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

COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

Chapter 3
Cost Behavior
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.

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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.
6. Define the learning curve, and discuss its impact on cost behavior.
7. Discuss the use of managerial judgment in determining cost
behavior.
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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.
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
to 10,000 units, only one supervisor is needed.
When production is between 10,001 and 20,000
units, two supervisors are required.
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Cost Behavior: Fixed Costs

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Cost Behavior: Fixed Costs

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Cost Behavior: Fixed Costs

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Cost Behavior: Fixed Costs

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Cost Behavior: Variable 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.

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Cost Behavior: Variable Costs

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Cost Behavior: Variable Costs

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Cost Behavior: Variable Costs

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Cost Behavior: Mixed 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.

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Cost Behavior: Mixed Costs
Y = Fixed cost + Total variable cost
Y = F + VX
where
Y = Total cost
For Days Computer, the selling cost is:

Y = $300,000 + $50X

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Cost Behavior: Mixed Costs

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Cost Behavior: Mixed Costs

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Resources, Activities,
and Cost Behavior
• Flexible resources
– Acquired as used and needed
– Usually considered variable costs
• Examples: materials, energy

• Committed resources
– Acquired in advance of usage
– Usually considered fixed costs
• Examples: buying or leasing buildings, contracts
with employees
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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
point
• Step-Variable costs
• Narrow increments
• Approximate as a strictly variable assumption

• Step-Fixed costs
• Wide increments
• Assigned to the fixed cost category
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Resources, Activities,
and Cost Behavior

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Methods for Separating Mixed Costs
into Fixed and Variable Components
Variable
Component
Fixed
Componen
t

• The High-Low Method
• The Scatterplot Method
• The Method of Least Squares

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Methods for Separating Mixed Costs
into Fixed and Variable Components
Straight-line equation:
Y = F + VX
where
Y = Total activity cost
F = Fixed cost component

V = Variable cost per unit
X = Measure of activity output
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High-Low Method

Step 1: Solve for variable cost (V)
V = Change in cost ÷ Change in activity
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High-Low Method
Low Activity

High Activity

Step1: V 

$7,500 - $2,000
 $13.75
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500 - 100


High-Low Method
Step 1: Solve for variable cost (V)
V = Change in cost ÷ Change in activity

V

$7,500 - $2,000
 $13.75
500 - 100

Step 2: Using either the high cost or low cost, solve for
the total fixed costs F

Low cost

Y  F V(X )
$2,000  F  $13.75(100)
$625  F

High cost

Y  F V ( X )
$7,500  F  $13.75(500)
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$625  F


Scatterplot Method
Step 1: Plot the data points on a scattergraph

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Scatterplot Method
Step 2: Choose the two data points most representative

of the data to describe the cost behavior line

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