Professional Documents
Culture Documents
Chapter 3
Units Machine
produced hours
A measure of what
causes the
incurrence of a
variable cost
Miles Labor
driven hours
Phone Bill
Minutes Talked
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
5
Types of Cost Behavior Patterns – Variable
Overage Charge
Per Minute
Minutes Talked
Direct material is
Cost
another example
of a cost that
behaves in a true
variable pattern.
Volume
Volume
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
11
Step-Variable Costs
Volume
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
12
Step-Variable Costs
workers employed.
Volume
A straight line
Economist’s
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost line
within the
Relevant
relevant range.
Total Cost
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Activity
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
14
Types of Cost Behavior Patterns – Fixed
A fixed cost is a cost whose total dollar amount
remains constant as the activity level changes.
Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced in short-term by current
the short term. managerial decisions
Examples Examples
Depreciation on Buildings Advertising and
and Equipment and Real Research and
Estate Taxes Development
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
19
The Trend Toward Fixed Costs
90
Rent Cost in Thousands
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
Step-variable costs
can be adjusted more
How does this quickly as conditions
step-function change and . . .
pattern differ from a The width of the activity
step-variable cost? steps is much wider for
the fixed cost.
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
29
Analysis of Mixed Costs
} Offshoring
¨ Hondaand Toyota Thailand plants
¨ HSBC back office functions in China
* *
**
10 * *
0 X
0 1 2 3 4
Patient-days in 1,000’s
* *
**
10 * *
0 X
0 1 2 3 4
Patient-days in 1,000’s
* *
**
10 * *
Intercept = Fixed cost: $10,000
0 X
0 1 2 3 4
Patient-days in 1,000’s
Patient days = 800
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
35
The Scattergraph Method
Make a quick estimate of variable cost per unit and
determine the cost equation.
Y = $10,000 + $1.25X
$2,400
= $6.00/hour
400
* * **
10 * *2
R varies from 0% to 100%, and
the higher the percentage the better.
0 X
0 1 2 3 4
Activity
©
2015
McGraw-‐Hill
Educa4on
Garrison,
Noreen,
Brewer,
Cheng
&
Yuen
48
Comparing Results From the Three Methods
Prepare an income
statement using the
contribution format.
Here is the
estimate of the
slope of the line.
Here is the
estimate of the
fixed costs.
Finally, we will
determine the
“goodness of
fit”, or R2, by
using the RSQ
function.
Here is the
estimate of R2.