2-1 Activity Cost Analysis and Planning C hapter 2 Prepared by Douglas Cloud Pepperdine University

2-2 Basic Cost Behavior Patterns Total variable costs increase in proportion to increases in unit level cost drivers. Total variable costs (Y) Total activity (X) 0 0

2-3 Total fixed costs increase in proportion to increases in unit level cost drivers. Total fixed costs (Y) Total activity (X) 0 0 Basic Cost Behavior Patterns

2-4 Total mixed costs contain fixed and variable cost elements. They increase, but not in direct proportion to increases in unit level cost drivers. Total mixed costs (Y) Total activity (X) 0 0 Sometimes called semi- variable costs Basic Cost Behavior Patterns

2-5 Total step costs are constant over a range of activity for a unit-level cost driver but move to a different amount at different ranges. Total step costs (Y) Total activity (X) 0 0 Basic Cost Behavior Patterns

2-6 Economists’ Curvilinear Total Cost Pattern Total power costs Units produced 0 0 Normal activity range Relevant range for which linear patterns are valid

2-7 Fixed Costs Committed costs (Capacity costs) are required to maintain the current service or production capacity to fill previous legal commitments.

2-8 Fixed Costs Discretionary costs (Program costs) are set at a fixed amount each year at the discretion of management.

2-9 High-Low Cost Estimation High activity periodLow activity period Number of Packaging Shipments Costs January6,000$17,000 February9,00026,000 March12,00032,000 Aprill0,00020,000 Variable cost per unit (b) = Difference in total costs Difference in activity b = $32,000 - $17,000 ContinuedContinued 12, ,000

2-10 Variable cost per unit (b) = $2.50 January a = Total costs - Variable costs $17,000 = a + ($2.50 x 6,000 shipments) a = $2,000 March $32,000 = a + ($2.50 x 12,000 shipments) a = $2,000 Same answer! High-Low Cost Estimation

2-11 Y = $2,000 + $2.50 X Total packing department costs Number of shipments High-Low Cost Estimation

2-12 $40, $30, $20, $10, $0 0 5,000 10,000 15,000 Total Costs Number of Shipments | | | Difference in activity level Difference in total costs Variable costs per unit = Difference in total costs Difference in activity Fixed costs= Total costs at either the high or low costs activity level - Variable costs computed for that level High-Low Cost Estimation

2-13 Least Squares Regression Analysis Y( 成本 ) X( 數量 ) Y-Ybar X-Xbar (Y-Ybar)(X-Xbar) $17,000 6,000 -6,750 -3,250 21,937,500 26,000 9,000 2, ,500 32,000 12,000 8,250 2,750 22,687,500 20,000 10,000 -3, ,812,500 41,250,000 Y = a + bx a = ybar – b xbar b = Sigma(x-xbar)(y-ybar)/Sigma(x-xbar)**2 a=23,750 – 2.2*9,250 = $3,400 b = $2.2 Y = $3,400 + $2.2X

2-14 Changing Composition of Total Manufacturing Costs Percent of total manufacturing costs Year Direct materials has increased Direct labor has decreased Manufacturing overhead has increased

2-15 Direct materials, the cost of primary raw materials converted into finished goods. The word “direct” indicates costs that are easily or directly traced to a finished product or service. Direct labor, the wages earned by production employees for the time they spend converting raw materials into finished products. Manufacturing overhead includes all manufacturing costs other than direct materials and direct labor. Manufacturing Costs

2-16 Manufacturing Cost Hierarchy  Unit level activities  Batch level activities  Product level activities  Facility level activities  Unit level activities  Batch level activities  Product level activities  Facility level activities

2-17 Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost UnitPerformed for each levelunit product produced or sold Cost of raw materials Cost of inserting a component Utilities cost of operating equipment Some costs of packaging Sales commissions

2-18 Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost BatchPerformed for each levelbatch of product produced or sold Cost of processing a sales order Cost of issuing and tracking work order Cost of equipment setup Cost of moving batch between workstations Cost of inspection

2-19 Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost ProductPerformed to support leveleach different product that can be produced Cost of product development Cost of product marketing such as advertising Cost of specialized equipment Cost of maintaining specialized equipment

2-20 Manufacturing Cost Hierarchy Activity Level Reason for Activity Examples of Activity Cost FacilityPerformed to levelmaintain general manufacturing capabilities Cost of maintaining general facilities Cost of nonspecialized equipment Cost of real property taxes Cost of general advertising Cost of general administration