COST ACCOUNTING

CHAPTER 3

COST BEHAVIOR ANALYSIS

CHAPTER OBJECTIVES
PRELUDE
1. Costs classification as to behavior
• Some costs vary in
( reaction to changers in cost driver ) proportion to changes in the
1. Analysis of mixed costs volume of production or
2. Separation of the fixed and variable activity level
components of MIXED COSTS • Other costs remain constant
3. Cost Volume Profit Analysis in amount but per unit they
4. The Elements of CVP Analysis are inversely proportional to
5. Break even analysis
the activity level.
6. Margin of Safety • And other costs have both
fixed and variable
7. Operating Leverage components
8. Analysis of required sales with
desired profit
 VARIABLE FIXED
     
Definition Costs that vary/change Costs that do not change in
depending on the company’s relation to production
production volume volume

     
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

Variable Costs 17,500 21,000 24,500

Fixed Costs 12,000 12,000 12,000
Total Costs 29,500 33,000 36,500

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

May 700 8,000 5,600,000 490,000 28,287,500 = 4,050a +2,852,500b

41,250 = 6a + 4,050b
Jun 900 6,000 5,400,000 810,000

28,287,500 =4,050a + 2,852,500b

Jul 600 7,500 4,500,000 360,000
( 675 ) 41,250 =6a + 4,050b
Aug 800 8,500 6,800,000 640,000

Sep 550 7,250 3,987,500 302,500

4,050 41,250 28,287,500 2,852,500

 28,287,500 = 4,050a + 2,852,500b
27,843,750 = 4,050 a + 2,733,750b
443,750 = + 118,750b
443,750 / 118,750 = b
3.74 = b
USING FORMULA #2 ( YOU CAN FIND FIXED COST )
• Σy  = na + b Σx
• 41,250 = 6a + 3.74 ( 4,050 )
• 41,250 = 6a + 15,147
• 26,103 = 6a
• a = 26,103 / 6
• a = 4,350.50
MOON Company produces and sells Rattan Baskets. The number of units produced and the
corresponding total production costs for 5 months are as follows:
• Production Unit
• Cost Produced
• Apr 4,140 50
• May 2,898 32
• Jun 3,795 45
• Jul 4,485 55
• Aug 2,622 28
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 800 units, how much would be the estimated total costs?
• Break-even analysis is a study of the relation
between the variable cost, fixed cost, and
profits.
• The Break-Even Analysis refers to
the method adopted by the firms to
determine what level of production and sales
is to be maintained to ensure that it does not
lose money.
• Break-even analysis is an important aspect
of a good business plan, since it helps the
business determine the cost structures, and
the number of units that need to be sold in
order to cover the cost or make a profit.
•  Break-even point can be described as
a point where there is no net profit or loss.
 CONTRIBUTION MARGIN INCOME STATEMENT
Peso Per Unit Ratio
• Sales ( Units x Selling Price ) 30,000 60 100%
• Less Variable Cost ( VC per unit X Units Sold ) 18,000 36 60%
• Contribution Margin 12,000 24 40%
• Less Fixed Cost 7,500
• Income before Tax 4,500
EXAMPLE:
• Unit Sold 500
• Selling Price 60
• Fixed Costs P7,500
• VC per unit 36
Unit Sold 500 4. If the Selling price is increased to
SP 60 P80 and the contribution margin ratio
FC 7500 is 40%, how musch is the profit
VC per unit 36 If the units sold and fixed costs
are the same.
1. Compute the Contribution Margin if the units sold
is increased to 800 units. 5. If the break even amount is increased
to P25,000 and the contribution margin
2. What is the contribution margin if the sales is remained the same, how much is the
went down to 400 units? new fixed costs

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

WEIGHTED AVERAGE CONTRIBUTION MARGIN RATIO ( WaCMR )

Sales 100,000 240,000 250,000 590,000

VC 60,000 180,000 200,000 440,000
CMR 40,000 60,000 50,000 150,000

WaCMR = Total CM 150,000

Total Sales = 590,000 25.42%
 WaCMR PER PRODUCT
A B C Total
CMR ( CMR / Sales ) 40% 25% 20%
X Sales Mix Ratio
A ( 100 /590 ) 16.95%
B ( 240 /590 ) 40.68%
C ( 250 / 590 ) 42.37%
WaCMR 6.78% 10.17% 8.47% 25.42%
Break even Sales 400,000 400,000 400,000
x Sales Mix Ratio 16.95% 40.68% 42.37%
BE per product 67,800 162,720 169,480 400,000
 EXERCISE 1
A B C Total
SP 200 240 120
VC/unit 150 144 72
CM/unit 80 60 24
Sales in units 3,600 3,000 5,400 12,000
Total Fixed Costs 174,150

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

Operating everage Factors ( OLF ) or also known as

Degree of Operating Leverage ( DOL ) is used to
measure the extent in the change in profi t because
of the change in Sales.

A company has good OLF or DOL if the contribution

margin is bigger than the profi t.

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