Presentation Chapter 6 - Completed
Presentation Chapter 6 - Completed
Cost Behavior,
and
Cost Estimation
CURVALINIARY COST
1. Marketing
2. Direct labor (Engineered Cost)
3. Air conditioning
4. General manager’s salary
5. Direct materials (Engineered Cost)
YES
IDENTIFY
COMMITTED COST
be changed?
TYPE OF YES
COST? YES
Is the cost linked ENGINEERED COST
to other
variable?
NO
DISCRETIONARY COST
Activity Analysis,
Cost Behavior,
and Cost
Estimation
COST BEHAVIOR
Cost Behavior
Cost
Activity
1 10 11 20
Step-Variable Costs
⮚ Total cost increases to a new higher cost of next higher
range of activity
Cost
Activity
1 10 11 20
Total Fixed Cost
⮚ A Fixed cost remain unchanged in total as the
activity level varies
90
Thousands of Dollars
Rent Cost in
60
30
Variable Lease
Charge Per Hour
Fixed Monthly
Rental Charge
Rental Charge Per Hour
Cost Estimation
Account-Classification Method
Visual-Fit Method
High-Low Method
6-26
Account Classification Method
6-27
Visual-Fit Method
( Scatterplott Method)
A scatter diagram of past cost behavior
may be helpful in analyzing mixed costs.
6-28
Visual-Fit Method
Plot the data points on a
graph (total cost vs. activity).
1,000’s of Dollars
20
* ** *
Total Cost in
* *
**
10 * *
0
0 1 2 3 4
Activity, 1,000’s of Units Produced
6-29
Visual-Fit Method
Draw a line through the plotted data points so that about
equal numbers of points fall above and below the line.
1,000’s of Dollars
20
* ** *
Total Cost in
* *
**
10 * *
0
0 1 2 3 4
Activity, 1,000’s of Units Produced
6-30
Visual-Fit Method
* *
** Vertical distance
10 * * is total cost,
approximately
$16,000.
0
0 1 2 3 4
Activity, 1,000’s of Units Produced
6-31
The High Low Method
Owl Co recorded the following production activity & maintenance costs for two
months:
6-32
The High Low Method
6-33
The High Low Method
in cost
Unit variable cost = in units
6-34
The High Low Method
6-35
The High Low Method
Units Cost
High activity level 9.000 $ 9.700
Low activity level 5.000 6.100
Change 4.000 $ 3.600
6-36
The High Low Method
Units Cost
High activity level 9.000 $ 9.700
Low activity level 5.000 6.100
Change 4.000 $ 3.600
6-37
The High Low Method
Units Cost
High activity level 9.000 $ 9.700
Low activity level 5.000 6.100
Change 4.000 $ 3.600
6-38
Least-Squares Regression Method
Total Cost
Activity
6-39
Activity Analysis,
Cost Behavior,
and Cost
Estimation
Multiple Regression
Y = a + b1X1 + b2X2…
• Y 🡪 Total activity cost is the dependent variable because its value depends on the value of another variable.
• a 🡪 The intercept parameter corresponds to fixed activity cost or total fixed cost. Graphically, the intercept parameter is
the point at which the mixed cost line intercepts the cost (vertical) axis (fixed-cost component)
• b1/b2 🡪 The slope parameter corresponds to the variable cost per unit of activity. Graphically, this represents the slope of
the mixed cost line (first/second explanatory variable)
• X 🡪 Measure of activity output is the independent variable because it measures activity output and explains changes in the
activity cost. There may be more than one independent variable. The choice of an independent variable is related to its
economic plausibility.
6-42
Engineering Method
of Cost Estimation
6-46
Learning Curve
Learning effects
are large initially.
Average Labor
Time per Unit
Learning effects
become smaller, eventually
reaching steady state.
1. Missing data
2. Outlier data points
3. Mismatched time periods costs
4. Trade-offs in choosing the time period
5. Allocated and discretionary costs
6. Inflation
6-48
THANK YOU