The Behavior of Costs

Part Two: Management Accounting

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Types of Cost Behavior

Slide 16-1

Total Cost $1,000 800 600 Variable

400 200 0 | 50 | 100 | 150 | 200 | 250

Volume

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Types of Cost Behavior

Slide 16-2

Total Cost $1,000 800 600 Fixed

400 200 0 | 50 | 100 | 150 | 200 | 250

Volume

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Types of Cost Behavior

Slide 16-3

Total Cost $1,000 800 600 Semivariable

400 200 0 | 50 | 100 | 150 | 200 | 250

Volume

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Relation of Total Costs to Volume

$2,000 1,800 -

Slide 16-4

1,600 1,400 1,200 1,000 800 600 400 200 0 Irwin/McGraw-Hill

Variable

Semivariable Fixed | | | 100 150 200 Volume

| 50

| 250
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Relation of Unit Costs to Volume

$12 11 10 9 8 -

Slide 16-5

Unit Cost = Total Cost/Volume $10.00 = $8.00 = $7.00 = $6.40 = $6.20 = $1,000/100 $1,600/200 $2,800/400 $6,400/1,000 $12,400/2,000

7 6 1 -

0 -

| | 100 200

| 400

| 1,000 Volume (units)

| 2,000

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Relevant Range

Slide 16-6

$2,000 1,600 Cost 1,200 800 UVC 400 TFC 0 50

Relevant range

Total cost: TFC + (UVC*X) Variable portion: (UVC*X)

Fixed portion: TFC

100

150 Volume (X)

200

250

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Step-Function Cost

Slide 16-7

Cost

Volume

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Estimating the Cost-Volume Relationship

How do I estimate fixed and variable cost?

Slide 16-8

Four methods for estimating total fixed cost and unit variable cost
Judgment High-low method Scatter diagram Linear regression

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High-Low Method
Month July August September October November December Costs $1,400 1,700 1,500 1,300 1,500 1,300 Volume 1,000 1,100 900 800 1,200 700

Slide 16-9

High month

High Cost - Low Cost High Volume - Volume Cost

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High-Low Method
Month July August September October November December $1,700 1,100
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Slide 16-10

High month

Costs $1,400 1,700 1,500 1,300 1,500 1,300

Volume 1,000 1,100 900 800 1,200 700

- Low Cost - Volume Cost

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High-Low Method
Month July August September October November December $1,700 1,100
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Slide 16-11

Low month

Costs $1,400 1,700 1,500 1,300 1,500 1,300

Volume 1,000 1,100 900 800 1,200 700

- Low Cost - Volume Cost

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High-Low Method
Month July August September October November December $1,700 1,100
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Slide 16-12

Low month

Costs $1,400 1,700 1,500 1,300 1,500 1,300 -

Volume 1,000 1,100 900 800 1,200 700 $1,300 700

Variable cost is $1 per unit

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High-Low Method Fixed Cost

Slide 16-13

Total Cost = Total Fixed Cost + Unit Variable Cost (X) $1,700 = Total Fixed Cost + $1 (1,100) $600 = Total Fixed Cost
Total cost in the highest month Number of units at highest month

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Scatter Diagram
Just a guess.

Slide 16-14

$2,000 -

1,500 Cost 1,000 -

The vertical intercept Month Costs Volume provides the estimated July $1,400 1,000 August 1,700 1,100 fixed cost.
Sept. Oct. Nov. Dec. 200 400 600 800 1,000 1,200 1,400 Volume 1,500 1,300 1,500 1,300 900 800 1,200 700

500 0 -

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Profitgraphs
Profit
Revenue
Total Cost or Revenue $2,000 1,600 1,200 800 400 0 Data Fixed costs (TFC) Variable costs (UVC) Selling price (UP)
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Slide 16-15

Loss

Cost
Loss Zone 50 100 150 Volume Profit Zone 200 250

$400.00 $6.00 $8.50

160 = breakeven
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Break-Even Analysis
UP * X = TFC + (UVC * X) $8.50 * X = $400 + ($6 * X) X = $160 units
Data Fixed costs (TFC) Variable costs (UVC) Selling price (UP)

Slide 16-16

$400.00 $6.00 $8.50

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Target Profit
Target fixed costs + Target profit

Slide 16-17

XT = XT =

How many Unit contribution margin units do I have to sell to make $400 + $17,600 a $17,600 profit?

$8.50 - $6.00

X T = 7,200 units
Data Fixed costs (TFC) Variable costs (UVC) Selling price (UP)
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$400.00 $6.00 $8.50

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Schematic of Contribution
Revenues

Slide 16-18

UR UR

C C

Contribution

Fixed Costs
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Profits
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Improving Profit Performance Increase selling price per unit (UR) Decrease variable cost per unit (UVC) Decrease fixed costs (TFC) Increase volume (X)

Slide 16-19

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Other Influences on Costs Changes in input prices The rate at which volume changes The direction of change in volume The duration of change in volume Prior knowledge of the change Productivity Management discretion
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Slide 16-20

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Chapter 16

The End

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