Kế toán, kiểm toán - Chapter 5: Cost behavior: Analysis and use

Cost Behavior:Analysis and Use Chapter5Types of Cost Behavior PatternsRecall the summary of our cost behavior discussion from Chapter 1.Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk.Minutes TalkedTotal Long DistanceTelephone BillVariable Cost Per Unit ExampleMinutes TalkedPer MinuteTelephone Charge The cost per minute talked is constant. For example, 10 cents per minute.Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Number of Local CallsMonthly Basic Telephone BillFixed Cost Per Unit ExampleNumber of Local CallsMonthly Basic Telephone Bill per Local CallThe fixed cost per local call decreases as more local calls are made.Cost BehaviorMerchandisersCost of Goods SoldManufacturersDirect Material, Direct Labor, and Variable Manufacturing OverheadMerchandisers and ManufacturersSales commissions and shipping costsService Organizations Supplies and travelExamples of normally variable costsExamples of normally fixed costsMerchandisers, manufacturers, and service organizationsReal estate taxes, Insurance, Sales salariesDepreciation, AdvertisingThe Activity BaseMachinehoursLaborhoursMilesdriven A measure of the event causing the incurrence of a variable cost – a cost driverUnitsproducedStep-Variable CostsActivityCostTotal cost remainsconstant within anarrow range ofactivity.Step-Variable CostsActivityCostTotal cost increases to a new higher cost for the next higher range of activity. ActivityTotal CostEconomist’sCurvilinear Cost FunctionThe Linearity Assumption and the Relevant RangeAccountant’s Straight-Line Approximation (constant unit variable cost)ActivityTotal CostRelevantRangeThe Linearity Assumption and the Relevant RangeAccountant’s Straight-Line Approximation (constant unit variable cost)Economist’sCurvilinear Cost FunctionA straight line closely approximates a curvilinear variable cost line within the relevant range. ExamplesAdvertising and Research and DevelopmentExamplesDepreciation on Buildings and EquipmentTypes of Fixed CostsFixed CostsDiscretionaryMay be altered in the short-term by current managerial decisionsCommittedLong-term, cannot be reduced in the short term.Trend Toward Fixed CostsIncreased automation.Increase in salaried knowledge workers who are difficult to train and replace. ImplicationsManagers are more “locked-in” with fewer decision alternatives.Planning becomes more crucial because fixed costs are difficult to change with current operating decisions. Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost.Fixed Costs and Relevant RangeContinueRent Cost in Thousands of Dollars 0 1,000 2,000 3,000  Rented Area (Square Feet)03060Fixed Costs and Relevant Range90 Relevant RangeTotal cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.Quick Check  Which of the following statements about cost behavior are true?a. Fixed costs per unit vary with the level of activity.b. Variable costs per unit are constant within the relevant range.c. Total fixed costs are constant within the relevant range.d. Total variable costs are constant within the relevant range.Quick Check  Which of the following statements about cost behavior are true?a. Fixed costs per unit vary with the level of activity.b. Variable costs per unit are constant within the relevant range.c. Total fixed costs are constant within the relevant range.d. Total variable costs are constant within the relevant range.How does this type of fixed cost differ from a step-variable cost?Step-variable costs can be adjusted more quickly and . . .The width of the activity steps is much wider for the fixed cost.Fixed Costs and Relevant RangeA mixed costhas both fixed and variablecomponents.Mixed Costs Consider thefollowing electric utility example.Fixed MonthlyUtility ChargeVariable Utility ChargeActivity (Kilowatt Hours) Total Utility CostMixed Costs XYTotal mixed cost Total mixed cost Y = a + bXFixed MonthlyUtility ChargeVariable Utility ChargeActivity (Kilowatt Hours) Total Utility CostMixed Costs XYFixed MonthlyUtility ChargeVariable Utility ChargeActivity (Kilowatt Hours) Total Utility CostTotal mixed cost Y = a + bXMixed Costs bXaXYThe Analysis of Mixed CostsEngineering ApproachAccount AnalysisScattergraph MethodLeast-Square Regression MethodHigh-Low MethodAccount AnalysisEach account is classified as eithervariable or fixed based on the analyst’s knowledge of how the account behaves.Engineering EstimatesCost estimates are based on an evaluation of production methods, and material, laborand overhead requirements.WiseCo recorded the following production activity and maintenance costs for two months: Using these two levels of activity, compute: the variable cost per unit; the fixed cost; and then express the costs in equation form Y = a + bX. The High-Low Method Unit variable cost =Changein costChange in unitsThe High-Low MethodThe High-Low Method Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit The High-Low Method Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600 Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600 Total cost = Fixed cost + Variable cost (Y = a + bX) Y = $1,600 + $0.90X The High-Low Method If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit Quick Check  If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit Quick Check $4,000 ÷ 40,000 units = $0.10 per unit If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check  If sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Quick Check NoteHow does the high-low method work when you have data for more than two periods?Select the two periods with the lowest and highest level of activity.LowHighQuick Check  Using the high-low method, estimate the cost formula Y = a +bX for the patient admitting costs on the previous page.a. Y = $9,720 + $2.00Xb. Y = $7,050 + $3.00Xc. Y = $8,385 + $2.50Xd. Y = $8,480 + $2.50XQuick Check  Using the high-low method, estimate the cost formula Y = a +bX for the patient admitting costs on the previous page.a. Y = $9,720 + $2.00Xb. Y = $7,050 + $3.00Xc. Y = $8,385 + $2.50Xd. Y = $8,480 + $2.50XThe Scattergraph MethodPlot the data points on a graph (total cost vs. activity).0 1 2 3 4*Total Cost in1,000’s of Dollars10200*********Activity, 1,000’s of Units ProducedXYThe Scattergraph MethodDraw a line through the data points with about anequal numbers of points above and below the line. 0 1 2 3 4*Total Cost in1,000’s of Dollars10200*********Activity, 1,000’s of Units ProducedXYThe Scattergraph MethodEstimated fixed cost = $10,0000 1 2 3 4*Total Cost in1,000’s of Dollars10200*********Activity, 1,000’s of Units ProducedXYThe slope of this line is the variable unit cost. (Slope is the change in total cost for a one unit change in activity).The Scattergraph MethodSlope =Change in costChange in unitsHorizontal distance is the change in activity.0 1 2 3 4*Total Cost in1,000’s of Dollars10200*********Activity, 1,000’s of Units ProducedXYVertical distance is the change in cost.Software can be used to fit a regression line through the data points.The cost analysis objective is the same: Y = a + bxLeast-Squares Regression MethodLeast-squares regression also provides a statistic, calledthe adjusted R2, that is a measure of the goodnessof fit of the regression line to the data points. 0 1 2 3 4Total Cost10200Activity**********Least-Squares Regression MethodR2 is the percentage of the variationin total cost explained by the activity.R2 for this relationship is near100% since the data points arevery close to the regression line.XYNoteLet’s plot the data for patient admitting costs.NoteProblems with the high-low method:Throws away information contained in all of the data other than the low and the high points.The low and high levels of activity tend to be unusual.You should always plot the data if you have more than two points to make sure it even makes sense to be using the high-low method.Let’s put our knowledge of cost behavior to work by preparing a contribution format income statement. The Contribution FormatThe Contribution FormatThe contribution margin format emphasizes cost behavior. Contribution margin covers fixed costsand provides for income.The Contribution FormatUsed primarily forexternal reporting.Used primarily bymanagement.End of Chapter 5