Module 14 Cost Behavior, Activity Analysis, and Cost Estimation.

Slides:



Advertisements
Similar presentations
© 2010 The McGraw-Hill Companies, Inc. Cost Behavior: Analysis and Use Chapter 5.
Advertisements

PERILAKU BIAYA : Analisis dan Penggunaan
Cost Behavior: Analysis and Use
Cost Behavior: Analysis and Use Mar 3, 2004 Chapter 5.
© 2008 McGraw-Hill Ryerson Limited. Cost Behaviour Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labour, and Variable Manufacturing.
Chapter 5. Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers.
Module 14 Cost Behavior and Cost Estimation
Cost Behavior, Activity Analysis, and Cost Estimation
Cost Behavior: Analysis and Use Chapter 5 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Cost Behavior Merchandisers Cost of Goods Sold Manufacturers.
Chapter 4 Cost-Volume-Profit Analysis Revenues Costs.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Copyright © 2014 Pearson Education,
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6 Activity Analysis, Cost Behavior, and Cost Estimation.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton ©2008 Prentice Hall Business Publishing,
Cost Behavior: Analysis and Use
Activity Analysis, Cost Behavior and Cost Estimation
Cost Behavior: Analysis and Use Chapter 5. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Types of Cost Behavior Patterns Recall the summary.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 11 th Edition Chapter 5.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Determining How Costs Behave Chapter 10 2/07/05.
Measurement of Cost Behaviour
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin.
Managerial Accounting and Cost Concepts
Managerial Accounting and Cost Concepts Chapter Two.
1 Cornerstones of Managerial Accounting, 2e Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western.
Cost Behavior Analysis Chapter 3. I Made R. Natawidnyana, Ak., CPMA Cost Accounting – Third Sesion Recall the summary of our cost behavior discussion.
Cost Behavior: Analysis and Use. Learning Objective 1 Understand how fixed and variable costs behave and how to use them to predict costs.
Cost Concepts - 1 COST CONCEPTS AND CLASSIFICATIONS Fixed vs Direct vs Variable Indirect Functional vs Behavioral.
1 CHAPTER M4 Cost Behavior © 2007 Pearson Custom Publishing.
Copyright © 2008 Prentice Hall All rights reserved 6-1 Cost Behavior Chapter 6.
Cost concepts, Cost Classification and Estimation
Cost Terms, Concepts, and Classifications
MANUFACTURING COMPANY: COST-VOLUME-PROFIT PLANNING AND ANALYSIS
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use.
Activity Cost Behavior
Chapter 5 Cost Behavior: Analysis and Use. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Types of Cost Behavior Patterns Recall the summary.
CHAPTER 5 COST – VOLUME - PROFIT Study Objectives
Cost Behavior: Analysis and Use Chapter 5 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
© 2006 McGraw-Hill Ryerson Ltd.. Chapter Five Cost Behaviour: Analysis and Use.
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6 Activity Analysis, Cost Behavior, and Cost Estimation.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use.
The Activity Base A measure of what causes the incurrence of a variable cost. Units produced Miles driven Machine hours Labor hours 5-1.
ABC - 1 Activity- Based Costing Systems. ABC - 2 Activity-Based Costing Activity-based costing (ABC) involves determining the cost of activities and tracing.
2-1 Activity Cost Analysis and Planning C hapter 2 Prepared by Douglas Cloud Pepperdine University.
Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use.
The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin CHAPTER 2 Cost Behavior, Operating Leverage, and Profitability Analysis.
0 CHAPTER 4 Cost Behavior and Relevant Costs © 2009 Cengage Learning.
Chapter 5 © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill /Irwin Cost Behavior: Analysis and Use.
Cost Behavior: Analysis and Use Chapter 5. 2 A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity.
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Measurement of Cost Behavior Chapter.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1.
Chapter 10: Determining How Costs Behave 1 Horngren 13e.
Chapter 4 Cost Terminology and Cost Flows. 1.What is the relationship between cost objects and direct costs? 2. How do you classify product costs into.
Cost Behaviors Management Accounting. Cost Classifications Association with cost object Cost object is anything for which management wants to collect.
Introduction to Management Accounting Chapter 3 Introduction to Management Accounting Measurement of Cost Behavior.
Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 11 th Edition Chapter 5.
Activity Analysis, Cost Behavior, and Cost Estimation Chapter 6 McGraw-Hill/Irwin Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction.
Analyzing Mixed Costs Appendix 5A.
Mixed Costs Chapter 2: Managerial Accounting and Cost Concepts. In this chapter we explain how managers need to rely on different cost classifications.
Analyzing Mixed Costs Appendix 5A.
Cost Behavior: Analysis and Use
Managerial Accounting and Cost Concepts
Cost Behavior: Analysis and Use
Managerial Accounting and Cost Concepts
Cost Behavior Chapter 6.
Dr.S.S.Jadhav Head, Dept of Commerce mrs.k.s.k. college beed
Activity Analysis, Cost Behavior, and Cost Estimation
Cost Behavior: Analysis and Use
Example Exercise 1 Cost Behavior Variable Costs
Cost Behavior, Activity Analysis, and Cost Estimation
Presentation transcript:

Module 14 Cost Behavior, Activity Analysis, and Cost Estimation

Variable Costs Increases as activity increases Increases as activity increases Equals zero dollars when activity is zero Equals zero dollars when activity is zero Example: Materials Example: Materials b = Variable cost per unit Total variable costs (Y) Total activity (X) 0 Variable cost: Y = bX Higher variable costs per unit create a steeper line slope.

Fixed Costs No change as activity increases or decreases No change as activity increases or decreases Example: Depreciation Example: Depreciation a = Total fixed costs Total fixed costs (Y) Total activity (X) 0 Fixed cost: Y = a Slope is zero, represented by a flat line.

Mixed Costs Increase in a linear fashion when activity increases Increase in a linear fashion when activity increases Positive in amount when activity is zero Positive in amount when activity is zero Example: Maintenance Example: Maintenance b = Variable cost per unit Mixed cost: Y = a + bX Total mixed costs (Y) Total activity (X) 0 Contains both fixed and variable cost elements. Fixed portion Variable portion

Step Costs Increase in a step like fashion as activity increases Increase in a step like fashion as activity increases Example: Supervisors Example: Supervisors Step cost: Y = a i Total step costs (Y) Total activity (X) 0

Total Cost Behavior Total Cost Equation = Total Fixed Costs + (Variable Costs per Unit × Number of Units)

Relevant Range A portion of a range of activity associated with the fixed cost of the current or expected capacity A portion of a range of activity associated with the fixed cost of the current or expected capacity A normal range of activity in which a company expects to operate, where the fixed costs remain linear, i.e., total cost remains the same A normal range of activity in which a company expects to operate, where the fixed costs remain linear, i.e., total cost remains the same Example: During normal operations, factory space is adequate for Mattel. However, during the three months preceding the holiday season, Mattel’s operations are out of the relevant range and storage trailers must be rented for the additional merchandise.

Unit Variable Costs Unit variable costs stay the same at all activity levels. Costs per Unit $ - Activity

Average Unit Costs | | | | | Number of customers served Average costs $35 -- $30 -- $25 -- $20 -- $15 -- $10 -- $5 -- $ Number of Average Cost Customers Per customer 100 $ $ $11.00 Number of Average Cost Customers Per customer 100 $ $ $11.00 Average cost graph is useful if a manager wants to know the cost of serving a customer

Classifying Fixed Costs Classification depends on the immediate impact if the company attempts to change the fixed costs. Committed fixed costs, known also as capacity costs, are required to maintain the current service or production capacity or to fill previous legal commitments. Discretionary fixed costs, known also as managed fixed costs, are set at a fixed amount each period by management. Depreciation Real-estate taxes Training Advertising

Cost Estimation What is it? What is it? The determination of the relationship between activity and cost The determination of the relationship between activity and cost An important part of cost management An important part of cost management Identifying variable or fixed costs Identifying variable or fixed costs Analyzing available accounting records Analyzing available accounting records Interviews Interviews Purpose of cost estimation Purpose of cost estimation Cost prediction Cost prediction i.e., forecasting future costs i.e., forecasting future costs

Estimating Mixed Cost Components High-low method High-low method Scatter diagrams Scatter diagrams Least-squares regression analysis Least-squares regression analysis Methods of estimating fixed and variable cost components cost components Mixed Costs Variable Costs Fixed Costs

High-Low Cost Estimation Utilizes data from two time periods Utilizes data from two time periods A high activity period, and a low activity period A high activity period, and a low activity period Select a representative high point and a representative low activity point. Determine variable costs per unit: Subtract total variable costs from total fixed costs using either the high or low point: Total costs – [Variable cost per unit × number of units] Difference in total costs Difference in activity Variable Costs Per Unit =

High-Low Example: Variable Costs Low activity period Number of Packaging Shipments Costs January8,600$25,000 February9,80026,000 March11,60031,600 April11,20033,000 High activity period Variable cost per unit (b) = $31,600 – $25,000 11,600 – 8,600 = $2.20 The variable cost of each unit produced is $2.20.

High Low Example Fixed Costs Variable cost per unit (b) = $2.20 per unit January a = Total costs – Variable costs $25,000 = a + ($2.20 × 8,600 units) a = $6,080 March $31,600 = a + ($2.20 × 11,600 units) a = $6,080 The same total fixed costs result using either the high or low activity point. Calculate fixed costs:

High-Low Cost Estimation Total costs – [Variable cost per unit × number of units] Y = $2.20X + 6, ,600 $30,000 $25,000 $10,000 0 Variable Costs per Unit Total Fixed Costs = Total Cost Equation:

Scatter Diagrams A graph of past activity and cost data, with individual observations represented by dots When used alone to estimate costs, professional judgment is required.

Least-Squares Regression Also known as simple regression (one variable) Also known as simple regression (one variable) A mathematical technique to fit a cost- estimating equation to observed data A mathematical technique to fit a cost- estimating equation to observed data Minimizes the vertical squared difference between the estimated and actual costs at each data point Minimizes the vertical squared difference between the estimated and actual costs at each data point Accomplished using Accomplished using Microsoft Excel ® Microsoft Excel ® Statistical software Statistical software Some calculators Some calculators Time consuming math calculations Time consuming math calculations

Least-Squares Criterion The least-squares method minimizes the sum of all squared vertical deviations between individual observations and the cost-estimating line.

Cautions in Developing Cost Estimate Equations Managers are responsible for making decisions Managers are responsible for making decisions  Mathematical models do not make decisions; they are tools to aid decision making Not all data are based on normal operating conditions Not all data are based on normal operating conditions Nonlinear relationships may exist Nonlinear relationships may exist Results should make sense Results should make sense

Production Costs Direct Materials Cost of primary raw materials converted into finished goods Direct Materials Cost of primary raw materials converted into finished goods “Direct” costs = easily or directly traceable to a finished product/service Direct Labor Wages earned by production employees for the time they spend converting raw materials into finished products Direct Labor Wages earned by production employees for the time they spend converting raw materials into finished products Production Overhead All manufacturing costs other than direct materials and direct labor Production Overhead All manufacturing costs other than direct materials and direct labor

Changing Composition of Total Manufacturing Costs

Changing Composition of Total Production Costs The problem The problem Past tendency was to ignore overhead and focus on direct materials, direct labor, and units produced Past tendency was to ignore overhead and focus on direct materials, direct labor, and units produced Units produced is no longer adequate in explaining costs Units produced is no longer adequate in explaining costs Must deal with overhead causing activities Must deal with overhead causing activities Including: Including: Batches, products, facilities, customers, markets Batches, products, facilities, customers, markets

Manufacturing Cost Hierarchy Unit level activities Batch level activities Product level activities Facility level activities A separate cost driver is selected for each level of cost.

Unit Level Activity Cost of raw materials Cost of raw materials Cost of cutting a component Cost of cutting a component Cost of a box to package cereal Cost of a box to package cereal Sales commission Sales commission Cost of paint brushes used to paint an office building Cost of paint brushes used to paint an office building Examples: This activity is performed for each unit of product produced or sold.

Batch Level Activity Cost of processing sales orders Cost of processing sales orders Cost of tracking work orders Cost of tracking work orders Cost of equipment setup Cost of equipment setup Cost of moving a batch between work stations Cost of moving a batch between work stations Cost of inspecting batches Cost of inspecting batches Examples: This activity is performed for each batch of product produced or sold.

Product Level Activity Cost of product development Cost of product development Cost of product marketing such as product-related advertising Cost of product marketing such as product-related advertising Cost of specialized equipment Cost of specialized equipment Cost of maintaining specialized equipment Cost of maintaining specialized equipment Examples: This activity is performed to support the production of each different type of product.

Facility Level Activity Cost of maintaining factory building and grounds Cost of maintaining factory building and grounds Cost of real property taxes Cost of real property taxes Cost of non-specialized equipment Cost of non-specialized equipment Cost of general advertising Cost of general advertising Cost of factory supervisor Cost of factory supervisor Examples: This activity is performed to maintain general capabilities.