysis-and-use.html
2 https://www.accountingformanagement.org/least-squares-regression-method/

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