1. Management Accounting4
Cost-Volume Relationship: Cost Behavior

2. Cost Analysis Cost-Volume-Profit Analysis

3. Cost Volume Relationship Cost Behavior Analysis
Cost Behavior Analysis is the study of how specific costs respond to changes in the level of business activity.
Some costs change; others remain the same.
Helps management plan operations and decide between alternative courses of action.
Applies to all types of businesses and entities.
Starting point is measuring key business activities.

4. Cost Volume Relationship Cost Behavior Analysis
«Level of activity» is an activity performed on each individual product or service. This activity is also called the event or working volume.

5. Cost Volume Relationship Cost Behavior Analysis
Activity levels may be expressed in terms of:
Total sales
sales volume,
production volume,
capacity usage rate,
the total transaction volume,
rooms occupied (in a hotel)
passenger
kilometers driven,
machine hours,
maintenance and repair hours

6. Cost Volume Relationship Cost Behavior Analysis
Changes in the level or volume of activity should be correlated with changes in costs.
Activity level selected is called activity or volume.
Activity
Identifies the activity that causes changes in the behavior of costs.
The activity can be any repetitive event that serves as a measure of output or usage

7. Cost Volume Relationship Cost Behavior-Variable Costs
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Cost Volume Relationship Cost Behavior-Variable Costs
Units produced
Km driven
Labor hours
Machine hours
Variable costs may be caused by a variety of different activity bases.
Gasoline consumption in your car is largely determined by the number of miles driven and the speed at which you travel.
A measure of what causes the incurrence of a variable cost

8. Cost Volume Relationship Cost Behavior-Variable Costs
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Cost Volume Relationship Cost Behavior-Variable Costs
Direct material is an example of a cost that behaves in a true variable pattern. Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity.
Cost
Volume

9. Cost Volume Relationship Cost Behavior-Variable Costs
Illustration: ABC Co. manufactures tablet computers that contain a 10 TL camera. The activity index is the number of tablets produced.
As ABC Co. manufactures each tablet, the total cost of the camera increases by 10 TL. As part (a) of illustration shows, total cost of the cameras will be 20,000 TL if ABC produces 2,000 tablets, and 100,000 TL when it produces 10,000 tablets.

10. Cost Volume Relationship Cost Behavior-Variable Costs
We also can see that a variable cost remains the same per unit as the level of activity changes.

11. Cost Volume Relationship Cost Behavior-Variable Costs

12. Cost Volume Relationship Cost Behavior-Variable Costs
Although variable costs change in total as the activity level rises and falls, variable cost per unit is constant.
For example, direct material per unit is constant.
a=Variable cost per unit
Total Variable Cost = ax
x=production unit
Variable cost per unit remains constant.
Production Unit=x
Direct Material Per Unit=a

13. Cost Volume Relationship Cost Behavior-Fixed Costs
Costs that remain the same in total regardless of changes in the activity level.
Per unit cost varies inversely with activity: As volume increases, unit cost declines, and vice versa
Examples:
Property taxes
Insurance
Rent
Depreciation on buildings and equipment

14. Cost Volume Relationship Cost Behavior-Fixed Costs
A fixed cost is a cost that does not vary in the short term, irrespective of changes in production or sales levels, or other measures of activity. 
Fixed in Short Term: Fixed costs remains constant within a given period of time or range of activity and do not fluctuate in the short term.
Fixed in The Changes of Capacity: The amount of fixed costs depend on the capacity. If capacity changes (a new technology investments) the amount of fixed costs will change.
Product Unit
Depreciation Cost

15. Cost Volume Relationship Cost Behavior-Fixed Costs
When a company has a large fixed cost component, it must generate a significant amount of sales volume in order to have sufficient contribution margin to offset the fixed cost.
Conversely, if a company has low fixed costs, it probably has a high variable cost per unit. In this case, a business can earn profit at very low volume levels, but does not earn outsized profits as sales increase.
Product Unit
Depreciation Cost

16. Cost Volume Relationship Cost Behavior-Fixed Costs
Example: Rent, insurance of factory buildings, depreciation etc. remain the same for different levels of production.
For example depreciation cost will remain constant change in level of production (activity).
Product Unit
Depreciation Cost

17. Cost Volume Relationship Cost Behavior-Fixed Costs
When expressed on a per unit basis, The total fixed cost per unit will decreases on the base of level of activity.
For example, the average depreciation cost per production unit decreases as more the production are made.
b=Total Fixed Cost
Unit Fixed Cost= b x
x=production unit
Fixed cost per unit decreases when activity rises and increases when activity falls.
Production Unit
Unit Depreciation Cost

18. Cost Volume Relationship Cost Behavior-Fixed Costs
Fixed costs can be classified as committed (yapısal) and discretionary (planlanmış) costs according to its characteristic. Committed fixed costs are required to maintain the current service or production capacity to fill previous legal commitments. For example rent, depreciation and insurance. Discretionary (planned) fixed costs are set at a fixed amount each year at the discretion of management. These costs occur in order to increase sales or to protect the existing capacity in the future. For example, advertising costs, training costs, market research costs etc.

19. Types of Fixed Costs Committed Discretionary Examples Examples
Long-term, cannot be significantly reduced in the short term.
Discretionary
May be altered in the short term by current managerial decisions
Examples
Depreciation on Buildings and Equipment and Real Estate Taxes
Examples
Advertising and Research and Development

20. Cost Volume Relationship Cost Behavior-Fixed Costs
Illustration: ABC Co. leases its productive facilities at a cost of $10,000 per month. Total fixed costs of the facilities will remain constant at every level of activity as shown in graph.

21. Cost Volume Relationship Cost Behavior-Fixed Costs
But, on a per unit basis, the cost of rent will decline as activity increases.
At 2,000 units, the unit cost per tablet computer is $5 ($10,000 ÷ 2,000). When ABC Co. produces 10,000 tablets, the unit cost is only $1 ($10,000 ÷ 10,000).

22. Cost Volume Relationship Cost Behavior-Fixed Costs

23. Cost Volume Relationship Cost Behavior
Total Cost=Variable Cost + Fixed Cost
TC= ax + b

24. Cost Volume Relationship Cost Behavior-Mixed Costs
Costs that have both a variable cost element and a fixed cost element.
Change in total but not proportionately with changes in activity level.

25. Cost Volume Relationship Relevant Range
The relevant range (geçerli-normal faaliyet aralığı) refers to a specific activity level that is bounded by a minimum and maximum amount. 
The relevant range of activity related with fixed costs as well as variable costs.
For example, rent costs which are generally fixed will rise if increased production requires larger or additional building.

26. Cost Volume Relationship Relevant Range
The concept of the relevant range is useful in two forms of analysis, which are Budgeting and Cost accounting.
In constructing a budget for a future period, assumptions is made about the relevant range of activities within which the business is likely to operate. In this case, the relevant range is most likely to be fairly close to the current activity level of a business, with minor modifications.
The assumed cost of a product, service, or activity is likely to be valid within a relevant range, and less valid outside of that range. in particular, a "fixed" cost is likely to remain fixed only within a relevant range of activity. Also, volume discounts from suppliers are only valid for certain purchasing volume quantities.

27. Cost Volume Relationship Relevant Range
Relevant Range – Range of activity over which a company expects to operate during a year.

28. Cost Volume Relationship Relevant Range
For example; labor cost for 0-25 production unit is TL. The labor cost for production unit is TL, is For example the relevant range of the is the assumed cost will be TL

29. Rent Cost in Thousands of Dollars
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Cost Volume Relationship Fixed Costs-Relevant Range 90
Relevant Range
Fixed costs only stay constant in total within the relevant range of activity.
As we adjust the relevant range of activity upward or downward we see changes in total fixed costs.
These upward or downward adjustments are generally very wide. 60
Rent Cost in Thousands of Dollars 30
, , , Rented Area (Square Feet)

30. Cost Volume Relationship Cost Behavior: Mixed Costs (Semi-Variable)
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Cost Volume Relationship Cost Behavior: Mixed Costs (Semi-Variable) X Y
Total mixed cost
Variable Cost per KW
Total Utility Cost
Fixed Monthly Utility Charge
Activity (Kilowatt Hours)
A mixed cost has both fixed and variable components.
For example if you pay your utility bill, you know that a portion of your total bill is fixed. This can be monthly utility charge as a subscription fee (abonelik ücreti). The variable portion of your utility costs depends upon the number of kilowatt hours you consume. Your total utility bill has both a fixed and variable element.

31. Fixed Monthly Utility Charge
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Cost Volume Relationship Cost Behavior: Mixed Costs (Semi-Variable) X Y
Variable Cost per KW
Total Cost=Variable Cost + Fixed Cost
TC= ax + b
Y= ax + b
Total mixed cost
Total Utility Cost
Fixed Monthly Utility Charge
Activity (Kilowatt Hours)
The mixed cost line can be expressed with the equation Y equals A plus B times X. In the equation, Y is the total mixed cost; b is the total fixed cost (or the vertical intercept of the line); a is the variable cost per unit of activity (or the slope of the line), and X is the actual level of activity.
In our utility example, Y is the total mixed cost; b is the total fixed monthly utility charge; a is the cost per kilowatt hour consumed, and X is the number of kilowatt hours consumed.

32. 5-32
Cost Volume Relationship Cost Behavior: Mixed Costs (Semi-Variable)
If your fixed monthly utility charge is 20 TL, your variable cost is 0,9 TL per kilowatt hour, and your monthly activity level is 200 kilowatt hours, what is the amount of your utility bill?
Y = ax + b
Y = (0,9X × 200) + 20
Y =
200 TL

33. Fixed Monthly Utility Charge
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Cost Volume Relationship Cost Behavior: Mixed Costs (Semi-Variable) X Y
Variable Cost per KW
Total Cost=Variable Cost + Fixed Cost
TC= ax + b
Y= ax + b
Total mixed cost
Total Utility Cost
Fixed Monthly Utility Charge
Activity (Kilowatt Hours)
For example, the labor cost of maintenance and repair workers can be vary according to the change of production volume. A company can pay its maintenance workers standard monthly TL as social benefit and 1,2 TL for each working hour. The cost of maintenance include both fixed and variable component:
TC = 1,2 (Working Hour)

34. Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
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Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
A step fixed cost remains constant within a range of activity, so it tends to look like a fixed cost.
Step costs look like stair steps when graphed.
This is a type of fixed cost that is only fixed within certain levels of activity. Once the upper limit of an activity level is reached then anew higher level of fixed cost becomes relevant.

35. Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
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Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
Volume
Cost
Volume
Cost
Relevant Range
Relevant Range
Step costs are fixed costs with very narrow ranges. Steps cost tend to be consider as fixed cost in small changes in level of activity. The narrow relevant ranges on step costs can be step-fixed or step-variable.

36. Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
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Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
Step Variable Cost
Narrow Stepped Costs: Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed.
For example changes in the level of production will cause a change in the number of maintenance workers employed and therefore cause change in the total maintenance cost.
Volume
Cost
Relevant Range

37. Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
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Cost Volume Relationship Cost Behavior: Semi Fixed Costs (Step Costs)
Consider the cost of cashier salaries in a company. Each cashier is paid 400 TL per week. When sales are less than 600 unit production during a month, the store needs only one cashier, resulting in total cashier salaries of 400TL for the month. When production and sales range from up to 1,200 units, two salaried workers are necessary costing 400 TL a week, for a total fixed salary cost of 800 TL. The total fixed cost amount 'steps up' (rises) by the cost of one additional cashier at each range of activity.
Volume
Cost

38. How does this type of fixed cost differ from a step-variable cost?
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Cost Volume Relationship Cost Behavior: Semi Variable Costs (Step-Variable Costs)
Step-variable costs can be adjusted more quickly and . . .
The width of the activity steps is much wider for the fixed cost.
How does this type of fixed cost differ from a step-variable cost?

39. Cost Volume Relationship Cost Behavior-Illustration
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Cost Volume Relationship Cost Behavior-Illustration
Ex: The maximum production capacity of a manufacturing company is 50 units. Company manufactures units (relevant range) in a month. The monthly production costs are as follows:
Direct Material: Company consumes 12 kg. material for each production. The unit cost of material is 12,5 TL/kg. (Variable)
Direct Labor: Employees work 5 hours for each product and the unit cost of labor is 26 TL. (Variable)
Company pays TL premium (ikramiye) to each worker and 20 TL product efficiency premium (üretim verimlilik primi) for each product. (Semi-Variable)
2 kwh electricity is consumed for each product and unit electricity cost is 5 TL. Company pays 100 TL subscription fee (abonelik ücreti) as an electricity cost. (Semi-Variable)

40. Cost Volume Relationship Cost Behavior-Illustration
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Cost Volume Relationship Cost Behavior-Illustration
Depending on the production unit, company uses spare part (yedek parça) for each machinery. The cost of spare part is as follows: (Step-fixed)
Range
Total Cost
1-10
500
31-40
2.000
11-20
1.000
41-50
2.500
21-30
1.500
The monthly depreciation cost is 900 TL (Fixed)
The transportation cost for 0-30 units is 800 TL, for units is TL. (Step-fixed)
Required: Ascertain the total cost on the base of behavior.

41. Cost Volume Relationship Cost Behavior-Illustration
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Cost Volume Relationship Cost Behavior-Illustration
Depending on the production unit, company uses spare part (yedek parça) for each machinery (Step-fixed).
Range
Total Cost
1-10
500
31-40
2.000
11-20
1.000
41-50
2.500
21-30
1.500
a= ∆Y ∆X
a= 2.500− −50 = =50

42. Total Cost=Variable Cost + Fixed Cost TC= ax + b TC(y)= 360x+3600
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Cost Volume Relationship Cost Behavior-Illustration
Cost
Unit Variable Cost
Fixed
Direct Material
12,5 x 12
150
Direct Labor
5 x 26
130
Indirect Labor 20
Utility
2 x 10 10
100
Depreciation -
900
Transportation
1.600
Indirect Material 50
Total Cost
360
3.600
Total Cost=Variable Cost + Fixed Cost
TC= ax + b
TC(y)= 360x+3600

43. Cost Volume Relationship Cost Behavior-Illustration
EX (KB A.8.7): The relationship between monthly unit machine cost and machine hours graphic has been given leftward. Required: 1) Ascertain the total cost function, 2) The machines has worked 720 hours in year 20X1. Ascertain total and unit cost for 20X1. 80 70 60 50 40 20 30 10 90
100
110
120
Unit cost
Machine Hours

44. Account Analysis, the Engineering Approach and
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Cost Volume Relationship Determining Variable or Fixed Base
Account Analysis, the Engineering Approach and
Statistical Approach
Each account is classified as either variable or fixed based on the analyst’s knowledge of how the account behaves.
Cost estimates are based on an evaluation of production methods, and material, labor and overhead requirements.