ALSARHANI YAHYA 1 Cost Behavior CH 3

ALSARHANI YAHYA 2  The cost behavior meaning : what is the way for changing the cost element. When the level of product change the other cost elements still fixed, however the other elements change as whole or parts.  The study for cost behavior important when the company prepare the cost data for determine the cost of the product or to prepare the different reports to the managers for decision making.

ALSARHANI YAHYA 3  Cost elements organized in relation to the change in the volume of production to: 1. Fixed cost. 2. Variable cost. 3. Mixed cost.  Fixed cost: it is that all cost are fixed and those costs remain fixed regardless of the change in the volume of production. such as ( rents the depreciation for machines and equipment…)

ALSARHANI YAHYA 4  Seen from the graph that fixed costs are fixed line with lowering the sight about the change of the level of activity.  We assume that the company product 20 unit so the cost for unit =5000/20 =250 R.O /UNIT =250 R.O /UNIT  Assume the company will product 50 unit so what is the cost?

ALSARHANI YAHYA 5  Variable Cost: The costs which changing usually with the change of unit product and these like :the cost of direct materials or direct salaries.  When the cost of unit 100 R.O from the raw materials so any increase in the product will increase the cost.  The total of variable cost =number of units x the cost of unit

ALSARHANI YAHYA 6  Seen from the graph the relationship between the variable cost and the level of activity a direct relation.  The Variable cost it’s the product costs so it founded when the product was and disappear when the product disappear.

ALSARHANI YAHYA 7  Mixed cost: The costs which have both variable and fixed costs like electric costs,indirect labor, Maintenance …  This cost called the semi - variable costs or semi-fixed costs.  Example: If the variable cost=100 R.O per unit. The fixed cost =5000 R.O and the total for all unit product 20 units. So what is the total of cost? And what is the fixed cost for one unit?  If the company product 50 unit so what is the total of cost and what is the fixed cost for one unit?  If the company product 10 unit so what is the total of cost and what is the fixed cost for one unit?  Give your notes?

Highest and Lowest level  There are many methods used to analyze these costs and distributed to variable and fixed costs the highest and lowest level.  This method relies on the tendency calculated based on the highest and lowest values of the costs to be uploaded ALSARHANI YAHYA 8

Highest and Lowest level  This method is calculation tendency rate on the basis of the highest level of production and the lowest level for this production and the corresponding costs for each of them and then give the difference between the cost of the highest level and low to the difference between the highest and lowest level of activity ALSARHANI YAHYA 9

Factory maintenance costsHours of operation ALSARHANI YAHYA 10 For example : If company showing this table about the cost for maintenance and the hours of operation How you can get the fixed cost?

ALSARHANI YAHYA 11 Cost Behavior Analysis  The formula of costs: T=F+VS T=the total of cost. F=Fixed cost. V=variable cost for unit S=the size of product.  Example : When the company product (S) unit with variable cost for unit=100 R.O for one unit, and the total of fixed cost=5000 R.O so what is the formula of costs? If the company decide to product 60 unit so what is the total of cost?

ALSARHANI YAHYA 12 The Methods of measuring cost 1. The overall method. 2. The variable method. 3. The untapped method. 4. The direct method.  Overall method :This method is based on the assumption that all elements of the costs are due to production, so the all cost element will appear in the cost product statement like that: Direct material xxx Direct labor xxx Manufacturing cost indirect (F&V) xxx Product costs ____ xxx

ALSARHANI YAHYA 13  The variable method: This method is based on the product costs are all the variable costs elements. On the other hand, the fixed costs are the time costs element such as rents or the depreciation.  The company will established bears remain fixed cost but the variable cost will stopped when the product stop,  The cost product statement will be like that: Direct material xxx Direct labor xxx Manufacturing cost indirect (V) xxx Product costs ____ xxx

ALSARHANI YAHYA 14  The untapped method: This method is based on untapped any cost to have a product.  To calculated the untapped method it should add only all the untapped costs in the cost statement. However, the non –untapped costs appear in the profit and loss statement, so the untapped costs =variable costs and percent from untapped fixed cost.  The cost product statement will be like that: Direct material xxx Direct labor xxx Manufacturing cost indirect (V) xxx Manufacturing cost indirect (F) xxx Product costs ____ xxx

ALSARHANI YAHYA 15  The cost of indirectly manufacturing fixed cost identified as follows: The percent untapped=the Actual energy/available energy.  Actual energy: it Maximum capacity can be done with not include any faults arising from the revenues generated or not revenues.  Available energy: it Maximum capacity can be done with not include any faults arising from the revenues generated.  The untapped fixed cost =percent untapped fixed cost x fixed costs.  Example: The A company was product unit and the available energy unit and the total of fixed cost=9000 R.O so what is the untapped fixed cost?

ALSARHANI YAHYA 16  The direct method: in this method to calculate the product cost by insert all the direct cost only and the other cost (indirect cost) post to profit & loss statement.  The statement of product cost will be like this: Material direct xxx Labor direct xxx Manufacturing variable direct cost xxx Manufacturing fixed direct cost xxx Product cost ____ xxx

ALSARHANI YAHYA 17 Example  This data from one of company:  Available power  The number of product unit  The price for one unit 18 R/unit  The material direct cost 4.5 R/unit  The labor direct cost 2.5 R/unit  Manufacturing variable indirect cost 2.5 R/unit.  Manufacturing fixed indirect cost 30,000 R  Sales variable expenses 1.5 R/unit  Sales and administration expenses 20,000 R/unit  Required : The product cost by 4 methods?

ALSARHANI YAHYA 18 Example  This data from one of company:  Available power  The number of product unit  The material direct cost 6.5 R/unit  The labor direct cost 4.5 R/unit  Manufacturing variable indirect cost 2.5 R/unit.  Manufacturing fixed indirect cost 40,000 R  Manufacturing variable direct cost 3.5 R/unit  Manufacturing fixed direct cost 20,000 R  Sales 20 R/unit  Sales and administration expenses 18,000 R/unit  Required : The product cost by 4 methods?