Activity Analysis,

Cost Behavior,
and
Cost Estimation
CURVALINIARY COST

Also called a nonlinear cost, is an expense that increases at

an inconsistent rate as production volume increases.

In other words, this is an irregular cost that increases at

different rates as total output increases
GRAPH
WHEN THIS IS USED?
A. Management uses these cost curves to plan
operations and calculate key ratios like the break-
even point in units.

A. Management can also use these curves to judge

whether current levels of production are
sustainable over the long term
EXAMPLE
At lower levels of production, few hourly workers are
needed, so the costs are low.

Once the production reaches the highest levels of

output, more workers are needed increasing the total
labor costs.
ENGINEERED COST

Costs in an organization that are directly linked

and proportional to the yield of a production
process.
EXAMPLE
Christina is trying to categorize a list of costs for the plant. The costs are
listed below:

1. Marketing
2. Direct labor (Engineered Cost)
3. Air conditioning
4. General manager’s salary
5. Direct materials (Engineered Cost)

Marketing, air conditioning, and Christina’s salary are not considered

engineered costs because they do not have a direct cost relationship to
outputs. Direct labor and direct materials can be directly linked to
output, and are therefore considered engineered costs.
COMMITTED COST

Costs associate with establishing and

maintaining the readiness to conduct business
EXAMPLE
The cost associate with : These cost are mainly
fixed in term of cost
➢ Franchise behavior and expire to
➢ Patent become expenses in the
➢ Drilling & Plant form of Amortization &
➢ Etc.. Depreciation
DISCRETTIONARY COST

The ammount of cost incurred depend’s on

management’s judgement about the amount
there is appropriate among the circumstances
CHARACTERISTIC

Usually serviced oriented and include

employee travel, repair and maintenance,
advertising, R&D.
 COST

YES

TO Can the cost

NO

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

The relationship between

cost and activity
Cost
 Variable Cost
⮚ Costs that remain constant on a per-unit basis and
fluctuate in total in direct response to cost-driver
changes
 Variable Cost Per
Unit
⮚ The cost per pay view show is constant, for example
$4.95 per show

Cost per Pay Per View

show
Number of Pay Per View
shows watched
 Step-Variable Costs
⮚ Total cost remains constant within a narrow range of
activity

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

Monthly basic cable bill

Number of hours watched
Your monthly basic cable TV bill probably does not
change no matter how many hours you watch
 Fixed Cost Per Unit
⮚ The average cost per hour decreases as more hours
are spent watching cable television
Monthly Basic cable Bill
per hour watched

Number of hours watched

 Step-Fixed Cost
⮚ Some costs remain fixed over a wide range of activity but jump
to a different amount for activity levels outside that range

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 Cost Per Unit
⮚ Total 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

90
Thousands of Dollars
Rent Cost in

60

30

0 1,000 2,000 3,000

Rented Area (Square Feet)
 Semivariable Cost
⮚ A semivariable cost is partly fixed and partly variable
The slope is
the variable
cost per unit
of activity.
Total Lease Cost

Variable Lease
Charge Per Hour

Fixed Monthly
Rental Charge
Rental Charge Per Hour
 Cost Estimation

Account-Classification Method

Visual-Fit Method

High-Low Method

Least-Squares Regression Method

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Account Classification Method

Cost estimates are based on a

review of each account making up
the total cost being analyzed.

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 Visual-Fit Method
( Scatterplott Method)
A scatter diagram of past cost behavior
may be helpful in analyzing mixed costs.

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 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
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 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
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 Visual-Fit Method

Estimated fixed cost = $10,000

1,000’s of Dollars
20
* ** *
Total Cost in

* *
** Vertical distance
10 * * is total cost,
approximately
$16,000.
0
0 1 2 3 4
Activity, 1,000’s of Units Produced
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 The High Low Method
Owl Co recorded the following production activity & maintenance costs for two
months:

Using these two levels of activity, compute:

the variable cost per unit.
the total fixed cost.

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The High Low Method

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 The High Low Method

in cost
Unit variable cost = in units

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 The High Low Method

Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

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 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

Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

Fixed cost = Total cost – Total variable cost

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 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

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)

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

Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit

Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600

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Least-Squares Regression Method
Total Cost

Activity

6-39
Activity Analysis,
Cost Behavior,
and Cost
Estimation
Multiple Regression

Multiple regression includes two or more independent variables:

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.

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 Engineering Method
of Cost Estimation

Cost estimates are based on measurement

and pricing of the work involved.
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Engineering Method
of Cost Estimation
❑ The engineering method indicates what costs should
be
❑ Analysts study the physical relation between the
quantity of inputs and outputs
❑ Determine the steps required to perform the task, the
time needed to complete each step, the number &
type of employees required, & the materials & other
inputs needed
❑ The accountant assigns costs to each of the inputs to
estimate the cost of the outputs
Engineering Method
of Cost Estimation
Effect of Learning on Cost Behavior

I’ve noticed the same

As I make more of these
thing. And if you
things it takes me less
include all the variable
time for each one. It
overhead costs that are
must be the learning
also declining, that
curve effect that the
must be the
boss was talking about.
experience curve.

6-46
Learning Curve

Learning effects
are large initially.
Average Labor
Time per Unit

Learning effects
become smaller, eventually
reaching steady state.

Cumulative Production Output

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Data Collection Problems

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

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THANK YOU