1. PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Chapter 5 Cost Behavior: Analysis and Use

2. 5-2 Minutes Talked Total Long Distance Telephone Bill True Variable Cost Example A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.

3. 5-3 Minutes Talked Per Minute Telephone Charge Variable Cost Per Unit Example A variable cost remains constant if expressed on a per unit basis. The per minute cost of long distance calls is constant, for example, 10¢ per minute.

4. 5-4 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)

5. 5-5 Number of Local Calls Monthly Basic Telephone Bill Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. A fixed cost is a cost whose total dollar amount remains constant as the activity level changes.

6. 5-6 Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed Cost Per Unit Example Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call decreases as more local calls are made.

7. 5-7 Types of Cost Behavior Patterns Recall the summary of our cost behavior discussion from Chapter 1.

8. 5-8 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y A mixed cost has both fixed and variable components. Consider your utility costs. Mixed Costs Total mixed cost

9. 5-9 Mixed Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Total mixed cost

10. 5-10 The Scattergraph Method Use one data point to estimate the total level of activity and the total cost. Intercept = Fixed cost: $10,000 0 1 2 3 4 * Maintenance Cost 1,000’s of Dollars 10 20 0 * * * * * * * * * Patient-days in 1,000’s X Y Patient days = 800 Total maintenance cost = $11,000

11. 5-11 The Scattergraph Method Make a quick estimate of variable cost per unit and determine the cost equation. Variable cost per unit = $1,000 800 $1.25 per patient-day = $1.25 per patient-day Y = $10,000 + $1.25X Total maintenance cost Number of patient days

12. 5-12 The High-Low Method The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours. = $8.00/hour $2,400 300 hours

13. 5-13 The High-Low Method Total Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = $9,800 – ($8/hour × 800 hours) Total Fixed Cost = $9,800 – $6,400 Total Fixed Cost = $3,400

14. 5-14 The Contribution Format The contribution margin format emphasizes cost behavior, by separating costs into fixed and variable categories. Contribution margin covers fixed costs and provides for income.

15. 5-15 The Contribution Format Used primarily for external reporting. Used primarily by management.

16. PowerPoint Authors: Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Appendix 5A Variable Costing

17. 5-17 Overview of Absorption and Variable Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs

18. 5-18 Summary of Key Insights NOI = net operating income

19. 5-19 End of Chapter 5