Cost management accounting and control 6e by hansen mowen guan chapter 03

Separate mixed costs into their fixed and variable components using the high-low method, the scatterplot method, and the method of least squares.. For production up Cost Behavior: Fixe

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 3

Study Objectives

1 Define and describe fixed, variable, and mixed costs.

2 Explain the use of resources and activities and their relationship to

cost behavior.

3 Separate mixed costs into their fixed and variable components

using the high-low method, the scatterplot method, and the method

of least squares.

4 Evaluate the reliability of the cost formula.

5 Explain how multiple regression can be used to assess cost

behavior.

Two production lines can process 10,000

computers per year each The workers on each line are supervised by a production-line manager who is paid $24,000 per year For production up

Cost Behavior: Fixed Costs

Fixed costs are costs that in total are

constant within the relevant range as

the level of the activity driver varies.

Cost Behavior: Fixed Costs

Cost Behavior: Fixed Costs

Cost Behavior: Fixed Costs

Cost Behavior: Fixed Costs

Variable costs are costs that in total

vary in direct proportion to changes in

an activity driver.

A CD-ROM disk drive is added to each

computer at a cost of $30 per computer

The total cost of disk drives for each level of

production varies

Cost Behavior: Variable Costs

Cost Behavior: Variable Costs

Cost Behavior: Variable Costs

Cost Behavior: Variable Costs

Mixed costs are costs that have both a fixed and a variable component.

Ten sales representatives each earn an

annual salary of $30,000 plus a commission

of $50 per computer sold 10,000 computers

are sold

Cost Behavior: Mixed Costs

Y = Fixed cost + Total variable cost

Cost Behavior: Mixed Costs

Cost Behavior: Mixed Costs

• Flexible resources

– Acquired as used and needed

– Usually considered variable costs

• Examples: materials, energy

• Committed resources

– Acquired in advance of usage

Resources, Activities, and Cost Behavior

Resources, Activities, and Cost Behavior

• Step cost behavior displays a constant level of cost for a range of output and then jumps to a higher level of cost at some

Resources, Activities, and Cost Behavior

Methods for Separating Mixed Costs into Fixed and Variable Components

• The High-Low Method

• The Scatterplot Method

Variable Component Fixed

Componen t

Y = F + VX

Methods for Separating Mixed Costs into Fixed and Variable Components

where

Y = Total activity cost

F = Fixed cost component

Straight-line equation:

High-Low Method

High-Low Method

Low Activity

High Activity

Step 2: Using either the high cost or low cost, solve for

the total fixed costs F

Step 1: Solve for variable cost (V)

V = Change in cost ÷ Change in activity

Scatterplot Method

Step 1: Plot the data points on a scattergraph

Scatterplot Method

Step 2: Choose the two data points most representative

of the data to describe the cost behavior line

Method of Least Squares

Regression Programs

• The best-fitting line is the line with the

smallest sum of squared deviations

• Regression analysis determines the linear function with the minimum sum of squared deviations

• Utilize spreadsheet packages such as

Spreadsheet Data for

Anderson Company

Regression Analysis for the Method of Least Squares

Regression Output for Anderson Company

Regression Analysis for the Method of Least Squares

The regression analysis gives rise to the following

equation for Anderson’s material handling cost:

Regression Analysis for the Method of Least Squares

Reliability of Cost Formulas

Hypothesis test of parameters

– The lower the P-value, the more likely that the

true parameter is significantly different from 0– Traditional benchmarks of significance are

Reliability of Cost Formulas

Goodness of fit

– Measures the percentage of change in the dependent variable explained by changes in

Reliability of Cost Formulas

Confidence intervals

– The standard error is used to determine the ± range of possible values around the

X1 = first explanatory variable

Multiple Regression

• Least-squares method is used to fit an

equation involving two or more

explanatory variables

Y = F + V1X1 + V2X2 etc.

where

Multiple Regression Analysis for the Method of Least Squares

Y = $507 + $7.84X1 + $0.11X2

Multiple Regression

Based on the multiple regression analysis, the

cost formula is written as:

In November the company expects to make 350 moves with a weight of 17,000 pounds The

predicted cost of material handling is:

Cumulative Cumulative Cumulative Individual Units

Number Average Time Total Time: Time for nth

of Units per Unit in Hours Labor Hours Unit-Labor Hours (1) (2) (3) = (1) × (2) (4)

Cumulative Average Time Learning

Curve with 80% Learning Rate

Graph of Cumulative Total Hours Required and the Cumulative Average Time per Unit

Managerial Judgment

• Managerial judgment is critically important

in determining cost behavior and is by far the most widely used method in practice

• Advantage – simplicity

• Disadvantage – poor judgment leads to errors

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 3