1. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Behavior of Costs © The McGraw-Hill Companies, Inc., 1999 16 Part Two: Management Accounting

2. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Types of Cost Behavior Slide 16-1 Total Cost Volume $1,000 - 800 - 600 - 400 - 200 - 0 - 50 100 150 200 250 | | | | | Variable

3. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 | | | | | Types of Cost Behavior Slide 16-2 Total Cost Volume $1,000 - 800 - 600 - 400 - 200 - 0 - 50 100 150 200 250 Fixed

4. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 | | | | | Types of Cost Behavior Slide 16-3 Total Cost Volume $1,000 - 800 - 600 - 400 - 200 - 0 - 50 100 150 200 250 Semivariable

5. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 $2,000 - 1,800 - 1,600 - 1,400 - 1,200 - 1,000 - 800 - 600 - 400 - 200 - 0 - Relation of Total Costs to Volume Slide 16-4 | | | | | Total Cost Volume 50 100 150 200 250 Fixed Variable Semivariable Total Cost Line

6. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Relation of Unit Costs to Volume Slide 16-5 | | | | | Cost Volume (units) $12 - 11 - 10 - 9 - 8 - 7 - 6 - 1 - 0 - 100 200 400 1,000 2,000 Unit Cost = Total Cost/Volume $10.00=$1,000/100 $8.00=$1,600/200 $7.00=$2,800/400 $6.40=$6,400/1,000 $6.20=$12,400/2,000 Unit Cost = Total Cost/Volume $10.00=$1,000/100 $8.00=$1,600/200 $7.00=$2,800/400 $6.40=$6,400/1,000 $6.20=$12,400/2,000

7. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Relevant range 50 100 150 200 250 $2,000 - 1,600 - 1,200 - 800 - 400 - 0 - Relevant Range Slide 16-6 Cost Volume (X) TFC UVC Total cost: TFC + (UVC*X) Variable portion: (UVC*X) Fixed portion: TFC

8. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Step-Function Cost Slide 16-7 Cost Volume

9. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Judgment High-low method Scatter diagram Linear regression Judgment High-low method Scatter diagram Linear regression Estimating the Cost-Volume Relationship Slide 16-8 Four methods for estimating total fixed cost and unit variable cost How do I estimate fixed and variable cost?

10. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-9 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 High Cost-Low Cost High Volume-Volume Cost High month

11. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-10 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 $1,700-Low Cost 1,100-Volume Cost High month

12. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-11 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 $1,700-Low Cost 1,100-Volume Cost Low month

13. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-12 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 Month Costs Volume July$1,4001,000 August1,7001,100 September1,500900 October1,300800 November1,5001,200 December1,300700 $1,700-$1,300 1,100-700 Low month Variable cost is $1 per unit

14. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 High-Low Method Slide 16-13 Fixed Cost Total Cost = Total Fixed Cost + Unit Variable Cost (X) $1,700 = Total Fixed Cost + $1 (1,100) Total cost in the highest month Number of units at highest month $600 = Total Fixed Cost

15. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 200 400 600 800 1,000 1,200 1,400 $2,000 - 1,500 - 1,000 - 500 - 0 - Cost Volume Scatter Diagram Slide 16-14 Just a guess. Month Costs Volume July$1,4001,000 August1,7001,100 Sept.1,500900 Oct.1,300800 Nov.1,5001,200 Dec.1,300700 The vertical intercept provides the estimated fixed cost. The vertical intercept provides the estimated fixed cost.

16. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Profitgraphs Slide 16-15 Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 50 100 150 200 250 $2,000 - 1,600 - 1,200 - 800 - 400 - 0 - Total Cost or Revenue Volume Revenue 160 = breakeven Cost Loss Zone Loss Profit Zone Profit

17. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Break-Even Analysis Slide 16-16 UP * X = TFC + (UVC * X) Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 $8.50 * X = $400 + ($6 * X) ß X = $160 units ß

18. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Target Profit Slide 16-17 Target fixed costs + Target profit Unit contribution margin T X = $400 + $17,600 $8.50 - $6.00 T X = Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 Data Fixed costs (TFC)$400.00 Variable costs (UVC)$6.00 Selling price (UP)$8.50 T X =7,200 units How many units do I have to sell to make a $17,600 profit? How many units do I have to sell to make a $17,600 profit?

19. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Schematic of Contribution Slide 16-18 Revenues UR Fixed Costs Profits UVC Variable Costs Contribution C C

20. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999  Increase selling price per unit (UR)  Decrease variable cost per unit (UVC)  Decrease fixed costs (TFC)  Increase volume (X) Improving Profit Performance Slide 16-19

21. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Changes in input prices The rate at which volume changes The direction of change in volume The duration of change in volume Prior knowledge of the change Productivity Management discretion Other Influences on Costs Slide 16-20

22. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Chapter 16 The End