Cornerstones of cost management 3rd edition hansen mowen chapter 3

COST BEHAVIOR
CHAPTER 3

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CHAPTER 3 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. Explain how several methods of cost
estimation can be used
4. Separate mixed costs into their fixed and
variable components using the high-low
method, the scatterplot method, and the
method of least squares
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service or otherwise on a password-protected website for classroom use.


CHAPTER 3 OBJECTIVES
5. Evaluate the reliability of the cost formula
6. Explain how multiple regression can be
used to assess cost behavior
7. Define the learning curve, and discuss its
impact on cost behavior
8. Discuss the use of managerial judgment
in determining cost behavior

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Cost Behavior

• The term used to describe whether a cost
changes when the level of output changes
• Fixed costs do not change as output
changes
• Variable costs increase in total with an
increase in output and decrease in total
with a decrease in output

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Cost Objects

• An item for which managers want cost
information
• For manufacturing or merchandising firms,
it is usually the tangible product
• For service firms, it is usually the service
provided

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Measures of Output

• Activity drivers explain changes in activity
costs by measuring changes in activity
output (usage)
• The two general categories of activity
drivers
• Unit-level drivers
• Non-unit-level drivers

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Fixed
FixedCosts
Costs

•

Fixed costs are costs that in total are constant within the relevant range as
the level of the activity driver varies

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Fixed
FixedCosts
Costs
JCM Audio Systems, Inc. produces speakers for home audio systems. One
department produces voice coils. There are two production lines that can each
make up to 100,000 voice coils per year. The production-line manager is paid
$60,000 per year. For production up to 100,000 units only one manager is
needed; above that (to 200,000 units) two managers are needed.

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Fixed
FixedCosts
Costs

JCM Audio Systems, Inc.

The total cost of supervision remains the same
within the relevant range, but the unit cost

decreases as production increases.

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© 2014 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 classroom use.


BASICS OF COST BEHAVIOR
Fixed
FixedCosts
Costs

JCM Audio Systems, Inc.

The total cost of supervision remains the same
within the relevant range, but the unit cost
decreases as production increases

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service or otherwise on a password-protected website for classroom use.


EXHIBIT 3.1—FIXED COST BEHAVIOR

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service or otherwise on a password-protected website for classroom use.

BASICS OF COST BEHAVIOR
Variable
VariableCosts
Costs

•
•

Variable costs are costs that in total vary in direct proportion to changes in
an activity driver
The total cost of direct materials for each level of production varies, but the
unit cost stays the same

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Variable
VariableCosts
Costs

JCM Audio Systems, Inc.

The total cost of supervision remains the same
within the relevant range, but the unit cost
decreases as production increases.

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© 2014 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 classroom use.


EXHIBIT 3.2—VARIABLE COST
BEHAVIOR

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service or otherwise on a password-protected website for classroom use.


EXHIBIT 3.3—NONLINEARITY OF
VARIABLE COSTS

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service or otherwise on a password-protected website for classroom use.


EXHIBIT 3.4—RELEVANT RANGE FOR
VARIABLE COSTS

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service or otherwise on a password-protected website for classroom use.

BASICS OF COST BEHAVIOR
Mixed
MixedCosts
Costs

•

Mixed costs are costs that has both a fixed and a variable component

Y = Fixed cost + Total variable
cost
Y = F + VX
where
Y = Total cost (Usually a mixed
cost)

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Mixed
MixedCosts
Costs
JCM’s sales costs are mixed. There are 10 sales representatives who each earn
$30,000 plus receive a commission of $5 per speaker sold. This function can
be represented by the following equation

Y = $300,000 + $5X

Fixed salaries

Variable commissio
n

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service or otherwise on a password-protected website for classroom use.


BASICS OF COST BEHAVIOR
Mixed
MixedCost
Cost

JCM Audio Systems, Inc.
Fixed Cost
of Selling

$300,000
300,000
300,000
300,000
300,000

Speakers Selling Cost

Variable Cost
Total Cost Sold
Per Unit
of Selling
$200,000
400,000
600,000
800,000
1,000,000

$ 500,000
700,000
900,000
1,100,000
1,300,000

40,000
80,000
120,000
160,000
200,000

$12.50
8.75
7.50
6.88
6.50

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service or otherwise on a password-protected website for classroom use.


EXHIBIT 3.5—MIXED COST BEHAVIOR

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service or otherwise on a password-protected website for classroom use.


RESOURCES, ACTIVITIES, AND COST
BEHAVIOR
Resources
•Economic elements that enable one to perform activities
•When a firm acquires the resources needed to perform an
activity, it obtains activity capacity
•Practical capacity is the activity level where the activity is
performed efficiently

•

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service or otherwise on a password-protected website for classroom use.


RESOURCES, ACTIVITIES, AND COST
BEHAVIOR
Flexible Resources
•Supplied as needed and used

•Quantity of resource supplied equals quantity
demanded
•No unused capacity

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service or otherwise on a password-protected website for classroom use.


RESOURCES, ACTIVITIES, AND COST
BEHAVIOR
Committed Resources
•Supplied in advance of usage
•A given quantity is obtained, whether or not that
full amount is used

• Unused capacity is possible

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© 2014 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 classroom use.


RESOURCES, ACTIVITIES, AND COST
BEHAVIOR
Step-Cost
Step-CostBehavior
Behavior

•

A step cost function displays a constant level of cost for a range of output
and then jumps to a higher level of cost at some point

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service or otherwise on a password-protected website for classroom use.


RESOURCES, ACTIVITIES, AND COST
BEHAVIOR
Step-Cost
Step-CostBehavior
Behavior
Step-variable Costs

•Follow a step-cost behavior with narrow steps
Step-fixed Costs

•Follow a step-cost function
•Exceed the relevant range, and the costs increase “one step”

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service or otherwise on a password-protected website for classroom use.