Professional Documents
Culture Documents
COST BEHAVIOR
QUESTIONS FOR WRITING AND DISCUSSION
1. Knowledge of cost behavior allows a
manager to assess changes in costs that
result from changes in activity. This allows a
manager to assess the effects of choices
that change activity. For example, if excess
capacity exists, bids that minimally cover
variable costs may be totally appropriate.
Knowing what costs are variable and what
costs are fixed can help a manager make
better bids.
2. The longer the time period, the more likely
that a cost will be variable. The short run is
a period of time for which at least one cost
is fixed. In the long run, all costs are
variable.
3. Resource spending is the cost of acquiring
the capacity to perform an activity, whereas
resource usage is the amount of activity
actually used. It is possible to use less of the
activity than what is supplied. Only the cost
of the activity actually used should be
assigned to products.
4. Flexible resources are those acquired from
outside sources and do not involve any
long-term commitment for any given
amount of resource. Thus, the cost of these
resources increases as the demand for them
increases, and they are variable costs
(varying in proportion to the associated
activity driver).
5. Committed resources are acquired by the
use of either explicit or implicit contracts to
obtain a given quantity of resources,
regardless of whether the quantity of
resources available is fully used or not. For
multiperiod commitments, the cost of these
resources essentially
corresponds to
committed fixed expenses. Other resources
acquired in advance are short term in
nature, and they essentially correspond to
discretionary fixed expenses.
6. A variable cost increases in direct proportion
to changes in activity usage. A 1-unit
increase in activity usage produces an
increase in cost. A step-variable cost,
however, increases only as activity usage
30
11.
12.
13.
30
EXERCISES
31
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
Activity
Machining
Assembling
Selling goods
Selling goods
Moving goods
Storing goods
Moving materials
X-raying patients
Transporting clients
Repairing teeth
Setting up equipment
Filing claims
Maintaining equipment
Selling products
Purchasing goods
Cost Behavior
Variable
Variable
Fixed
Variable
Variable
Fixed
Fixed
Variable
Mixed
Variable
Mixed
Variable
Mixed
Variable
Mixed
Driver
Machine hours
Units produced
Units sold
Units sold
Number of moves
Square feet
Number of moves
Number of x-rays
Miles driven
Number of fillings
Number of setups
Number of claims
Maintenance hours
Number of circulars
Number of orders
32
1.
2.
3.
4.
5.
6.
7.
8.
a. and b.
Unit costa
Unit fixed costb
Unit variable costc
50,000 Units
$9.20
7.00
2.20
100,000 Units
$5.70
3.50
2.20
32
Concluded
32
The unit cost increases in the first case and decreases in the second. This is
because fixed costs are spread over fewer units in the first case and over
more units in the second. The unit variable cost stays constant.
33
1.
a.
Equipment Depreciation
$15,000
10,00
0 5,00
0 0
Series
1
C
os
t
0 10,000
20,00
0
30,00
0
40,00
0
Feet of tubing
b.
Supervision Cost
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
0
10,000
20,000
30,000
Feet of Tubing
33
c.
Concluded
Graph of materials and power cost:
33
40,000
Series
1
C
os
t
10,00
0
20,00
0
30,00
0
40,00
0
Feet of
tubing
2.
34
1.
2.
3.
34
4.
Concluded
Cost of activity supplied = Cost of activity used + Cost of unused activity
Cost of activity supplied = Cost of 96,000 rolls + Cost of 4,000 rolls
34
35
1.
a.
1,000
2,000
3,000
Units Produced
b.
35
4,000
5,000
Supervision Cost
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
0
1,000
2,000
3,000
4,000
5,000
Units Produced
2.
Direct labor cost is a step-variable cost because of the small width of the
step. The steps are small enough that we might be willing to view the
resource as one acquired as needed and, thus, treated simply as a variable
cost.
Supervision is a step-fixed cost because of the large width of the step. This
is a resource acquired in advance of usage, and since the step width is large,
supervision would be treated as a fixed cost (discretionaryacquired in
lumpy amounts).
3.
Currently, direct labor cost is $90,000 (in the 1,001 to 1,500 range). If
production increases by 400 units next year, the company will need to hire
one additional direct laborer (the production range will be between 1,501 and
2,000), increasing direct labor cost by $30,000. This increase in activity will
require the hiring of one new machinist. Supervision costs will increase by
$45,000, as a new supervisor will need to be hired.
36
36
1.
Cos
t
2,00
0
1,00
0
0
0
1,00
0
2,00
0
3,00
0
Low:
700, $2,628
High: 3,100, $6,564
V = (Y2 Y1)/(X2 X1)
= ($6,564 $2,628)/(3,100 700)
= $3,936/2,400
= $1.64 per visit
F = $6,564 $1.64(3,100)
= $1,480
OR
F = $2,628 $1.64(700)
= $1,480
Y = $1,480 + $1.64X
3.
Y = $1,480 + $1.64(1,900)
= $1,480 + $3,116
= $4,596
37
4,00
0
37
1.
Regression
Residual
Total
Intercept
X Variable 1
Coefficients
1198.964
1.738619
SS
11432890
480013
11912903
MS
11432890
68573.29
F
166.7251
Standard Error
250.5827
0.134649
t Stat
4.784704
12.91221
P-value
0.002001
3.88E-06
Y = $1,199 + $1.74X
2.
3.
R2 is about 0.96. This says that about 96% of the variability in the tanning
services cost is explained by the number of visits. The t statistic for the
number of appointments is 4.784704, and the t statistic for the intercept term
is 12.91221. Both of these are statistically significant at better than the 0.001
level, meaning that the number of visit is a significant variable in explaining
tanning costs, and that some omitted variables (a fixed cost captured by the
intercept) are also important in explaining tanning costs.
38
38
1.
Y
X1
X2
X3
2.
3.
Helena can compare the cost of gift wrapping (an extra $1.30 per item) to the
price charged of $2.50. If it would help Kidstuff to compete against other
similar companies, the price of gift wrapping could be reduced.
39
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
f,
a,
k,
b,
g,
c,
e,
d,
h,
i,
l,
kilowatt-hours
sales revenues
number of parts
number of pairs
number of credit hours
number of credit hours
number of nails
number of orders
number of gowns
number of customers
age of equipment
39
PROBLEMS
310
1.
Scattergraph
Cost
25,00
0
20,00
0
15,00
0
10,00
0
5,00
0
0
0
2.
50
1,00
1,50
0
0
0
Number of purchase orders
3.
40
2,00
0
F = Y2 VX2
= $26,000 $12(1,700)
= $5,600
Y = $5,600 + $12X
4.
Regression
Residual
Total
SS
198880017.3
34568982.68
233449000
MS
2E+08
4321123
Coefficients
Standard Error
t Stat
3617.965
14.671
2760.934621
2.162530893
1.31041
6.78418
Intercept
X Variable 1
F
46.0251
P-value
0.22643
0.00014
(rounded)
Se = $2,079 (rounded)
Yf = $3,618 + $14.67 (1,200)
= $21,222
Thus, the 95% confidence interval is computed as follows:
$21,222
2.306($2,079)
$16,428 Yf $26,016
41
311
1.
Scattergraph
Cost
10,000
20,000
30,000
40,000
Machine hours
Yes, the relationship between machine hours and power cost appears to be
linear. However, the observation for quarter 1 may be an outlier.
2.
High:
Low:
(30,000, $42,500)
(18,000, $31,400)
42
= $14,750
Y = $14,750 + $0.925X
3.
df
1
6
7
Coefficients
7442.88793
1.19870689
SS
166680194
40528556.03
207208750
MS
1.7E+08
6754759
F
24.676
Standard Error
5744.757622
0.241310348
t Stat
1.2956
4.96749
P-value
0.24272
0.00253
43
311 Concluded
4.
first
quarter
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.98817240
R Square
0.97648470
Adjusted R
0.97178164
Square
Standard Error
691.2822495
Observations
7
ANOVA
Regression
df
1
SS
99219215.69
MS
9.9E+07
Residual
Total
5
6
2389355.742
101608571.4
477871
Intercept
X Variable 1
Coefficients
Standard Error
t Stat
13315.12605
1663.380231
8.00486
0.98627451
0.068447142
14.4093
F
207.62
8
Pvalue
0.0004
9
2.9E-05
44
312
1.
0.931469
285.6803
9
ANOVA
df
1
7
8
Regression
Residual
Total
Coefficients
Intercept
X Variable 1
2498.644
2.506915
SS
7765004
571292.5
8336296
Standard Error
680.6304
0.257009
MS
7765004
81613.21
t Stat
3.671073
9.754176
F
95.14395498
P-value
0.007952951
2.5203E-05
0.013273
1084.017
9
ANOVA
df
Regression
Residual
Total
1
7
8
Coefficients
Intercept
X Variable 1
8742.904
6.050735
SS
MS
110647.8
8225648
8336296
110647.8
1175093
0.094160902
Standard Error
t Stat
P-value
1132.739
19.71845
312
Concluded
45
7.718376
0.306856
0.000114503
0.767879538
3.
4.
0.998212
49.83698
9
ANOVA
df
Regression
Residual
Total
2
6
8
Coefficients
Intercept
X Variable 1
X Variable 2
1493.265
2.605579
13.7142
SS
8321394
14902.34
8336296
Standard Error
136.42
0.045317
0.916289
MS
4160697
2483.724
1675.18476
t Stat
10.94608
57.49626
14.96711
P-value
3.45153E-05
1.85951E-09
5.60187E-06
Se = $50 (rounded)
Thus, the 99% confidence interval is computed as follows:
$10,035
3.707($50)
$9,850 Yf $10,220
46
3-13
1.
2.
3.
4.
Advantages: Using the highest R2, the lowest standard error, and the
equation involves three variables. A more accurate forecast should be the
outcome.
Disadvantages: More complexity in computing the formula.
314
1.
Cumulative
Number
Time for nth
of Units
(1)
(3) = (1) (2)
1
2
4
8
16
32
Cumulative
Average Time
Cumulative
Individual Unit
Labor Hours
1,000
1,600
2,560
4,096
6,553.6
10,486.4
1,000
600
454
355
280.6
223.4
2.
1 unit
Direct materials
$ 10,500
Conversion cost
70,000
Total variable cost $80,500
Units
1
Unit variable cost $ 80,500
2 units
$ 21,000
112,000
$133,000
2
$ 66,500
4 units
$ 42,000
179,200
$221,200
4
$ 55,300
47
8 units
$ 84,000
286,720
$370,720
8
$ 46,340
16 units
$ 168,000
458,787
$ 626,787
16
$ 39,174
32 units
$ 336,000
734,076
$1,070,076
32
$ 33,440