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McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-2
Learning Objective 1
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-3
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-4
Machine
Machine
hours
hours
A
Ameasure
measure of
of what
what
causes
causes the
the
incurrence
incurrence of
of aa
variable
variable cost
cost
Miles
Miles
driven
driven
McGrawHill/Irwin
Labor
Labor
hours
hours
Copyright2008,TheMcGrawHillCompanies,Inc.
5-5
Minutes Talked
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-6
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-7
Per Minute
Telephone Charge
Minutes Talked
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-8
A manufacturing company
will often have many
variable costs.
A service company
will normally have a high
proportion of variable costs.
A merchandising company
usually will have a high
proportion of variable costs,
like cost of sales.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-9
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-10
Cost
Volume
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-11
Step-Variable Costs
Cost
Volume
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-12
Step-Variable Costs
Cost
Small
Small changes
changes in
in the
the level
level of
of production
production are
are
not
not likely
likely to
to have
have any
any effect
effect on
on the
the number
number of
of
maintenance
maintenance workers
workers employed.
employed.
Volume
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-13
Step-Variable Costs
Cost
Volume
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-14
Total Cost
A
A straight
straight line
line
Economists
closely
closely
Curvilinear Cost approximates
approximates aa
Function
curvilinear
curvilinear
Relevant
Range
variable
variable cost
cost
line
line within
within the
the
relevant
relevant range.
range.
Accountants Straight-Line
Approximation (constant
unit variable cost)
Activity
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-15
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-16
Monthly Basic
Telephone Bill
Copyright2008,TheMcGrawHillCompanies,Inc.
5-17
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-18
Copyright2008,TheMcGrawHillCompanies,Inc.
5-19
Committed
Committed
Discretionary
Discretionary
Long-term,
Long-term, cannot
cannot be
be
significantly
significantly reduced
reduced
in
in the
the short
short term.
term.
May
May be
be altered
altered in
in the
the
short-term
short-term by
by current
current
managerial
managerial decisions
decisions
Examples
Examples
Examples
Depreciation on
Equipment and
Real Estate Taxes
Advertising
Advertising and
and
Research
Research and
and
Development
Development
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-20
McGrawHill/Irwin
Knowledge
Knowledge workers
workers
tend
tend to
to be
be salaried,
salaried,
highly-trained
highly-trained and
and
difficult
difficult to
to replace.
replace. The
The
cost
cost to
to compensate
compensate
these
these valued
valued employees
employees
is
is relatively
relatively fixed
fixed
rather
rather than
than variable.
variable.
Copyright2008,TheMcGrawHillCompanies,Inc.
5-21
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
Rent Cost in
Thousands of Dollars
5-22
McGrawHill/Irwin
90
Relevant
60
Range
30
0
Total
Total cost
cost doesnt
doesnt
change
change for
for aa wide
wide
range
range of
of activity,
activity,
and
and then
then jumps
jumps to
to
aa new
new higher
higher cost
cost
for
for the
the next
next higher
higher
range
range of
of activity.
activity.
1,000
2,000
3,000
Rented Area (Square Feet)
Copyright2008,TheMcGrawHillCompanies,Inc.
5-23
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-24
Step-variable costs
can be adjusted
more quickly and . . .
The width of the
activity steps is
much wider for the
fixed cost.
Copyright2008,TheMcGrawHillCompanies,Inc.
5-25
Quick Check
Which
Which of
of the
the following
following statements
statements about
about cost
cost
behavior
behavior are
are true?
true?
1.
1. Fixed
Fixed costs
costs per
per unit
unit vary
vary with
with the
the level
level of
of
activity.
activity.
2.
2. Variable
Variable costs
costs per
per unit
unit are
are constant
constant within
within the
the
relevant
relevant range.
range.
3.
3. Total
Total fixed
fixed costs
costs are
are constant
constant within
within the
the
relevant
relevant range.
range.
4.
4. Total
Total variable
variable costs
costs are
are constant
constant within
within the
the
relevant
relevant range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-26
Quick Check
Which
Which of
of the
the following
following statements
statements about
about cost
cost
behavior
behavior are
are true?
true?
1.
1. Fixed
Fixed costs
costs per
per unit
unit vary
vary with
with the
the level
level of
of
activity.
activity.
2.
2. Variable
Variable costs
costs per
per unit
unit are
are constant
constant within
within the
the
relevant
relevant range.
range.
3.
3. Total
Total fixed
fixed costs
costs are
are constant
constant within
within the
the
relevant
relevant range.
range.
4.
4. Total
Total variable
variable costs
costs are
are constant
constant within
within the
the
relevant
relevant range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-27
Mixed Costs
A
A mixed
mixed cost
cost has
has both
both fixed
fixed and
and variable
variable
components.
components. Consider
Consider the
the example
example of
of utility
utility cost.
cost.
Total Utility Cost
ta
o
T
xe
i
lm
os
c
d
t
Variable
Cost per KW
Fixed Monthly
Utility Charge
Copyright2008,TheMcGrawHillCompanies,Inc.
5-28
Mixed Costs
ta
o
T
xe
i
lm
os
c
d
t
Variable
Cost per KW
Fixed Monthly
Utility Charge
Copyright2008,TheMcGrawHillCompanies,Inc.
5-29
Y = a + bX
Y = $40 + ($0.03 2,000)
Y = $100
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-30
Cost
Cost estimates
estimates are
are based
based on
on an
an
evaluation
evaluation of
of production
production methods,
methods, and
and
material,
material, labor
labor and
and overhead
overhead
requirements.
requirements.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-31
Learning Objective 2
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-32
Maintenance Cost
1,000s of Dollars
Y
20
* *
* *
10
* ** *
**
Patient-days in 1,000s
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-33
Maintenance Cost
1,000s of Dollars
Draw
Draw aa line
line through
through the
the data
data points
points with
with about
about an
an
equal
equal numbers
numbers of
of points
points above
above and
and below
below the
the line.
line.
Y
20
* *
* *
10
* ** *
**
Patient-days in 1,000s
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-34
Maintenance Cost
1,000s of Dollars
Use
Use one
one data
data point
point to
to estimate
estimate the
the total
total level
level of
of activity
activity
and
and the
the total
total cost.
cost.
Y Total maintenance cost = $11,000
20
* ** *
**
* *
* *
10
Patient-days in 1,000s
Patient days = 800
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-35
$1,000
800
= $1.25/patient-day
Y = $10,000 + $1.25X
Total maintenance cost
McGrawHill/Irwin
5-36
Learning Objective 3
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-37
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-38
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-39
Copyright2008,TheMcGrawHillCompanies,Inc.
5-40
Y = $3,400 + $8.00X
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-41
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are
are $10,000
$10,000 when
when
80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when 120,000
120,000
units
units are
are sold.
sold. Using
Using the
the high-low
high-low method,
method, what
what is
is
the
the variable
variable portion
portion of
of sales
sales salaries
salaries and
and
commission?
commission?
a.
a. $0.08
$0.08 per
per unit
unit
b.
b. $0.10
$0.10 per
per unit
unit
c.
c. $0.12
$0.12 per
per unit
unit
d.
d. $0.125
$0.125 per
per unit
unit
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-42
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are
are $10,000
$10,000 when
when
80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when 120,000
120,000
units
units are
are sold.
sold. Using
Using the
the high-low
high-low method,
method, what
what is
is
the
the variable
variable portion
portion of
of sales
sales salaries
salaries and
and
commission?
commission?
Units
Cost
a.
a. $0.08
$0.08 per
per unit
unit High level
120,000
$ 14,000
b.
80,000
10,000
b. $0.10
$0.10 per
per unit
unit Low level
40,000
$ 4,000
c.
c. $0.12
$0.12 per
per unit
unit Change
d.
d. $0.125
$0.125 per
per unit
unit
$4,000 40,000 units
= $0.10 per unit
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-43
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are
are $10,000
$10,000 when
when
80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when 120,000
120,000
units
units are
are sold.
sold. Using
Using the
the high-low
high-low method,
method, what
what is
is
the
the fixed
fixed portion
portion of
of sales
sales salaries
salaries and
and commissions?
commissions?
a.
a. $$ 2,000
2,000
b.
b. $$ 4,000
4,000
c.
c. $10,000
$10,000
d.
d. $12,000
$12,000
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-44
Quick Check
Sales
Sales salaries
salaries and
and commissions
commissions are
are $10,000
$10,000 when
when
80,000
80,000 units
units are
are sold,
sold, and
and $14,000
$14,000 when
when 120,000
120,000
units
units are
are sold.
sold. Using
Using the
the high-low
high-low method,
method, what
what is
is
the
the fixed
fixed portion
portion of
of sales
sales salaries
salaries and
and commissions?
commissions?
a.
a. $$ 2,000
2,000
b.
b. $$ 4,000
4,000
c.
c. $10,000
$10,000
d.
d. $12,000
$12,000
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-45
McGrawHill/Irwin
5-46
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-47
Y
Total Cost
20
10
0
McGrawHill/Irwin
* *
* *
* ** *
**
2
3
Activity
Copyright2008,TheMcGrawHillCompanies,Inc.
5-48
Copyright2008,TheMcGrawHillCompanies,Inc.
5-49
Learning Objective 4
Prepare an income
statement using the
contribution format.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-50
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-51
The
The contribution
contribution margin
margin format
format emphasizes
emphasizes
cost
cost behavior.
behavior. Contribution
Contribution margin
margin covers
covers fixed
fixed
costs
costs and
and provides
provides for
for income.
income.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-52
1.
1. Cost-volume-profit
Cost-volume-profit analysis
analysis (Chapter
(Chapter 6).
6).
2.
2. Budgeting
Budgeting (Chapter
(Chapter 9).
9).
3.
3. Segmented
Segmented reporting
reporting of
of profit
profit data
data (Chapter
(Chapter 12).
12).
4.
4. Special
Special decisions
decisions such
such as
as pricing
pricing and
and make-ormake-orbuy
buy analysis
analysis (Chapter
(Chapter 13).
13).
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-53
Used primarily by
management.
Copyright2008,TheMcGrawHillCompanies,Inc.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-55
Learning Objective 5
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-56
Matrix,
Matrix, Inc.
Inc. wants
wants to
to
know
know its
its average
average
fixed
fixed cost
cost and
and
variable
variable cost
cost per
per unit.
unit.
Using
Using the
the data
data to
to the
the
right,
right, lets
lets see
see how
how to
to
do
do aa regression
regression using
using
Microsoft
Microsoft Excel.
Excel.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-57
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-58
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-59
Scroll
Scroll down
down to
to the
the
Statistical
Statistical,,
functions.
functions. Now
Now
scroll
scroll down
down the
the
statistical
statistical
functions
functions until
until you
you
highlight
highlight
SLOPE
SLOPE
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-60
1.
1. In
In the
the Known_ys
Known_ys box,
box, enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box,
box, enter
enter D4:D19
D4:D19 for
for the
the range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-61
Here is the
estimate of the
slope of the line.
1.
1. In
In the
the Known_ys
Known_ys box,
box, enter,
enter, C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box,
box, enter,
enter, D4:D19
D4:D19 for
for the
the range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-62
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-63
Here is the
estimate of the
fixed costs.
1.
1. In
In the
the Known_ys
Known_ys box,
box, enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box,
box, enter
enter D4:D19
D4:D19 for
for the
the range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-64
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-65
Here is the
estimate of R2.
1.
1. In
In the
the Known_ys
Known_ys box,
box, enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box,
box, enter
enter D4:D19
D4:D19 for
for the
the range.
range.
McGrawHill/Irwin
Copyright2008,TheMcGrawHillCompanies,Inc.
5-66
McGrawHill/Irwin
End of Chapter 5
Copyright2008,TheMcGrawHillCompanies,Inc.