Cost Estimation Cost-Volume-Profit Analysis

1
Cost EstimationCost-Volume-Profit Analysis

• Chapters 6 and 7
• Learning Objectives
• Perform cost estimation methods (high-low and
  regression analysis)
• Understand and calculate break-even sales volume
  in total dollars and total units
• Understand contribution margin

2
Cost Estimation

• Cost estimation is the development of a
  well-defined _____________________________________
  ______ for the purpose of producing the cost
• It helps ________________ using previously
  identified activity-based, volume-based,
  structural, or executional cost drivers
• Cost estimation _________________________ for a
  cost object and which of these costs drivers are
  most useful in predicting cost

3
Six Steps of Cost Estimation

• Define the _________ for which the related costs
  are to be estimated
• Determine the ____________
• __________________________ on the cost object and
  the cost drivers
• Graph the data
• Select and employ an appropriate estimation
  method (__________ and __________________)
• Evaluate the accuracy of the cost estimate

4
High-Low Method

• The high-low method uses two points to estimate
  the general cost equation
• Y F ? VX

Y Total cost F Fixed cost V Variable cost
per unit X Cost driver activity in number of
units

• Basic Steps
• Select the highest and the lowest of activity
  level (X)
• Calculate variable cost per unit based on two
  selected points
• Calculate fixed cost using Y F ? VX

5
Cost Estimation Example

• ABC company has its own photocopying department.
  ABCs photocopying costs include costs of copy
  machines, operators, paper, toner, utilities, and
  so on. We have the following cost and activity
  data

Month Number of copies Total Photocopying Cost (baht) Month Number of copies Total Photocopying Cost (baht)
1 16000 2500 7 14500 2360
2 19500 2900 8 21000 2800
3 15000 2400 9 19250 2750
4 15500 2300 10 14000 2350
5 20000 2800 11 17500 2600
6 14250 2350 12 20000 2750
Use the high-low method and regression method to
measure cost behavior of the photocopy department
6
Cost Estimation Example
7
Regression Analysis

• Regression analysis is a statistical method for
  obtaining the unique cost estimating equation
  that best fits a set of data points
• The objective of the regression method is still a
  linear equation to estimate costs
• Y a bX e

8
Regression Analysis
400 350 300 250 200
Supplies Expense
Outliers may be discarded toobtain a regression
that is morerepresentative of the data.
50 100
150 200
Units
9
Evaluating Regression Analysis
Evaluating a Regression Analysis
R2, the coefficient of determination, is a
measure of the explanatory powerof the
regression, the degree thatchanges in the
dependentvariable can be predicted by changesin
the independent variable.
The standard error of the estimate (SE) is a
measureof the accuracy of the regressions
estimates.
10
Cost-Volume-Profit for Breakeven Planning

• Effects of output volume on
• Revenue (sales)
• Expenses (costs)
• Net income (net profit)
• Simplifying assumption classify costs as either
  variable or fixed costs w.r.t. a single measure
  of output volume

11
Break-Even Point

• Level of sales at which
• Revenue Expenses, and
• Net Income 0
• To asses possible risks How far sales can fall
  below the planed level before losses occur,
  Margin of Safety
• Margin of Safety Planned Unit Sales Break
  Even Unit Sales
• Contribution Margin Technique
• Contribution margin (unit sales price)
  (unit variable cost)
• At BEP, (Total Contribution Margin) (Total
  Fixed Cost)
• Equation Technique
• At BEP, Net income 0.
• (Sales) (Variable Costs) (Fixed Costs) Net
  Income 0

12
BEP Example
Per Unit
Selling Price Variable cost per unit Selling Price less variable cost Monthly fixed expenses Rent Wages Other fixed expenses Total fixed expenses per month 0.50 0.40 0.10 1000 4,500 500 6000