Management

Accounting: The
Cornerstone for
Business Decisions

Cost Behavior

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

 Learning Objectives
1. Explain the meaning of cost behavior
and define and describe fixed and
variable costs.
2. Define and describe mixed and step
costs.
3. Separate mixed costs into their fixed
and variable components using the
high-low method, the scattergraph
method, and the least squares method.
 Learning Objectives
4. (Appendix) Use a personal computer
spreadsheet program to perform the
method of least squares.
 Match Definitions
Relevant A cost that does not change as
Range output changes
The range of output over which the
Cost assumed cost relationships are valid
Behavior for normal operations

Fixed Cost A factor that changes or leads to a

change in a cost or activity
Variable Whether a cost changes when the
Cost level of output changes

Driver A cost that changes in the same

direction as changes in output
Illustrate Relevant Range
 Define Mixed and Step Costs
◙ Mixed Cost

◙ Step Cost
What is the cost formula?
 How to create and use a cost
3-1 formula.
The Accounting Department of State College
decided to attend the State Business Leaders of
Tomorrow Conference (SBLTC) to recruit new
students. They must rent a display table space
and have chosen to advertise in the program
for a total cost of $500. In addition every
student who enters the raffle receives a free
calculator that costs $0.50.
REQUIRED:
1. Create a cost formula for recruiting accounting
majors at SBLTC.
 How to create and use a cost
3-1 formula.
Calculation:
 How to create and use a cost
3-1 formula.
REQUIRED: 2. If the Accounting
Department expects to have 1,500
students enter the raffle at the SBLTC,
what is the expected fixed cost? Total
variable cost? Total conference cost?
Calculation:
What are the 4 steps of the
High-Low Method?
 How to use the high-low
3-2 method.
BlueDenim makes jeans. The controller
has assigned you to calculate fixed costs,
variable rate and the cost formula
associated with the electricity rate with
the data collected in the last year.
REQUIRED: Using the high-low method
calculate the fixed cost of electricity,
calculate the variable rate of electricity
per machine hour, and construct the cost
formula for total electricity cost.
 How to use the high-low
3-2 method.
Month Electricity Cost Machine Hours
January $ 3,255 460
February 3,485 500
March 4,100 600
April 3,300 470
May 3,312 470
June 2,575 350
July 3,910 570
August 4,200 590
September 2,514 340
October 3,485 500
 How to use the high-low
3-2 method.
Calculation:
 Using the high-low method to
3-3 predict total variable and total cost
for budgeted output.
BlueDenim constructed the following cost formula
for electricity cost in Cornerstone 3-2
Total electricity cost = $440 + ($6.10 x machine
hours)
Assume that 620 hours are budgeted for the month
of October. Use the above cost formula for the
following calculations:
1. Calculate the total variable electricity cost for
October.
2. Calculate the total electricity cost for October.
 The high-low method of
3-3 predicting total variable and total
cost for budgeted output.
Calculation:
 Using the high-low method to
predict costs when the time period
3-4 differs from that of the data.
BlueDenim constructed the following:
Total electricity cost = $440 + ($6.10 x machine
hours)
Required: Assume that 7,200 machine hours are
budgeted for the next year. Use the above cost
formula to make the following calculations:
1. Calculate total variable electricity cost for the
year.
2. Calculate total fixed electricity cost for the year.
3. Calculate total electricity cost for the next year.
 Using the high-low method to
predict costs when the time period
3-4 differs from that of the data
Calculation:
Discuss the Scattergraph
Method
 Scattergraph Method
700
600
Overhead Cost

500
400
300
200
100
0
0 50 100 150 200 250

Maintenance Hours
 Using regression to calculate fixed
cost, variable rate, construct a cost
3-5 formula & budgeted cost.
The controller assigned you to calculate fixed and
variable costs associated with electricity used in
the factory. Data for the last nine months was
collected and is presented on the following slide.
REQUIRED: Using the results of the regression,
calculate the fixed cost of electricity and the
variable rate per machine hour. Construct the cost
formula for total electricity cost. Calculate the
budgeted cost for next month assuming that 550
machine hours are budgeted.
 Using regression to calculate fixed
cost, variable rate, construct a cost
3-5 formula & budgeted cost.
Month Electricity Cost Machine Hours
January $ 3,255 460
February 3,485 500
March 4,100 600
April 3,300 470
May 3,312 470
June 2,575 350
July 3,910 570
August 4,200 590
 Using regression to calculate fixed
cost, variable rate, construct a cost
3-5 formula & budgeted cost.
Comment on Managerial
Judgment