Class Meeting 04

FUNCTION AND ACTIVITY

COST BEHAVIOR AND COST
ESTIMATION

RIWAYADI
 Two approaches of Cost
Behavior
Traditional Functional
cost (volume)
behavior Cost
Cost Behavior
Behavior /VCB

Activity
Contemporary Cost
Cost Behavior Behavior /
ACB
 Cost Behavior definition
 cost behaviour is a study of the
relationship between cost and activity
driver output
 Cost driver is the factor causing the cost
 Activity cost behavior concerns how total
cost and unit costs vary with changes in
activity driver output.
 Exhibit 4-1 Relationship of Total Cost,
Unit Cost, and Activity Driver Output
Activity Total cost changes
driver
Output
changes Unit cost unchanges
Gambar 4-1a
Total cost unchanges
Activity
Output
driver Unit cost changes
changes
Gambar 4-1b
 Traditional cost behavior is called functional
cost behaviour (FCB) total cost and unit
cost is linked to unit driver (units produced,
machine hours, direct labor hours, direct raw
material cost and direct labor cost)
– Unit driver is a driver that is driven by no. of unit
produced
 Contemporary cost behavior is called activity cost
behavior (ACB)  total cost and unit cost is not
only linked to unit driver but also to non unit driver,
such as no. of moves, no. of inspections, no. of set
ups (batch driver).
 Traditional cost behavior
Cost Activity Driver
Direct raw
material cost variabel

Direct labor variable Units produced

cost
Fixed
Machine set up Y = a + bx
cost
Fixed Fixed
Material
inspection cost Fixed Depreciation exp
Materials purchase of factory
cost building
Contemporary (activity) cost behavior
Y = a + bX1 + cX2 + dX3 + eX4
Cost Activity Driver
Direct material
cost Variable Units produced

Direct labor Variable

cost Set up hours
Variable
Machine set up No. of
cost inspection
Variable No. of purchase
Material
order
inspection cost
Variable Fixed
Purchase cost Depreciation exp
of factory building
 The need of studying the activity
cost behavior
 By knowing activity cost behavior, it will make
easier for the management to make the cost
planning and control. For cost planning, the
following formula can be used:

y=a+bx
Y = total cost, a = fixed cost, b=variable cost per
unit, x = activity output
Cost classification by activity cost
behavior
1. Fixed cost
2. Variable cost
3. Semi-variable cost
 FIXED COSTS
 Definition:
Fixed costs are the costs, in total amount,
that are constant within a relevant range of
activity while costs per unit vary as the
changes of activity output (opposite
direction).
Fixed cost is the cost that is incurred because
the time goes by
 examples
Salaries of production executives,
depreciation (using straight-line
method), property tax, and insurance
expenses if they are correlated to units
produced (activity output)
 ILLUSTRATION OF FA
Total Total Cost Fixed Cost Per
Production (Depreciation Unit
expense/year)
10 Rp 500.000 Rp 50.000
100 500.000 5.000
1.000 500.000 500
THE GRAPH OF FIXED COST IN TOTAL

Cost

Total FC Line
500.000
Y = a => y = 500.000
Units
0 10 100 1.000 produced
 THE GRAPH OF FC PER UNIT
Cost
500.000

5.000
500 FC/unit line

Volume
0 10 100 1.000
 VARIABLE COSTS

 Definition:
Variable costs are the costs, in total amount, that
change in proportion to changes in activity output
while variable costs per unit are constant within a
relevant range .
 Variable cost is the cost that is incurred because of
activity
 examples
Direct materials and direct labor if they are
correlated to units produced as activity output.
ILLUSTRATION OF VC
No. of Cost per
Apples Apple Total Cost

0 Rp 1.000 Rp 0
10 1.000 10.000
100 1.000 100.000
1.000 1.000 1.000.000
 THE GRAPH OF VARIABLE COST IN TOTAL

Cost

Total VC line
1.000.000
Y = bx => y = 1.000x

1.000 No. of apples

purchased
THE GRAPH OF VARIABLE COST PER UNIT

Cost

1.000 VC/unit line

No of apples
0 10 100 1.000 purchased
 SEMI VARIABLE COSTS
 Definition:
Semivariable costs are the costs, in total amount,
change unproportionately with the changes of activity
output and SVC/unit is also change in opposite
direction. Why? becuase the costs contain both fixed
and variable elements.
SVC is the cost that is incurred because of time goes by
and activity
 examples
Electricity cost, tuition fees using fixed and variable
cost, and maintenance costs are the examples of
 ILLUSTRATION OF SVC
No. Of SKS Total Tuition Tuition fee Per
Fees*) SKS

2 Rp 400.000 Rp 200.000
5 475.000 95.000
10 600.000 60.000
20 850.000 42.500
24 950.000 39.583

*)Fixed cost Rp 350.000, VC/SKS Rp 25.000

 The Graph of SVC In Total
Cost
TC line

850.000 Y = 350.000 + 25.000x

600.000 VC TC
350.000 FC line
FC

SKS
0 10 20
The Graph of SVC Per Unit
Cost

350.000

42.500 SVC/SKS line

SKS
0 10 20 24
 conclusion
Fixed Cost Variable Cost Semivariable
Cost
otal Cost Constant Vary Vary
proposionately unproposionately
nit cost Vary oppositely Constant Vary appositely

xample Salaries, Property DRMC, DLC, ect. Post Paid

tax, ect Electricity cost,
Hallo card, etc
 RELEVANT RANGE
• Relevant range is the range of the cost driver in
which a specific relationship between cost and the
driver is valid. Fixed costs or variable costs per
unit are constant only in relation to a given
relevant range of the cost driver and a given time
span.
• VC  fried bananas price of Rp 1.500/unit
(to 100 units).
> 100 units, price will decrease to Rp 1.400.
 The Graph of Relevant Range
Total Fixed Cost

15.000.000

10.000.000

5.000.000
Volume
100.000 200.000 (units)
Relevant
Range
Depreciation exp. Rp 5 m/year for 1 machine at capacity of 100.000
 STEP COSTS
• Step cost is fixed for a short range of activity, changes
abruptly, and then remains fixed for another short
range of activity.
• Is Step cost SVC or FC? Depend on the length of step
and period of time considered
• If a person inspects 100 units per month and earns Rp
2.000.000/month. The company hires a second
inspector when volume increases beyond 100 units and
total inspection costs become Rp 4.000.000 and so on.
 The Graph of Step Costs
Total Costs
Rp

6.000.000

4.000.000 Variable cost

2.000.000

Fixed Costs
Volume
 BREAKING DOWN SEMIVARIABLE
COSTS INTO VARIABLE COSTS AND
FIXED COSTS
FC = a
VC= bx
SVC= a + bx
TC = a + bx
Methods that can be used to breaking down the SMV:
1. Standby cost method=> is done by stopping the operation
temporarily. Cost that is still incurred during stopping operation
is so called standby cost (fixed cost). This method is costly.
2. High & low point method
3. Scatter graph method
4. Least square method
Method 2 to 4 is using observation data for past periods.
 High & low point method

Maintenance
Month DLH Cost
January 5.500 Rp 745.000
February 7.000 850.000
March 5.000 700.000
April 6.500 820.000
May 7.500 960.000
June 8.000 1.000.000
July 6.000 825.000
 High-Low Method
DLH Total Cost
High point (June) 8.000 Rp 1.000.000
Low point (March) 5.000 700.000
Change 3.000 Rp 300.000
Rp 300.000
Variable rate = --------------- = Rp 100 per DLH
3.000
 High-Low Method (continuing)
Fixed cost = total cost – variable cost

Fixed cost = Rp 1.000.000 – (Rp 100 x 8.000)

= Rp 200.000,-
or
Fixed cost = Rp 700.000 – (Rp 100 x 5.000)
= Rp 200.000.
High-Low Method (continuing)
Y=a+bx
Y = 200.000 + 100 x
X = direct labor hours (DLH)

Total maintenance cost for 9.000 DLH is:

Y = 200.000 + 100 (9.000 hours)

= Rp 1.100.000
High-Low Method (continuing)
The high-low point method is very simple to
apply, but it suffers from the major disadvantage
of utilizing only two points in determining a cost
formula.
 This method is accurate in determining a cost
formula only if the high and low points happen to
fall in such a way as to represent a true average of
all points of cost and activity. Only rarely will the
high and low points happen to fall in this way.
Scattergraph (visual fit), or scattergram

Cost

Variable Cost
Fixed Cost
Machine
Hour
Regression Analysis (least
square method)

y = a + bx

xy
b = ------- a = ybar – b xbar
x2
 Total
Maint. X y
Month DLH x2 xy
Cost

January 5.500 745.000 -1.000 -105.000 1.000.000 105.000.000

February 7.000 850.000 500 0 250.000 0
March 5.000 700.000 -1.500 -150.000 2.250.000 225.000.000
April 6.500 820.000 0 -30.000 0 0
May 7.500 960.000 1.000 110.000 1.000.000 110.000.000
June 8.000 1.000.000 1.500 150.000 2.250.000 225.000.000
July 6.000 875.000 -500 25.000 250.000 12.500.000

Total 45.500 5.950.000 0 0 7.000,000 677.500.000

Average 6.500 850.000
(Xbar) (Ybar)
 677.500.000
b = --------------- = Rp 96,79
7.000,000

a = 850.000 – 96,79 (6.500) = Rp 220.865 / month

y = 220.865 + 96,79 x
 Exercise
500 DLH 2.000 1.000 400 DLH
DLH DLH
DRMC 500.000 2.000.000 1.000.000 400.000
DLC 200.000 800.000 400.000 160.000
Maintenan 1.500.000 3.000.000 2.000.000 1.400.000
ce
Salary 5.000.000 5.000.000 5.000.000 5.000.000

1. Classify costs above as FC, VC, and SVC

2. Break down SVC into FC and VC using high and low point
method
3. Make the cost formula
 THE IMPACT OF AUTOMATED
MANUFACTURING ON THE COST
BEHAVIOR PATTERNS
 Because of the manufacturing
environment changes, workers are
previously classified as direct labor and
their wages are variable costs, they are
now classified as indirect labor and
their wages are fixed costs.