Managerial accounting and introduction to concepts methods and user 11e by maher chapter 05

VARIABLE COSTS: Definition Are costs that change in total as the level of activity changes.. FIXED COSTS: Definition Are costs that do not change in total with changes in activity levels

Cost Drivers and Cost Behavior

© 2012 Cengage Learning All Rights Reserved May

not be copied, scanned, or duplicated, in whole or in

part, except for use as permitted in a license

distributed with a certain product or service or

otherwise on a password-protected website for

Florida Institute of Technology

Managerial Accounting 11E

Maher/Stickney/Weil

CHAPTER GOAL

This chapter discusses classifying costs and

methods for estimating cost behavior

Fixed costs

 Variable costs

All managerial decisions deal with choices

among different activity levels Managers must estimate which costs will vary with the activity and by how much

VARIABLE COSTS: Definition

Are costs that change in total as the level of activity changes

FIXED COSTS: Definition

Are costs that do not change in total

with changes in activity levels

RELEVANT RANGE: Definition

Is the range of activity over which the firm expects a set of cost behaviors to be consistent

EXHIBIT 5.1

Estimates

of variable and fixed costs apply only if level

of activity lies within

relevant range

Estimates

of variable and fixed costs apply only if level

of activity lies within

relevant range

FIXED COSTS

Fixed (capacity) costs are divided between

Committed costs

Capacity costs that will continue to exist even if

operations are temporarily reduced

Discretionary (programmed or managed) costs

Need not be incurred in the short run to operate the

business

Fixed costs remain constant over

the relevant range of activity

What is an example of

a curvilinear cost?

Costs become curvilinear when

volume discounts are offered

EXHIBIT 5.5

Volume discounts

Volume discounts

EXHIBIT 5.6 A

Production time decreases as volume increases due to

learning from experience

Production time decreases as volume increases due to

learning from experience

EXHIBIT 5.6 B & C

Total labor time and cost

will decrease with increases in volume

Total labor time and cost

will decrease with increases in volume

Time

Cost

Are costs that have both fixed and

variable components Also called

Mixed Costs.

EXHIBIT 5.7

Semifixed costs change

because of changes in long-term

assets;

semivariable costs do not

Semifixed costs change because of changes in long-term assets;

semivariable costs do not

Semivariable

Semifixed

SIMPLIFYING COST ANALYSES

Some costs do not vary in the short run

over the relevant range (fixed costs)

Some vary with volume (variable

costs) Others are neither completely

fixed or variable

Decision makers can simplify these

variations by treating costs as either

fixed or variable.

Some costs do not vary in the short run

over the relevant range (fixed costs)

Some vary with volume (variable costs) Others are neither completely fixed or variable

Decision makers can simplify these

variations by treating costs as either

fixed or variable

EXERCISE 3

Press “Enter” or click left mouse button for answer.

Name three methods of cost estimation

Statistical regression, Account analysis, and

Engineering estimation

ANALYZING HISTORICAL COSTS

Two steps to analyze historical cost data

Make an estimate of the past relation

Update for current, future periods

Adjust costs for inflation and other changes

ANALYZING COSTS

Steps in analyzing costs are:

Review alternative cost drivers

(independent variables)

Plot the data

Examine the data and method of

accumulation

DATA PROBLEMS

Regardless of method used, results will only be

as good as the quality of the data used

Mismatched time periods

Trade-offs in choosing time period

EXHIBIT 5.12

Every method of cost estimation has strengths

and weaknesses

Every method of cost estimation has strengths

and weaknesses

COMMON SIMPLIFICATIONS

In general, more sophisticated methods provide

more accurate cost estimates than simpler

ones Methods of simplification are

Using only one cost driver

Assuming cost behavior patterns are linear within the

relevant range

Assume cost decreases are not “sticky”

CURVES

Mathematically, the learning curve effect can be

expressed by the equation: Y=aX b , where

Y = average number of labor hours required per unit

for X units

a = number of labor hours required for the first unit

X = cumulative number of units produced

b = index of learning, equal to the log of the learning

rate divided by the log of 2.

STANDARD ERRORS OF THE

COEFFICIENTS

idea of the confidence we can have in the fixed and

variable cost coefficients

The smaller the standard error relative to its

coefficient, the more precise the estimate

Such computational precision does not necessarily

indicate that the estimating procedure is theoretically

correct, however.

T-STATISTIC

The ratio between an estimated regression coefficient

and its standard error is known as the value or

t-statistic

If the absolute value of the t-statistic is approximately

2 or larger, we can be relatively confident that the

actual coefficient differs from zero.

R-SQUARED

The R 2 attempts to measure how well the line fits the

data (that is, how closely the data points cluster about

the fitted line)

 If all the data points were on the same straight line,

formed a circle or disk, the R 2 would be zero,

indicating that no line passing through the center of

the circle or disk fits the data better than any other

28