MANAGEMENT

PowerPoint Presentation by ACCOUNTING

Gail B. Wright
Professor Emeritus of Accounting 8th EDITION
Bryant University
BY
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
HANSEN & MOWEN

3 ACTIVITY COST BEHAVIOR

1
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
LEARNING GOALS

After studying this

chapter, you should be
able to:

2
 LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Define cost behavior for fixed, variable, &
mixed costs.
2. Explain the role of the resource usage model
in understanding cost behavior.
3. Separate mixed costs into their fixed &
variable components using the high-low
method, scatterplot method, and method of
least squares.
Continued
3
 LEARNING
LEARNING OBJECTIVES
OBJECTIVES

4. Evaluate the reliability of a cost equation.

5. Discuss the role of multiple regression in
assessing cost behavior.
6. Describe the use of managerial judgment in
determining cost behavior.

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Questions to Think About
4
QUESTIONS TO THINK ABOUT:
Reddy Heaters

If the division reduces demand for

rework activity, will resource
spending be reduced by the same
proportion? Is there a difference
between resource spending and
resource usage?

5
QUESTIONS TO THINK ABOUT:
Reddy Heaters

If total cost of rework and # of

units reworked are known, is it
possible to determine how much is
variable cost? How much is fixed
cost? Is knowing variable- and
fixed-cost behavior important?

6
QUESTIONS TO THINK ABOUT:
Reddy Heaters

What role does management

play in determining cost
behavior?

7
QUESTIONS TO THINK ABOUT:
Reddy Heaters

Can you think of reasons other

than those in the scenario that
make it important for managers
to understand cost behavior?

8
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

1
Define cost behavior for
fixed, variable, & mixed
costs.

9
 LO 1

If Reddy Heaters produces

twice as many heaters as last
year, will production costs
double?

NO. Variable costs will double

if production doubles but fixed
costs will not change.

10
 LO 1

REDDY HEATERS:
Cutting Activity


Cutting
Cutting activity
activity uses
uses 22 inputs
inputs

Cutting
Cutting machine
machine

11 machine
machine can
can produce
produce up
up to
to 240,000,
240,000, 3-inch
3-inch
segments
segments per
per year
year (fixed
(fixed cost)
cost)

Power
Power to
to operate
operate machine
machine (variable
(variable cost)
cost)

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 LO 1

FIXED
FIXED COST:
COST: Definition
Definition

Fixed costs do not vary over the

relevant range.
Reddy Heaters: 1 cutting
machine costs $60,000 per year
& can produce up to 240,000, 3-
inch segments

12
 Contoh Kasus
 Mesin pemotong disewa seharga Rp. 60.000.000 per tahun dan memiliki kapasitas
produksi sd 240.000 potongan 3 inci dalam 1 tahun. Perilaku biaya diilustrasikan
sbb:

Sewa Mesin Jumlah Potongan 3 inci Biaya per Unit

Rp. 60.000.000 60.000 Rp. 1.000
60.000.000 120.000 500
60.000.000 180.000 330
60.000.000 240.000 250

Catatan: Meskipun jumlah biaya sewa tidak

berubah, biaya per unit berubah
 Biaya Variabel

 Biaya yang dalam jumlah keseluruhan berubah secara proporsional terhadap perubahan
keluaran (output)
 Contoh: Untuk memotong 1 potongan logam 3 inci-an diperlukan 0,1 jam KwH dan biaya
listrik adalah Rp. 2.000 per jam KwH. Jadi, biaya listrik per potongan 3 inci-an adalah Rp. 200
yaitu Rp. 2.000 x 0,1. Biaya listrik untuk berbagai tingkatan:

Biaya Listrik Jumlah Potongan 3 Biaya per Unit

inci
Rp. 12.000.000 60.000 Rp. 200
24.000.000 120.000 200
36.000.000 180.000 200
48.000.000 240.000 200
Jumlah B. Variabel = B. Variabel per unit x
Jumlah Unit
 LO 1

VARIABLE
VARIABLE COST:
COST: Definition
Definition

Variable costs vary in direct

proportion to changes in output.
Reddy Heaters: 1 segment uses
0.1 kilowatts at cost of $2.00 per
kilowatt. Each segment costs
$.20.

15
 LO 1

VARIABLE COSTS:
$0.20 per Unit Produced
What
Whatisisthe
thetotal
total
variable
variablecost
costtoto
produce
produce120,000
120,0003- 3-
inch
inchsegments?
segments?

EXHIBIT 3-2
16
 Biaya Variabel
 Biaya yang dalam jumlah keseluruhan berubah secara proporsional terhadap perubahan
keluaran (output)
 Contoh: Untuk memotong 1 potongan logam 3 inci-an diperlukan 0,1 jam KwH dan biaya
listrik adalah Rp. 2.000 per jam KwH. Jadi, biaya listrik per potongan 3 inci-an adalah Rp. 200
yaitu Rp. 2.000 x 0,1. Biaya listrik untuk berbagai tingkatan:

Biaya Listrik Jumlah Potongan 3 Biaya per Unit

inci
Rp. 12.000.000 60.000 Rp. 200
24.000.000 120.000 200
36.000.000 180.000 200
48.000.000 240.000 200

Jumlah B. Variabel = B. Variabel per unit x Jumlah Unit

 Cost Behaviour

Fixed-Cost Variable-Cost
$ Behaviour
Relevant Range
$ Behaviour

Units Produced Units Produced

 LO 1

MIXED
MIXED COST:
COST: Definition
Definition

Mixed costs have a variable and

a fixed component.
Reddy Heaters: sales people
earn a $10,000 salary + $0.50
commission on each heater sold.

19
Mixed-Cost Behaviour
Linearity Assumption
Total Costs

Cost
Fixed Costs
Variable Costs

Number of Units Produced

Total cost = Fixed cost + Total variable

cost
 LO 1

COST BEHAVIOR ACTIVITIES

Every activity has a
Time horizon for measurement
Resources to accomplish the task
Materials
Labor
Capital
Output measures (activity drivers)

21
 Activity Cost Behaviour
Model
Inputs:

Materials

Energy Activities Activity Output

Labour

Capital

Cost Behaviour
Changes in Input Cost Changes in Output
 LO 1

ACTIVITY DRIVERS 1
Production drivers (unit level)
Explain changes in unit cost as units produced
changes
Are inputs with direct relationship with production
level
Examples:
Pounds direct materials
Direct labor

23
 LO 1

ACTIVITY DRIVERS 2
Non-unit level activity drivers
Explain changes in cost in terms other than
changes in units of production
Have no direct relationship with production
Examples
Depreciation
Set-up costs incurred to change the items produced

24
 LO 1

ACTIVITY DRIVERS & COST

BEHAVIOR
FBM
Functional-based cost system includes only unit-
level costs in observations of cost behavior
ABM
Activity-based cost system includes both unit- and
non-unit level costs in observations of cost
behavior
Implication
ABM produces richer view of cost behavior

25
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Explain the role of

2 resource usage model in

understanding cost
behavior.

26
 LO 2

CAPACITY:
CAPACITY: Definition
Definition

Capacity for an activity is the

amount of an activity a company
can perform.
Practical capacity is the level at
which company can perform
efficiently.

27
 LO 2

How much capacity does a

company need? What happens
if there is excess capacity?

Need for capacity depends on

level of performance required.
Excess capacity affects cost
behavior.

28
 LO 2

FLEXIBLE RESOURCES

Are resources that can be acquired as needed

No long term commitment
Quantity supplied = quantity demanded
>>>>>NO EXCESS CAPACITY
Example: direct materials

29
 LO 2

COMMITTED RESOURCES

Are resources acquired in advance of usage

Often have long term commitment
Quantity supplied (often) ≠ quantity demanded
>>>>> MAY MEAN EXCESS CAPACITY
Example: factory building

30
 LO 2

COMMITTED
COMMITTED RESOURCES:
RESOURCES:
Can
Can Be
Be

Committed fixed costs, such as

a building or equipment bought,
leased; or
Committed discretionary
costs, such as implicit contracts
with employees.

31
 LO 2

STEP
STEP COST:
COST: Definition
Definition

Step-costs exhibit a discontinuous

behavior pattern.
Step-costs are constant for a certain
range of output, then jump to another
level, remaining constant again over a
certain range of output.

32
 LO 2

CHANGE ORDER EQUATIONS

CHANGE ORDER = Fixed Cost + Variable Cost

= Engineering Cost + Supply Cost
Total committed cost
Fixed activity rate = Total capacity available

Total cost of flexible resources

Variable activity rate = Capacity used

33
 LO 2

IMPLICATIONS
Improving managerial control & decision
making by
Encouraging managers to pay more attention to
controlling resource usage, spending
Providing information to control capacity
efficiently
Allowing managers to calculate change in resource
supply, demand

34
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Separate mixed costs

3
into fixed & variable
components using high-
low, scatterplot, & least
squares.

35
 LO 3

LINEARITY ASSUMPTION
Variable
Variablecost
cost
assumes
assumesaalinear
linear
relationship
relationship
between
betweencost
costand
and
activity
activitydriver.
driver.

EXHIBIT 3-7
36
 LO 3

TOTAL COSTS = Fixed cost + (Variable rate x Output)

Intercept is Slope is variable cost

fixed cost

EXHIBIT 3-10
37
 LO 3

HIGH-LOW EQUATIONS

Variable rate = Change in cost / Change in output

(High cost – Low cost) / (High output – Low output)
Fixed cost =
Total cost for High (Low) point
{Variable rate x High (Low) output}

38
 High-Low Method: An Example

Month Setup Costs Setup Hours

January $1,000 100
February 1,250 200
March 2,250 300
April 2,500 400
May 3,750 500
 The High-Low Method
(continued)
Variable Rate (V) = Change in cost/Change in output
V =(High cost - Low cost) / (High output - Low output)
V = ($3,750 - $1,000) / (500 - 100)
V = $2,750 / 400
V = $6.875 per setup hour
 The High-Low
Method (continued)
Fixed cost = High cost - (Variable per unit x high
output)
Fixed cost = $3,750 – ($6,875 x 500)
Fixed cost = $3,750.00 - $3,437.50
Fixed cost = $312.50

The cost formula using the high-low method is:

Total cost = $312.50 + ($6.875 x setup hours)
 Pembahasan
 The High-Low Method memiliki keunggulan obyektivitas. Dua orang yang
menggunakan metode ini pada data yang sama akan menghasilkan jawaban
yang sama. Selain itu, metode ini memungkinkan manajer utnuk
mengambil keputusan yang cepat mengenai hubungan keluaran dengan
biaya hanya dengan menggunakan dua titik.
 Namun metode ini kadang tidak akurat, karena bisa jadi titik tinggi atau
rendah merupakan outlier atau mungkin titik-titik tersebut tidak mewakili
kondisi perusahaan.
 The Scatterplot
Method
 Metode penentuan persamaan suatu garis dengan menggambarkan data
dalam suatu grafik.
 Langkah pertama, menggambarkan titik-titik data sehingga hubungan
antara biaya penyetelan dan tingkat aktivitas bisa terlihat. Plot ini disebut
garis scatter. Sumbu vertikal adalah jumlah penyetelan, sumbu horizontal
adalah waktu penyetelan
 Tujuan grafik scatter melihat apakah hubungan linier wajar atau tidak.
Titik-titik outlier akan tampak. Hal ini akan mengeleminasi oulier dan
menuntun pada perkiraan biaya yang lebih baik.
 Grafik scatter membantu memberikan tambahan pengetahuan tentang
hubungan antara biaya dengan penggunaan aktivitas
 Dengan kata lain, scatter plot memungkinkan kita melihat data secara
visual.
 Kelemahannya, tidak ada kriteria obyektif untuk memilih garis terbaik.
Kualitas rumus biaya tergantung pada kualitas penilaiansubyektif analisis
atau manajer.
 Activity
Cost Scatterplot
$4,000
Important: Cost function is only
. Method
relevant within relevant range
3,000

. .
2,000 Analyst can fit line

. based on his or her

1,000 . experience

0
100 200 300 400 500
Activity Hours
 Pembahasan
 Misal dari gambar tersebut pilihan garis terbaik menurut manajer adalah
garis yang melalui titik 1 (100, $1,000) dan 3 (300, $ 2.250). Selanjutnya,
kedua titik tersebut untuk menghitung kemiringan:
($2.250-$1.000)/(300-100)
$1.250/200
$6,25
Biaya tetap = $2.250-($6,25 x 300)
= $375
Jumlah biaya = $375 + ($6,25 x waktu penyetelan)
 Nonlinear Relationship`

Activity
Cost

* *
*
*
*
0 Activity Output
Pembahasan
 Upward Shift in Cost
Relationship

Activit
y
Cost *
*
*

* * *
0 Activity Output
 Presence of Outliers

Activit
y *
Cost *
*

* * *
0 Activity Output
 Least
Squares
Constant 125
Standard Error of Y Est 299.304749934466
R squared 0.944300518134715
No. of Observations 5
Degrees of Freedom 3

X Coefficient(s) 6.75
Standard Error of Coef. 0.9464847243
 Least Squares (continued)

The results give rise to the following equation:

Setup Costs = $125 + ($6.75 x # of setup hours)

R2 = .944, or 94.4 percent of the variation in

setup costs is explained by the
number of setup hours variable.
 Multiple Regression

TC = b0 + b1X1 + b2X2 + . . .

b0 = the fixed cost or intercept

bi = the variable rate for the ith independen

Xi = the ith independent variable

 LO 3

SCATTERPLOT METHOD
Scatterplot
Scatterplotisisaa
method
methodof of
determining
determiningthethe
equation
equationofofaaline
linebyby
plotting
plottingthe
thedata
dataonon
aagraph.
graph.

EXHIBIT 3-11
53
 LO 3

What are the advantages,

disadvantages of scatterplot?

Scatterplot
Allows you to see the data BUT
It lacks any objective criterion
for choosing the best-fitting line

54
 LO 3

METHOD OF LEAST SQUARES

Squares the vertical deviations

from point in scatterplot to line
drawn by least squares methods,
then adds them to give an overall
measure of closeness of fit of line
to data.

55
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

4 Evaluate the reliability of

a cost equation.

56
 LO 4

How reliable is the cost

equation developed by the
least squares method?

R2, the coefficient of

determination, and the
coefficient of correlation will tell
you the goodness of fit of your
cost equation.

57
 LO 4

COEFFICIENT OF
DETERMINATION (R2)

Percentage
Percentageofofvariability
variabilityin
independent
dependent
variable
variableexplained
explainedbybyindependent
independent
variable
variable

Range:
Range:00––11

Higher
Higherisisbetter
better

58
 LO 4

COEFFICIENT OF
CORRELATION


Square
Squareroot
rootof
ofcoefficient
coefficientof
of
determination
determination

Measures
Measureswhether
whethervariables
variablesmove
moveinin
same
same(+)
(+)or
oropposite
opposite(-)
(-)directions
directions

Range:
Range:-1
-1--+1
+1

59
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

5
Discuss the role of
multiple regression in
assessing cost behavior.

60
 LO 5

MULTIPLE
MULTIPLE REGRESSION:
REGRESSION: Definition
Definition

Multiple regression uses 2 or more

independent variables (variable
costs) in addition to the y-
intercept (fixed cost) to explain
the dependent variable.

61
LEARNING
LEARNING OBJECTIVE
OBJECTIVE

6
Describe the use of
managerial judgment in
determining cost
behavior.

62
 LO 6

MANAGERIAL JUDGMENT
Is a method of cost assignment used to
Determine fixed, variable cost
Uses managerial experience
Uses past observation of cost relationships
To refine statistical estimation results
Advantage: simplicity
Disadvantage: judgment errors

63
CHAPTER 3

THE
THE END
END

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