Identifying Cost Behavior Chapter 4 Managerial Accounting Identifying Cost Behavior Prepared by Diane Tanner University of North Florida Copyright ©2015. University of North Florida. All rights reserved.
To predict cost behavior, we must assume Assumptions 2 To predict cost behavior, we must assume Production equals sales (in units) I.e., no change in beginning and ending inventories Cost behavior is linear Activity level occurs within a defined activity range Called relevant range
3 Relevant Range A range of activity within which cost behavior holds true I. e., Normal range of operations that can be expected for a particular product or company Activity outside of this range, forecasts of cost behavior may not be accurate Cost Relevant range Units
Variable Cost Behavior 4 Total Variable Cost Unit Variable Cost Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 10 20 30 Units Produced (000) Cost per Unit $20 $15 $10 $5 10 20 30 Units Produced (000) Total Variable Costs Change as volume or activity level changes Unit Variable Costs Same cost per unit at any activity level
Fixed Cost Behavior Total Fixed Cost Unit Fixed Cost Total Fixed Costs 5 Total Fixed Cost Unit Fixed Cost Total Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 10 20 30 Units Produced (000) $20 $15 $10 $5 Cost per Unit 10 20 30 Units Produced (000) Total Fixed Costs Same cost at any activity level Unit Fixed Costs Change per unit as volume or activity levels change
Discretionary vs. Committed Fixed Costs 6 Discretionary vs. Committed Fixed Costs Describes behavior of fixed costs in the short-run Discretionary Can easily change in the short run Examples: Advertising R&D Repair and maintenance Committed Not easily changed in the short run Rent Depreciation – buildings and equipment Insurance for buildings and equipment
7 Step Costs Costs that remain constant within a short relevant range of activity, then adjust to a new level Example: Cleaning services at UNF 0-40 classrooms 41-80 classrooms 1 Janitor 2 Janitors $22,000 $44,000 81-120 classrooms 3 Janitors $66,000 Volume Cost
1- Flat monthly charge plus added costs for excess data usage Mixed Costs 8 Consist of both a variable cost element and a fixed cost element Often referred to as semi-variable costs Characteristics Costs change in total but not proportionately with changes in the activity level Example: Cell phone 1- Flat monthly charge plus added costs for excess data usage Fixed cost portion Total cost Number of megabytes over Cost Variable cost portion
Determining Cost Behavior Two-step process Step 1 - Test to determine if the cost is fixed: Compare the total cost at all activity levels. A fixed cost is the same in total at all activity levels. If the fixed cost test fails, move to step 2. If the fixed cost test passes, the cost is fixed. Step 2 - Test to determine if the cost is variable: Compare the unit cost at all activity levels. A unit variable cost is the same at all activity levels. If the variable cost test fails, the cost is a mixed cost. If the variable cost test passes, the cost is variable.
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