Cost Behavior Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives 1.Explain the meaning of cost behavior and define and describe fixed and variable costs. 2.Define and describe mixed and step costs. 3.Separate mixed costs into their fixed and variable components using the high-low method, the scattergraph method, and the least squares method.

Learning Objectives 4.(Appendix) Use a personal computer spreadsheet program to perform the method of least squares.

Match Definitions Relevant Range Driver Cost Behavior A cost that does not change as output changes A cost that changes in the same direction as changes in output The range of output over which the assumed cost relationships are valid for normal operations Variable Cost Fixed Cost A factor that changes or leads to a change in a cost or activity Whether a cost changes when the level of output changes

Illustrate Relevant Range

Define Mixed and Step Costs ◙ Mixed Cost ◙ Step Cost

What is the cost formula?

How to create and use a cost formula. The Accounting Department of State College decided to attend the State Business Leaders of Tomorrow Conference (SBLTC) to recruit new students. They must rent a display table space and have chosen to advertise in the program for a total cost of $500. In addition every student who enters the raffle receives a free calculator that costs $0.50. REQUIRED: 1. Create a cost formula for recruiting accounting majors at SBLTC. 3-1

Calculation: How to create and use a cost formula. 3-1

REQUIRED: 2. If the Accounting Department expects to have 1,500 students enter the raffle at the SBLTC, what is the expected fixed cost? Total variable cost? Total conference cost? Calculation: How to create and use a cost formula. 3-1

What are the 4 steps of the High-Low Method?

How to use the high-low method. BlueDenim makes jeans. The controller has assigned you to calculate fixed costs, variable rate and the cost formula associated with the electricity rate with the data collected in the last year. REQUIRED: Using the high-low method calculate the fixed cost of electricity, calculate the variable rate of electricity per machine hour, and construct the cost formula for total electricity cost. 3-2

How to use the high-low method. 3-2 MonthElectricity CostMachine Hours January $ 3, February 3, March 4, April 3, May 3, June 2, July 3, August 4, September 2, October 3,

Calculation: How to use the high-low method. 3-2

Using the high-low method to predict total variable and total cost for budgeted output. BlueDenim constructed the following cost formula for electricity cost in Cornerstone 3-2 Total electricity cost = $440 + ($6.10 x machine hours) Assume that 620 hours are budgeted for the month of October. Use the above cost formula for the following calculations: 1.Calculate the total variable electricity cost for October. 2.Calculate the total electricity cost for October. 3-3

Calculation: The high-low method of predicting total variable and total cost for budgeted output. 3-3

Using the high-low method to predict costs when the time period differs from that of the data. BlueDenim constructed the following: Total electricity cost = $440 + ($6.10 x machine hours) Required: Assume that 7,200 machine hours are budgeted for the next year. Use the above cost formula to make the following calculations: 1.Calculate total variable electricity cost for the year. 2.Calculate total fixed electricity cost for the year. 3.Calculate total electricity cost for the next year. 3-4

Calculation: Using the high-low method to predict costs when the time period differs from that of the data 3-4

Discuss the Scattergraph Method

Scattergraph Method

Using regression to calculate fixed cost, variable rate, construct a cost formula & budgeted cost. The controller assigned you to calculate fixed and variable costs associated with electricity used in the factory. Data for the last nine months was collected and is presented on the following slide. REQUIRED: Using the results of the regression, calculate the fixed cost of electricity and the variable rate per machine hour. Construct the cost formula for total electricity cost. Calculate the budgeted cost for next month assuming that 550 machine hours are budgeted. 3-5

Using regression to calculate fixed cost, variable rate, construct a cost formula & budgeted cost. 3-5 MonthElectricity CostMachine Hours January $ 3, February 3, March 4, April 3, May 3, June 2, July 3, August 4,

Using regression to calculate fixed cost, variable rate, construct a cost formula & budgeted cost. 3-5

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