Scribd
Upload
36 views

Cost Behavior and Cost Concepts

This document discusses cost behavior and cost concepts. It defines different types of costs such as fixed costs, variable costs, and mixed costs. It also defines important cost accounting terms like cost pool, cost object, cost driver, and activity. The document explains that costs can have fixed, variable, or mixed behavior depending on whether the cost stays constant, varies proportionally, or has both fixed and variable components respectively as activity changes. It discusses assumptions around relevant range and time period for cost behavior. Methods for segregating fixed and variable components of mixed costs are also presented.

Uploaded by

Mark Jaypee Santiago
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
36 views

Cost Behavior and Cost Concepts

This document discusses cost behavior and cost concepts. It defines different types of costs such as fixed costs, variable costs, and mixed costs. It also defines important cost accounting terms like cost pool, cost object, cost driver, and activity. The document explains that costs can have fixed, variable, or mixed behavior depending on whether the cost stays constant, varies proportionally, or has both fixed and variable components respectively as activity changes. It discusses assumptions around relevant range and time period for cost behavior. Methods for segregating fixed and variable components of mixed costs are also presented.

Uploaded by

Mark Jaypee Santiago
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Cost Behavior and Cost

Concepts
Cost Behavior
The term for describing whether a cost changes when the level of output
changes.

Cost – a measurement, in monetary term, of the amount of resources used


for some purpose.
Cost Pool – an account in which variety of similar costs are accumulated
prior to allocation to cost object. It is a group of cost associated with an
activity.
Cost Object – The intermediate and final disposition of cost pools.
Example : product, job, process
Cost Driver – A factor that cause a change in the cost pool for a
particular activity. It is used as a basis for cost allocation; any factor or
activity that has a direct cause-effect relationship

Activity – any event, action transaction, or work sequence that incurs


costs when producing a product or providing a service.
Types of Costs as to Behavior

1. Fixed Cost – in total: constant within the relevant range as activity


output changes; per unit : changes as activity level changes

2. Variable Cost – in total : varies in direct proportion to changes in


activity output; per unit : remains constant

3. Mixed Cost – has both fixed and variable components.


Fixed Cost and
Variable Cost Unit Variable
Cost

Unit Fixed Cost


“asymptotic”

Mixed Cost

Variable
Components

Fixed
Components

Step Variable Step Fixed Curvilinear


Cost Behavior Assumptions

a. Relevant Range Assumption


Relevant range refers to the band of activity within which the
identified cost behavior patterns are valid. Any level of activity outside
this range may have a different cost behavior pattern.

b. Time Period Assumption


The cost behavior patterns identified are true only over a specific
period of time. Beyond this, the cost may show a different behavior.
Correlation of Activities
Correlation determines the relationship of activities. Correlation of
activities can be presented in graphical or mathematical form. It must be
also:
I. Linear
An activity is linear when we can draw a straight line to graphical
points. If the line is pointing upward to the right, it is said to be positive
or has a direct relationship.

If pointing downward to the right, it is said to be negative or has an


indirect relationship.
II. Strong
The closer the points in the graph, the better the correlation of
activities.

Coefficient of Correlation – determines the goodness of fit. It also


determines whether the relationship of activities is inverse or direct. It
must be closest in absolute value of 1 (+1 or -1)

-1 or closer to -1 = inverse relationship


+1 or closer to +1 = direct relationship

Other Term :
-R
- R squared
Question :

Can a nonlinear activities be included in consideration


whether those activities has a good relationship?
Answer :

Yes, as long as a those activities has a strong relationship.


Segregation of Fixed and Variable Elements of Mixed
Cost

1) High-Low Points Method


The fixed and variable elements of the mixed costs are computed
from two data points (period) – the high and low periods as to
activity level or cost driver.

Variable Rate = High Point Cost – Low Point Cost


High Point Output – Low Point Output
2) Statistical Scatthergraph Method
Various costs ( the dependent variable) are plotted on a vertical line
(y-axis) and measurement figures (cost driver or activity levels) are
plotted on a horizontal line (x-axis). A straight line is drawn through
the points and, using this line, the rate of variability and the fixed
cost are computed
3) Method of Least Squares (Regression Analysis)
Mathematically determines a line of best fit or a linear regression
line through a set of plotted points so that the sum of the squared
deviations of each actual plotted point from point directly above or
below or on the regression line is at minimum.

This method uses the following equations in computing for the values
of unit variable cost and fixed cost:

Equation 1 : ΣY = na + bΣx
Equation 2 : Σxy = aΣx + bΣx2

You might also like