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Cost Accounting - Chapter 3
Cost Accounting - Chapter 3
Cost Accounting - Chapter 3
CHAPTER 3
When Production Total variable costs increase Total fixed cost stays the
Increases same
When Production Total variable costs decrease Total fixed cost stays the
Decreases same
Examples Raw Materials Rent
Direct Labor Advertising
Insurance
Depreciation
Units
Produced 500 600 700
PER UNIT
Variable Costs 35 35 35
Fixed Costs 24 20 17
MIXED COSTS
• How about costs that contain both variable and fixed costs? We
call that SEMI-VARIABLE COSTS
• SEMI-VARIABLE COSTS are known as mixed costs or a mixture of
fixed and variable costs
• For analytical purposes, manufacturing and non-manufacturing
costs are usually classified only as FIXED and VARIABLE.
• It is necessary that the mixed costs must be divided into its variable
and fixed components.
• Not only for analysis, mixed costs need to be segregated its fixed
and variable components in order to use in planning, controlling,
and measuring results of the business operations.
• SEGREGATTING FIXED COSTS AND VARIABLE COST
• Computational methods are used in separating from
mixed costs the fixed costs and variable costs
• Historical data are needed to obtain the accuracy of
the computations
• When there are abnormalities from the sample data,
ignore the data or not include in the computation.
• Abnormalities happened when there are temporary
equipment failure, strike of labor or work stoppage, so
many holidays in a month, replacement of new
machines, training of new worker, etc.
•To enhance prediction accuracy, the
historical data should be inspected or
reviewed by experienced manager.
•There are three ways in determining
the variable costs and fixed costs from
mixed costs.
•High-Low Method; The scattergraph
method; and Regression Analysis or
Method of Least Square.
• Three methods for
separating mixed costs into
their fixed and variable
cost components:
1. Prepare a scattergraph by plotting points
onto a graph.
2. High-low method.
3. Regression analysis.
SCATTERGRAPH METHOD
• This is done by plotting in the graph all the data points
• The “y axis” or in vertical line is used for dependent variables
( the amount of costs ) like maintenance costs; electrical costs;
• The “x axis “ or horizontal line is used for independent variables
( Activity level ) like No. of units produced; Direct Labor hours
used; percentage of capacity; units of output
• Through visual inspection, draw a straight line through all
points where approximately equal number of points fall below
and above it
• The line fitted to the plotted points are called regression line
• Get two points from the regression line and determine the
slope, or the variable cost per unit
• The y intercept is the fixed costs
HIGH-LOW METHOD
• Fixed and variable elements of a mixed costs are computed
from two data points ( period )
• The data points are selected from the historical data of
various months activities
• Select the highest and the lowest activity levels
• Get the differences in the costs and the cost drivers ( units )
between the highest and the lowest data point
• Determine the variable cost per cost driver ( difference in
costs / difference in units )
• Determine the fixed costs at any data point ( Total costs less
Variable Costs )
• State the cost function or cost formula (y = a + bx )
• Y is total cost ; a is fixed cost ; b is variable cost per unit; x is
number of units
Unit Shipping Unit Sales
Sold Cost Sold Commission
Jan 6,000 66,000 Jan 480 48,120
Feb 5,000 65,000 Feb 320 37,080
Mar 7,000 70,000 Mar 625 58,125
Apr 9,000 80,000 Apr 525 51,225
May 8,000 76,000 May 345 38,805
Jun 10,000 85,000 Jun 800 70,200
Jul 12,000 100,000 Jul 520 50,880
Aug 11,000 87,000 Aug 435 45,015
1. Compute the variable cost per unit 1. Compute the variable cost per unit
2. What is the fixed costs? 2. What is the fixed costs?
3. How much is the total shipping costs 3. How much is the total commission
for 14,250 units sold for 750 units sold
Regression Analysis
• Regression analysis refers to a
technique for estimating the
relationship between variables.
• It helps people understand how the
value of a dependent variable changes
• This happens when one independent
variable is variable while another is
held constant.
• Regression analysis is used in
forecasting future data.
• The two main types of regression
analysis are linear regression and
multiple regression.
MOON Company produces and sells Rattan Baskets. The number of units produced and the
corresponding total production costs for six months are as follows:
• Production Unit
• Cost Produced
• Apr 4,000 500
• May 8,000 700
• Jun 6,000 900
• Jul 7,500 600
• Aug 8,500 800
• Sep 7,250 550
Based on the given information, and using the least squares method of computation,
1. find the variable cost per unit
2. How much is the fixed costs?
3. In producing 1,200 units, how much would be the estimated total costs?
Unit Total 1st Formula
Produced Cost
• Σxy = a Σx + bΣx2
n X y xy x2 2nd Formula
• Σy = na + b Σx
Apr 500 4,000 2,000,000 250,000
3. What is the contribution margin ratio if the 6. If the Break even is increased to
Selling price is increase to P80 per unit and P40,000 and the new fixed costs is
Variable cost is increased to P40 per unit. Fixed P15,000. How much is the new
Costs remained the same. Selling Price if VC per unit is the same.
BREAK EVEN POINT :
IN PESO AMOUNT
Fixed Costs 7,500
CMR = 40%
= 18,750
IN UNIT
Fixed Costs 7,500
CMu = 24
312
CHECKING
Sales ( 312.5 x P60 ) 18,750
Variable Cost ( 312.5 x P24 ) 7,500
Contribution Margin 7,500
Less Fixed Cost 7,500
Profit -
EXAMPLE: 1 EXAMPLE: 3
Unit Sold 10,000 Unit Sold 2,600
Selling Price 5 Selling Price 80
Fixed Costs 12,000 Fixed Costs 15,000
VC per unit 3 VC per unit 60
EXAMPLE: 2 EXAMPLE: 4
Unit Sold 2,500 Unit Sold 3,800
Selling Price 30 Selling Price 120
Fixed Costs 18,000 Fixed Costs 22,500
VC per unit 18 VC per unit 30
TARGET PROFIT ANALYSIS
• Sometime management wants to earn a
certain amount of profit during a certain
period of time.
• This certain amount of profit is
commonly known as target profit.
• Target profit analysis is about finding
out the estimated business activities to
perform to earn a target profit during a
certain period of time.
• Among these activities, management is
especially interested to find out the
sales volume required to generate a
target profit.
EXAMPLE: 1 EXAMPLE: 3
Unit Sold 10,000 Unit Sold 2,600
Selling Price 5 Selling Price 80
Fixed Costs 12,000 Fixed Costs 15,000
VC per unit 3 VC per unit 60
Desires Profit 8,000 Desired Profit 20,000
EXAMPLE: 2 EXAMPLE: 4
Unit Sold 2,500 Unit Sold 3,800
Selling Price 30 Selling Price 120
Fixed Costs 18,000 Fixed Costs 22,500
VC per unit 18 VC per unit 30
Desired Profit 25,000 Desired Profit 5,000
MULTIPLE PRODUCTS
A B C Total
Seling Price 100 120 50
VC per unit 60 90 40
CM per unit 40 30 10
Sales in units 1,000 2,000 5,000 8,000
Total Fixed Costs 101,680
EXERCISE 2
A B C Total
SP 200 240 250
VC/unit 120 180 200
CM/unit 80 60 50
Sales in units 1,800 3,600 3,600 9,000
Total Fixed Costs 120,000
OPERATING LEVERAGE
FORMULA :
Contribution Margin
Profi t
Sales ( 10,000 units x P5 ) 50,000
EXERCISE 2
Variable Costs ( 10,000 units x 3 ) 30,000 Sales in Units 35,000
Contribution Margin 20,000
Fixed Cost 12,000
Seling Price 120
Profit before Tax 8,000 Variable Cost / Unit 40
Fixed Costs 90,000
Operating Leverage
Contribution Margin 20,000
EBIT 8,000 2.5 EXERCISE 3
EXERCISE 1 Sales in Units 100,000
Sales in Units 50,000 Seling Price 50
Seling Price 80 Variable Cost / Unit 25
Variable Cost / Unit 32
Fixed Costs 45,000 Fixed Costs 80,000