1. Cost Estimation

2.  Why Know How Costs Behave?  Must cover all costs!!  Ability to predict future costs under different circumstances and activity levels

3.  True (always) Variable – ex: Material  Step Variable – Technicians  5 computers = 1 tech  6 -10computers = 2 tech  Would it cost you the same for 6 computers as 10?  Relevant Range  Range: 100,000110,000  Machines5 6  Manpower5 6  Facilities2000sqft5000sqft

4.  Defined: remain the same every month  Can change but will remain the same after that  Committed Costs – Can’t be significantly reduced – locked in (rent)  Discretionary Costs –Can be managed – not locked in (advertising)

5.  Semi Variable- includes both a fixed costs and a variable cost  Examples: Utilities, licenses, maintenance costs, nursing wages

6.  To estimate the mixed cost use this formula  Total Cost = Fixed Cost + Variable Cost  a + bx  Total Utilities Costs = $200 +.30 per kilowatt(2000 kilowatt)  $260 = $200 + $60

7.  Fixed Cost - $5,000 Variable Cost- $3.00/per unit  If we sold 10,000 units what would be the cost?  $5,000 + 3.00 (10,000) = $35,000  Per Unit Cost 3.50  Bad Times only sell ½ 5,000 units: Cost?  $5,000 + 3.00(5,000) = $20,000  Per Unit 4.00  Exercise 1-3 pg 50

8.  To determine the fixed cost and variable cost from total cost  SCATTERGRAM (quick and dirty)  HIGH LOW (easy but not accurate)  REGRESSION (Computer and accurate)

9.  Y= dependent variable = $$$$  X=independent variable= activity or volume  (causes the cost)  Fixed cost is where the line crosses the Y axis Fixed Costs Y X

10.  1. 0 is the corner where X and Y meet  2. For Y axis take the highest # to an even # add 20% for the maximum #  3. Divide in ¼ spans.  4. Do same for X axis.  To plot the dots  1. go over to the x axis then up to the matching $ on y axis. Put a dot. Do same for all total cost per activity  2. Draw a straight line that has the smallest space between the line and the dots.  3. Where this line meets the y line is the fixed cost. The difference between the line and the dot is the variable cost.  Exercise 1-10 pg 53

11.  1. Highlight table  2. Select Chart Wizard  3. Select Scattergram

12.  Rough Estimate Not exact Good Excel worksht  1. Determine high driver and associated cost  2. Determine low driver and associated cost  3. Subtract two driver and the two costs  4. divide cost by driver = variable cost per unit  5. units variable cost x driver = total variable $  6. Subtract total cost from variable $ = Fixed $  Exercise 1-4 pg 51

13.  Best if use computer  1. Create table with driver and $  2. Tools  3. Data Analysis  4. Identify what column is the x (driver)  5. Identify what column is the y  6. Identify where you want the graph (output)

14.  Manual formula  Exercise 1-13 pg 54

15.  1.Office Icon  2. Excel options at bottom  3. Add Ins  4. Analyses Tool Pak  5. Go  Xxx.sixsigmafirst.com/regresexcel/tut.htm

16.  TRADITIONALCONTRIB MARGIN  SalesSales  -COGS-VC( COGS,VS, VA ) =GM=CM  -S&A-FC( FS, FA)  =Net Income=Net Income  Exercise 1-5 pg 51

17.  Common – cannot be traced to a particular project  Differential – cost of selling one more unit  Opportunity- benefit given up when you choose one alternative over another  Sunk Costs –already incurred – cannot be changed  Review Problem pg 40-41