Scribd
Upload
2 views

Lecture Three

The document discusses cost behavior in managerial accounting, emphasizing the importance of understanding variable and fixed costs for accurate budgeting and forecasting. It outlines the assumptions necessary for predicting cost behavior, defines relevant ranges, and explains the characteristics of variable and fixed costs. Additionally, it introduces semi-variable costs and methods for analyzing them, such as the high-low method, and includes practical examples and review questions for application.

Uploaded by

Jesca Monyo
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
2 views

Lecture Three

The document discusses cost behavior in managerial accounting, emphasizing the importance of understanding variable and fixed costs for accurate budgeting and forecasting. It outlines the assumptions necessary for predicting cost behavior, defines relevant ranges, and explains the characteristics of variable and fixed costs. Additionally, it introduces semi-variable costs and methods for analyzing them, such as the high-low method, and includes practical examples and review questions for application.

Uploaded by

Jesca Monyo
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/ 15

ACCOUNTING FOR MANAGERS

(BBM & BMPR II)


IDENTIFYING COST BEHAVIOUR
• When managers are able to predict cost behavior, managers
can estimate the amount of costs that are expected to be
incurred at different levels of activity. Estimated costs is the
heart of budgeting and forecasting which is one of the
primary functions of managerial accounting. Unless the cost
behavior--variable or fixed--is known, costs cannot be
accurately used for forecasting.
Assumptions.
To predict/estimate cost behavior, you must assume the
following:
• The number of units produced is equal to the number of
units sold. In other words, there is no change in inventory
levels.
• The cost behavior is linear.
• The level of activity (sales/production) occurs within the
relevant range.
• The Relevant Range
• A relevant range is a range of activity within which cost behavior holds true. It is
the normal range of production or sales that can be expected for a particular
product or company. For example, a particular retail store may have normal
monthly revenues of $500,000, with occasional lows of $400,000 or highs of
$600,000. The relevant range is the range of normal activity from $400,000 to
$600,000. The costs that are identified as fixed, such as manager salaries, are the
same throughout the entire range. If sales were to increase to $700,000, the
company would likely acquire an additional manager thereby increasing it salary
costs. Conversely, if sales drop to $320,000, the company would likely eliminate a
manager to reduce total fixed costs. A relevant range ignores extreme levels of
activity. Above or below the relevant range, forecasts of cost behavior may be
linear and likely be less accurate in predictions of future costs.
Variable Cost Behavior
• Total variable costs vary in direct proportion to volume.
In other words, the more units produced the higher the total variable
cost. Total variable cost is zero if no units are produced. As weekly sales
climb, each dollar of additional sales generates 20 cents of variable
costs. The total variable labor cost rises to $5,000 when sales activity
reaches $25,000. Note the rising variable cost line in the graph below.
The math function that names this line is shown as:
y = 0.20X, where y is the total cost and X represents the activity. In
this case the activity is weekly sales.
• Unit variable cost remains the same no matter how many units are
produced or sold. The unit variable cost is $0.20 per unit regardless of
the activity level.
Example of variable costs:
• Materials and parts to manufacture products
• Hourly labor (wages) for employees to produce or assemble products
or to provide services to customers
Fixed Cost Behavior
• Total fixed costs stay the same amount in total as volume fluctuates.
In other words, more units produced has no effect on the total
amount of total fixed costs. The weekly rent cost remains at $2,500
regardless of what happens to the weekly sales revenue. Note the
total fixed cost line which begins on the y-axis at zero weekly sales
costing $2,500. The total fixed rent cost remains at $2,500 regardless
of the amount of weekly sales. The math function that names this line
is shown as y = 2,500, where y is the total cost.
Unit fixed costs
• Unit fixed costs vary inversely when more or fewer units are
produced and sold. If total production and sales increase, unit fixed
costs decrease. If total production and sales decrease, unit fixed costs
increase. Example of fixed costs:
• Rent
• Insurance
• Salaries for employees such as supervisors and janitors
• Advertising and marketing costs
• Depreciation on equipment and buildings
• Fixed costs are often tricky to identify. The best way to think about
costs when trying to identify the type of cost is to think about what
happens to the total cost when sales/production increases. If an
increase in sales/production causes the total cost to increase, the cost
is considered variable. If an increase in sales/production has no effect
on the amount of the total cost, the cost is considered fixed. For
example, selling two more units does not cause the total amount
incurred (total fixed cost) for newspaper advertising to increase, nor
does it cause depreciation to become larger.
Analysis of semi-variable costs into their fixed and variable
elements

• It is not just the utilities that have semi-variable costs. Many other
costs, such as security and maintenance, also follow this pattern.
Often, only the total amounts of these semi variable costs are known
and the fixed and variable elements have to be worked out
mathematically. Three alternative ways of doing this are shown below.
THE HIGH–LOW METHOD
The following table shows the machine maintenance costs and the
output level of products for the First six-monthly periods of the year.
EXAMPLE.

Month OUTPUT(units) TOTAL


COSTS
(TZS 000)
1 586 12,340
2 503 11,949
3 600 12,400
4 579 12,298
5 550 12,075
6 500 12,000
REQUIRED.
(a). Variable cost per unit.
(b). Total Fixed Cost.
(c). Calculate the total anticipated costs when the output units is 1,000.
(d). Briefly explain the advantages and disadvantages of high-low
method at least three(3).
REVIEW QUESTION.
QUESTION ONE.

A factory has done an analysis of the maintenance department cost showing that there is a fixed
element of TZS. 500,000 per month and a variable element related to machine hours amounting to
TZS. 2,250 per machine hour.

REQUIRED:

What is the expected cost for a month when the planned activity level is

(i) 1,500 machine hours

(ii) 1,800 machine hours


QUESTION TWO
The behaviour of a cost can be expressed algebraically as: Cost = bx + cx² + dx³

Where b = Labour hours

c= material in Kgs

d = machine hours

X = output in units

REQUIRED:

(i) Calculate the cost at output levels of 80 units when b=6, c = 0.7 and d = 0.04

(ii) Calculate the cost at output levels of 100 units when b=6, c = 0.7 and d = 0.04

You might also like