Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Behavior of Costs © The McGraw-Hill Companies, Inc., Part Two: Management Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Types of Cost Behavior Slide 16-1 Total Cost Volume $1, | | | | | Variable

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 | | | | | Types of Cost Behavior Slide 16-2 Total Cost Volume $1, Fixed

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 | | | | | Types of Cost Behavior Slide 16-3 Total Cost Volume $1, Semivariable

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 $2, , , , , , Relation of Total Costs to Volume Slide 16-4 | | | | | Total Cost Volume Fixed Variable Semivariable Total Cost Line

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Relation of Unit Costs to Volume Slide 16-5 | | | | | Cost Volume (units) $ ,000 2,000 Unit Cost = Total Cost/Volume $10.00=$1,000/100 $8.00=$1,600/200 $7.00=$2,800/400 $6.40=$6,400/1,000 $6.20=$12,400/2,000 Unit Cost = Total Cost/Volume $10.00=$1,000/100 $8.00=$1,600/200 $7.00=$2,800/400 $6.40=$6,400/1,000 $6.20=$12,400/2,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Relevant range $2, , , Relevant Range Slide 16-6 Cost Volume (X) TFC UVC Total cost: TFC + (UVC*X) Variable portion: (UVC*X) Fixed portion: TFC

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Step-Function Cost Slide 16-7 Cost Volume

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Judgment High-low method Scatter diagram Linear regression Judgment High-low method Scatter diagram Linear regression Estimating the Cost-Volume Relationship Slide 16-8 Four methods for estimating total fixed cost and unit variable cost How do I estimate fixed and variable cost?

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-9 Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, High Cost-Low Cost High Volume-Volume Cost High month

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, $1,700-Low Cost 1,100-Volume Cost High month

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, $1,700-Low Cost 1,100-Volume Cost Low month

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, Month Costs Volume July$1,4001,000 August1,7001,100 September1, October1, November1,5001,200 December1, $1,700-$1,300 1, Low month Variable cost is $1 per unit

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide Fixed Cost Total Cost = Total Fixed Cost + Unit Variable Cost (X) $1,700 = Total Fixed Cost + $1 (1,100) Total cost in the highest month Number of units at highest month $600 = Total Fixed Cost

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., ,000 1,200 1,400 $2, , , Cost Volume Scatter Diagram Slide Just a guess. Month Costs Volume July$1,4001,000 August1,7001,100 Sept.1, Oct.1, Nov.1,5001,200 Dec.1, The vertical intercept provides the estimated fixed cost. The vertical intercept provides the estimated fixed cost.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Profitgraphs Slide Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$ $2, , , Total Cost or Revenue Volume Revenue 160 = breakeven Cost Loss Zone Loss Profit Zone Profit

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Break-Even Analysis Slide UP * X = TFC + (UVC * X) Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$8.50 $8.50 * X = $400 + ($6 * X) ß X = $160 units ß

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Target Profit Slide Target fixed costs + Target profit Unit contribution margin T X = $400 + $17,600 $ $6.00 T X = Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$ Variable costs (UVC)$6.00 Selling price (UP)$8.50 T X =7,200 units How many units do I have to sell to make a $17,600 profit? How many units do I have to sell to make a $17,600 profit?

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Schematic of Contribution Slide Revenues UR Fixed Costs Profits UVC Variable Costs Contribution C C

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999  Increase selling price per unit (UR)  Decrease variable cost per unit (UVC)  Decrease fixed costs (TFC)  Increase volume (X) Improving Profit Performance Slide 16-19

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Changes in input prices The rate at which volume changes The direction of change in volume The duration of change in volume Prior knowledge of the change Productivity Management discretion Other Influences on Costs Slide 16-20

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Chapter 16 The End