1 cost drivers and cost behavior chapter 5 © 2012 cengage learning. all rights reserved. may not be...
DESCRIPTION
3 VARIABLE COSTS: Definition Are costs that change in total as the level of activity changes. LO 1 FIXED COSTS: Definition Are costs that do not change in total with changes in activity levels.TRANSCRIPT
1
Cost Drivers and Cost Behavior
CHAPTER 5
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
PowerPointPowerPoint Presentation by Presentation by
LuAnn BeanLuAnn BeanProfessor of AccountingProfessor of AccountingFlorida Institute of TechnologyFlorida Institute of Technology
Managerial Accounting 11E
Maher/Stickney/Weil
2
CHAPTER GOALThis chapter discusses classifying costs and
methods for estimating cost behavior. Fixed costsVariable costs
All managerial decisions deal with choices among different activity levels. Managers must estimate which costs will vary with the activity and by how much.
☼ ☼
3
VARIABLE COSTS: Definition
Are costs that change in total as the level of activity changes.
LO 1
FIXED COSTS: Definition
Are costs that do not change in total with changes in activity levels.
4
RELEVANT RANGE: Definition
Is the range of activity over which the firm expects a set of cost behaviors to be consistent.
LO 1
5
LO 1
EXHIBITEXHIBIT 5.15.1
Estimates of variable and fixed costs apply only if level of
activity lies within
relevant range.
6
FIXED COSTS
Fixed (capacity) costs are divided between Committed costs
Capacity costs that will continue to exist even if operations are temporarily reduced
Discretionary (programmed or managed) costsNeed not be incurred in the short run to operate the
business
LO 2
7
VARIABLE and FIXED COSTS: A Reminder
Variable costs change with the volume of activity.
Fixed costs remain constant over the relevant range of activity.
LO 3
8
CURVILINEAR VARIABLE COSTS: Definition
Are costs that vary with the volume of activity but not in
constant proportion.
LO 3
9
What is an example of a curvilinear cost?
Costs become curvilinear when volume discounts are offered.
LO 3
10
LO 3
EXHIBITEXHIBIT 5.55.5
Volume discounts.
11
LO 3
EXHIBITEXHIBIT 5.6 A5.6 A
Production time decreases as
volume increases due to learning from experience.
12
LO 3
EXHIBITEXHIBIT 5.6 B & C5.6 B & C
Total labor time and cost will decrease
with increases in volume. Time
Cost
13
SEMIVARIABLE COSTS: Definition
Are costs that have both fixed and variable components. Also called
Mixed Costs.
LO 3
14
LO 3
EXHIBITEXHIBIT 5.75.7
Semifixed costs change because of changes in long-term
assets; semivariable costs do not.
Semivariable
Semifixed
15
SIMPLIFYING COST ANALYSESSome costs do not vary in the short run
over the relevant range (fixed costs). Some vary with volume (variable costs). Others are neither completely fixed or variable.
Decision makers can simplify these variations by treating costs as either fixed or variable.
LO 3
16
EXERCISE 3
Press “Enter” or click left mouse button for answer.
Name three methods of cost estimation.
LO 4
Statistical regression, Account analysis, and Engineering estimation
17
ANALYZING HISTORICAL COSTS
Two steps to analyze historical cost dataMake an estimate of the past relationUpdate for current, future periods
Adjust costs for inflation and other changes
LO 5
18
TOTAL COST EQUATIONLO 5
Total costs =
Fixed costs + (Variable costs × Activity)
Independent Variables
19
ANALYZING COSTSSteps in analyzing costs are:
Review alternative cost drivers (independent variables)
Plot the dataExamine the data and method of
accumulation
LO 5
20
MULTIPLE REGRESSION: Definition
Has more than one independent variable.
LO 6R
21
DATA PROBLEMSRegardless of method used, results will only be
as good as the quality of the data used. Problems include
Missing dataOutliersAllocated and discretionary costsInflationMismatched time periodsTrade-offs in choosing time period
LO 6
22
LO 7
EXHIBITEXHIBIT 5.125.12
Every method of
cost estimation
has strengths and
weaknesses.
23
COMMON SIMPLIFICATIONSIn general, more sophisticated methods provide
more accurate cost estimates than simpler ones. Methods of simplification are
Using only one cost driverAssuming cost behavior patterns are linear within the
relevant rangeAssume cost decreases are not “sticky”
LO 7
24
DERIVING LEARNING CURVES
Mathematically, the learning curve effect can be expressed by the equation: Y=aX b, where
Y = average number of labor hours required per unit for X units
a = number of labor hours required for the first unitX = cumulative number of units producedb = index of learning, equal to the log of the learning
rate divided by the log of 2.
LO 8
25
STANDARD ERRORS OF THE COEFFICIENTS
The standard errors of the coefficients give an idea of the confidence we can have in the fixed and variable cost coefficients.
The smaller the standard error relative to its coefficient, the more precise the estimate.
Such computational precision does not necessarily indicate that the estimating procedure is theoretically correct, however.
LO 9
26
T-STATISTICThe ratio between an estimated regression coefficient
and its standard error is known as the t-value or t-statistic.
If the absolute value of the t-statistic is approximately 2 or larger, we can be relatively confident that the actual coefficient differs from zero.
LO 9
27
R-SQUAREDThe R2 attempts to measure how well the line fits the
data (that is, how closely the data points cluster about the fitted line).
If all the data points were on the same straight line, the R2 would be 1.00—a perfect fit. If the data points formed a circle or disk, the R2 would be zero, indicating that no line passing through the center of the circle or disk fits the data better than any other.
LO 9
28
End of CHAPTER 5