Cost management HMCost3e PPT ch03

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
Fixed Costs
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
Fixed Costs
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 productionline 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
Fixed Costs
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.


BASICS OF COST BEHAVIOR
Fixed
Fixed Costs
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
Variable Costs
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
Variable Costs
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
Mixed Costs
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
Mixed Costs
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
equationY = $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
Mixed Cost
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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service or otherwise on a password-protected website for classroom use.


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