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Garrison12ce PPT Ch03
Garrison12ce PPT Ch03
Cost Behaviour:
Analysis and Use
Prepared by
Shannon Butler,
CPA, CA
Carleton University
Learning Objectives
Units Machine
produced hours
A measure of what
causes the incurrence
of a variable cost
Miles Labour
driven hours
© 2021 McGraw-Hill Limited 3-4
Variable Cost Example
• A variable cost is a cost whose total dollar amount
varies in direct proportion to changes in the activity
level. Your total long distance telephone bill is based
on how many minutes you talk.
Total Long Distance
Telephone Bill
Minutes Talked
© 2021 McGraw-Hill Limited 3-5
Variable Cost Per Unit Example
• A variable cost remains constant if expressed on a
per unit basis. The cost per minute talked is
constant. For example, 10 cents per minute.
Telephone Charge
Per Minute
Minutes Talked
© 2021 McGraw-Hill Limited 3-6
Extent of Variable Costs
• The proportion of variable costs differs across
organizations. For example:
• A public utility with large investments in equipment
will tend to have fewer variable costs.-University
hiring professor in 1 year contract
• A service company will normally have a high
proportion of variable costs.
• A merchandising company usually will have a high
proportion of variable costs, like cost of sales.
• A manufacturing company will often have many
variable costs.
Power
Both merchandising and Selling, general, and administrative costs:
manufacturing companies
Sales commissions
Clerical costs, such as billing
Shipping costs
Service organizations Supplies, travel, clerical, sales commissions
Volume
© 2021 McGraw-Hill Limited 3-9
Step-Variable Costs 1
• A resource that is obtainable only in large chunks
(such as maintenance workers) and whose costs
increase or decrease only in response to fairly wide
changes in activity is known as a step-variable cost.
Cost
Volume
© 2021 McGraw-Hill Limited 3-10
Step-Variable Costs 2
• Small changes in the level of production are not
likely to have any effect on the number of
maintenance workers employed.
Cost
Volume
© 2021 McGraw-Hill Limited 3-11
Step-Variable Costs 3
Volume
Activity
© 2021 McGraw-Hill Limited 3-13
Total Fixed Cost Example
• A fixed cost is a cost whose total dollar amount
remains constant as the activity level changes. Your
monthly basic telephone bill is probably fixed and does
not change when you make more local calls.
Monthly Basic
Telephone Bill
90
Rent Cost in Thousands of
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
Y
Total Utility Cost
o st
d c
ix e
al m
Tot Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
© 2021 McGraw-Hill Limited 3-22
Mixed Costs Part 2
The total mixed cost line can be expressed
as an equation: Y = a + bX
xe dc
i
al m
Tot Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
© 2021 McGraw-Hill Limited 3-23
Mixed Costs Example
• If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what is
the amount of your utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
© 2021 McGraw-Hill Limited 3-24
Analyzing Mixed Costs Part 1
• The fixed portion of a mixed cost represents the basic
minimum cost of having an activity ready and available
for use.
• The variable portion represents the cost incurred for
actual consumption of the activity.
• Common methods used for estimating the fixed and
variable components of a mixed cost are:
• Account analysis
• Engineering approach
• High-low method
• Regression analysis
* *
**
10 * *
0 X
0 1 2 3 4
Patient-days in 1,000’s
* *
**
10 * *
0 X
0 1 2 3 4
Patient-days in 1,000’s
* *
**
10 * *
Intercept = Fixed cost: $10,000
0 X
0 1 2 3 4
Patient-days in 1,000’s
Patient days = 800
© 2021 McGraw-Hill Limited 3-29
Scattergraph Plots Part 4
Make a quick estimate of variable cost per unit and
determine the cost equation.
$1,000
Variable cost per unit = = $1.25/patient-day
800
Y = $10,000 + $1.25X
$2,400
= $8.00/hour
300
Answer:
a. $ 2,000
Appendix 3A
Least Squares Regression
Calculations
10 * * 2
R varies from 0% to 100%, and
the higher the percentage the better.
0 X
0 1 2 3 4
Activity
© 2021 McGraw-Hill Limited 3-50
Least-Squares Regression
Method Part 4
• Economic plausibility:
•Does it make sense that a change in the activity level
of the independent variable would cause a change in
the dependent variable ?
• Multiple regression:
•An analytical method used when the dependent
variable (e.g. cost) is caused by more than one activity.