Title: Activity Analysis, Cost Behavior, and Cost Estimation
17
Chapter Seven
- Activity Analysis, Cost Behavior, and
CostEstimation
2Introduction
Costestimation
Process ofdeterminingcost behavior,often
focusingon historicaldata.
3Cost Behavior Patterns
Recall the summary of our cost behavior
discussion from Chapter 2.
4Total Variable Cost Example
- Your total long distance telephone bill is
based on how many minutes you talk.
Total Long DistanceTelephone Bill
Minutes Talked
5Variable Cost Per Unit Example
- The cost per long distance minute talked is
constant. For example, 5 cents per minute.
Per MinuteTelephone Charge
Minutes Talked
6Total Fixed Cost Example
- Your monthly basic telephone bill probably
does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls
7Fixed Cost Per Unit Example
- The average cost per local call decreases as more
local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
8Step-Variable Costs
Total cost remainsconstant within anarrow range
ofactivity.
Cost
Activity
9Step-Variable Costs
Total cost increases to a new higher cost for
the next higher range of activity.
Cost
Activity
10Step-Fixed Costs
- Example Office space is available at a
rental rate of 30,000 per year in increments of
1,000 square feet. As the business grows more
space is rented, increasing the total cost.
Continue
11Step-Fixed Costs
90
Total cost doesnt change for a wide range of
activity, and then jumps to a new higher cost for
the next higher range of activity.
60
Rent Cost in Thousands of Dollars
30
0
0 1,000 2,000
3,000 Rented Area (Square Feet)
12Step-Fixed Costs
How does this type of fixed cost differ from a
step-variable cost?
13Semivariable Cost
- A semivariable cost is partly fixed and partly
variable.
Consider thefollowing electric utility example.
14Semivariable Cost
Total semivariable cost
Variable Utility Charge
Total Utility Cost
Fixed MonthlyUtility Charge
Activity (Kilowatt Hours)
15Curvilinear Cost
CurvilinearCost Function
Activity
16Cost Estimation
Account-Classification Method
Visual-Fit Method
High-Low Method
Least-Squares Regression Method
Engineering Method of Cost Estimation
17Account Classification Method
Cost estimates are based on areview of each
account making up the total cost being analyzed.
18Account Classification MethodExample
19Visual-Fit Method
- A scatter diagram of past cost behavior
may be helpful in analyzing mixed costs.
20Visual-Fit Method
Plot the data points on a graph (total cost vs.
activity).
21Visual-Fit Method
Draw a line through the plotted data points so
that about equal numbers of points fall above and
below the line.
22Visual-Fit Method
23Visual-Fit Method
Total variable cost Total cost Total
fixed costTotal variable cost 16,000
10,000 6,000
24Visual-Fit Method
Total variable cost Total cost Total
fixed costTotal variable cost 16,000
10,000 6,000Unit variable cost 6,000
3,000 units 2
25The High-Low Method
- OwlCo recorded the following production activity
and maintenance costs for two months -
- Using these two levels of activity, compute
- the variable cost per unit.
- the total fixed cost.
26The High-Low Method
27The High-Low Method
??in cost??in units
28The High-Low Method
- Unit variable cost 3,600 4,000 units
0.90 per unit
29The High-Low Method
- Unit variable cost 3,600 4,000 units
0.90 per unit - Fixed cost Total cost Total variable cost
30The High-Low Method
- 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)
31The High-Low Method
- 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)
32The High-Low Method
- 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
33Least-Squares Regression Method
- Regression is a statistical procedure usedto
determine the relationship between variables such
as activity and cost.
The objective ofthe regressionmethod is
thegeneral cost equation Y a bX in cost
terms TC F VX
Total Cost
Activity
34Equation Form of Least-Squares Regression Line
TC F VX
35Least-Squares Regression Method
- Statistics courses and computer courses deal with
detailed regression computations using computer
spreadsheet software. - Accountants and managers must be able to
interpret and use regression estimates.
36Goodness of Fit
20
Total Cost
10
0
0 1 2 3 4
Activity
37Multiple Regression
- Multiple regression includes two or more
independent variables - Terms in the equation have the samemeaning as
in simple regression withonly one independent
variable.
TC FC V1X1 V2X2
38End of Chapter 7