Académique Documents
Professionnel Documents
Culture Documents
Do not change in response to a change in activity volume Contain a fixed and variable cost element; sometimes called semi-variable costs Constant within a narrow range of activity, but shift to a higher level when activity exceeds the range
Mixed Costs
Fixed Costs
Variable Costs
Increases as activity increases Equals zero dollars when activity is zero
Variable cost: Y = bX
Higher variable costs per unit create a steeper line slope.
Fixed Costs
Fixed cost: Y = a
Slope is zero, represented by a flat line.
No change as activity increases or decreases No response to short-run changes in activity cost drivers
Mixed Costs
Increase in a linear fashion when activity increases Positive in amount when activity is zero
Mixed cost: Y = a + bX
Contains both fixed and variable cost elements. Variable portion Fixed portion
0
Step Costs
Increase in a step like fashion as activity increases Total cost shifts to a higher level when activity exceeds a range
Step cost: Y = ai
0
Total activity (X)
A unit of final output is the primary cost driver The time period is too short to incorporate changes in strategic cost drivers such as the scale of operations
Causes some costs to be viewed as fixed in the short term, but appear variable in the long run
Relevant Range
A portion of a range of activity associated with the fixed cost of the current or expected capacity A normal range of activity in which a company expects to operate, where the fixed costs remain linear, i.e., total cost remains the same
Example:
During normal operations, factory space is adequate for Mattel. However, during the three months preceding the holiday season, Mattels operations are out of the relevant range and storage trailers must be rented for the additional merchandise.
Relevant Range
Economists total cost function, referred to as curvilinear Accountants linear approximation of total cost function
Marginal Cost
Marginal cost is the varying increment in total cost of making one more unit.
Economist
Total cost graph is useful in predicting total costs for the coming period.
100
200
300
400
500
$$$$$-
100
200
300
400
500
Activity
Average Costs
Average costs
Average cost graph is useful if a manager wants to know the cost of serving a customer
Number of Customers 100 300 500 Average Cost Per customer $35.00 $15.00 $11.00
Committed fixed costs, known also as capacity costs, are required to maintain the current service or production capacity or to fill previous legal commitments.
Cost Estimation
What is it?
The determination of the relationship between activity and cost An important part of cost management
Cost prediction
Variable Costs
Mixed Costs Fixed Costs
A high activity period, and a low activity period representative low activity point.
$25,000 = a + ($2.20 8,600 units) a = $6,080 $31,600 = a + ($2.20 11,600 units) a = $6,080
The same total fixed costs result using either the high or low activity point.
$25,000 $10,000 0
8600 11,600
Y = $2.20X + 6,080
Scatter Diagrams
A graph of past activity and cost data, with individual observations represented by dots
Least-Squares Regression
Also known as simple regression (one variable) A mathematical technique to fit a costestimating equation to observed data Minimizes the vertical squared difference between the estimated and actual costs at each data point Accomplished using
Microsoft Excel Statistical software Some calculators Time consuming math calculations
Least-Squares Criterion
The least-squares method minimizes the sum of all squared vertical deviations between individual observations and the cost-estimating line.
Least-Squares Advantage
Statistical measures are available to determine how well the equation fits the line
Coefficient of determination
Measures the percent of variation in the dependent variable that the independent variable explains Also called R-squared (R2)
Y = a + bX
Y = a + b1X1 + b2X2
Multiple Regression
Often contains more than two variables Can be used to determine the effect of individual product features on the market value of a product
Mathematical models do not make decisions; they are tools to aid decision making
Not all data are based on normal operating conditions Nonlinear relationships may exist Results should make sense
Data used in developing cost estimates must be based on the same technology.
Changes in Prices
Data used must reflect the same price level, or be restated to a single price level.
Time Lags
Actual costs are not known until a future time period Shorter time periods have higher probabilities of error in matching costs and activities
Examples: Vehicle mileage is used consistently but maintenance costs occur every few months Cell phone bills arrive at the end of the month, but usage occurs throughout the month
Cost driver should have a logical, causal relationship with costs Scatter diagrams and statistical measures are helpful Selection of a driver requires judgment and professional experience
Assumes changes in costs are best explained by changes in the number of units of product (or service provided) Inaccurate for analyzing cost behavior when a company changes
From labor-based to automated manufacturing From a limited number related products to multiple products, with variations in volume and complexity From a set of similar customers to a diverse set of customers
Manufacturing Costs
Direct Materials
Cost of primary raw materials converted into finished goods
Direct costs = easily or directly traceable to a finished product/service
Direct Labor
Wages earned by production employees for the time they spend converting raw materials into finished products
Manufacturing Overhead
All manufacturing costs other than direct materials and direct labor
The problem
Past tendency was to ignore overhead and focus on direct materials and labor Units produced is no longer adequate in explaining manufacturing costs
Fixed Costs Costs that do not vary with the number of units
Fixed Costs Costs that do not respond to change in variable cost drivers are considered:
Facility level
Examples: Cost of raw materials Cost of cutting a component Cost of a box to package cereal Sales commission Cost of paint brushes used by a painting company to paint an office building
Examples: Cost of processing sales orders Cost of tracking work orders Cost of equipment setup Cost of moving a batch between work stations Cost of inspecting batches
Examples: Cost of product development Cost of product marketing such as advertising Cost of specialized equipment Cost of maintaining specialized equipment
Examples: Cost of maintaining factory building and grounds Cost of real property taxes Cost of non-specialized equipment Cost of general advertising Cost of factory supervisor
Often used by
Merchandising organizations Sales divisions of manufacturers Customer classification scheme
Answers questions about the cost of individual orders or costs of individual customers
Unit-level activities Order-level activities Customer classification Customer-level activities Market-segment-level activities scheme Facility-level activities
Often used by
Builders Special contracts with the government