Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 6 - Ronald W. Hilton, David E. Platt

Chapter 6
Activity Analysis,
Cost Behavior, and
Cost
Estimation

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Introduction
Cost
estimation

Cost
behavior

Cost
prediction

Process of
determining
cost behavior,
often focuses
on historical
data.

Relationship
between
cost and
activity.

Using knowledge
of cost behavior
to forecast
level of cost at
a particular
activity. Focus
is on the future.
6­2


Total Variable Cost Example

Total Pay Per View Bill

Y our total Pay Per View bill is based on how many Pay
Per View shows that you watch.

Number of Pay Per View shows
watched

6­3


Variable Cost Per Unit Example

Cost per Pay Per View
show

The cost per Pay Per View show is constant. For example,
$4.95 per show.

Number of Pay Per View
shows watched

6­4


Step-Variable Costs

Cost

Total cost remains
constant within a
narrow range of
activity.

Activity
6­5


Step-Variable Costs

Cost

Total cost increases to a
new higher cost for the
next higher range of
activity.

Activity

6­6


Total Fixed Cost Example

Monthly Basic
Cable Bill

Y our monthly basic cable TV bill probably does not change
no matter how many hours you watch.

Number of hours watched
6­7


Fixed Cost Per Unit Example

Monthly Basic cable Bill
per hour watched

The average cost per hour decreases as more hours are
spent watching cable television.

Number of hours watched
6­8


Step-Fixed Costs
Total cost doesn’t change for a wide range of
activity, and then jumps to a new higher cost for the

next higher range of activity.

Rent Cost in
Thousands of Dollars

90

60

30

0

1,000
2,000
3,000
Rented Area (Square Feet)

6­9


Semivariable Cost

A semivariable
cost is partly
fixed and partly
variable.

Consider the
following

example:.
6­10


Semivariable Cost

Total Lease Cost

The slope is
the variable
cost per unit
of activity.

iv
m
se
l
ta
o
T

l
b
a
ari

s
o
ec

t

Variable Lease
Charge Per Hour
Fixed Monthly
Rental Charge

Rental Charge Per Hour
6­11


Total Cost

Curvilinear Cost

Relevant Range

Curvilinear
Cost Function

A straight-line
(constant unit
variable cost) closely
approximates a
curvilinear line within
the relevant range.

Activity
6­12

Total Cost

Curvilinear Cost

Relevant Range

Curvilinear
Cost Function

A straight-Line
(constant unit
variable cost) closely
approximates a
curvilinear line within
the relevant range.

Activity
6­13


Engineered, Committed, and
Discretionary Costs
Committed

Discretionary

Long-term, cannot be
reduced in the short
term.

May be altered in the
short term by current
managerial decisions.

Engineered
Physical relationship
with activity measure.
Depreciation on
Buildings and
equipment

Direct
Materials

Advertising and
Research and
Development
6­14


Visual-Fit Method
A scatter diagram of past cost behavior
may be helpful in analyzing mixed costs.

6­15


Visual-Fit Method

Total Cost in
1,000’s of Dollars

Plot the data points on a
graph (total cost vs. activity).

20

10

0

* *
* *

* ** *
**

0
1
2
3
4
Activity, 1,000’s of Units Produced
6­16


Visual-Fit Method

Total Cost in

1,000’s of Dollars

Draw a line through the plotted data points so that about
equal numbers of points fall above and below the line.

20

10

0

* *
* *

* ** *
**

0
1
2
3
4
Activity, 1,000’s of Units Produced
6­17


Visual-Fit Method

Total Cost in
1,000’s of Dollars

Estimated fixed cost = $10,000
20

10

0

* *
* *

* ** *
Vertical distance
**
is total cost,
approximately
$16,000.

0
1
2
3
4
Activity, 1,000’s of Units Produced
6­18


The High-Low Method
Owl Co recorded the following production activity &
maintenance costs for two months:

High activity level
Low activity level

Units
9,000
5,000

Cost
$ 9,700
6,100

Using these two levels of activity, compute:
the variable cost per unit.
the total fixed cost.
6­19


The High-Low Method
High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost
$ 9,700

6,100
$ 3,600

6­20


The High-Low Method
High activity level
Low activity level
Change

Unit variable cost =

Units
9,000
5,000
4,000

Cost
$ 9,700
6,100
$ 3,600

in cost
in units

6­21


The High-Low Method

High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost
$ 9,700
6,100
$ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit

6­22


The High-Low Method
High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost

$ 9,700
6,100
$ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit
Fixed cost = Total cost – Total variable cost

6­23


The High-Low Method
High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost
$ 9,700
6,100
$ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $0.90 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($0.90 per unit × 9,000 units)

6­24

The High-Low Method
High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost
$ 9,700
6,100
$ 3,600

Unit variable cost = $3,600 ÷ 4,000 units = $.90 per unit
Fixed cost = Total cost – Total variable cost
Fixed cost = $9,700 – ($.90 per unit × 9,000 units)
Fixed cost = $9,700 – $8,100 = $1,600

6­25