&) RBU-The Rerrew School of Uecomitancey » Manegemand Udrsory, Sources MAS-01: COST BEHAVIOR ANALYSIS COST. the monetary amount of the resources given up oF sacnficed to attain some objective such as acquiring goods and services. When uoued by A term that defines the purpose, cost becomes ‘operational (e.g., acquisition cast, produ: tion cast: cost of goods sold) COST BEHAVIOR Cost behavior is the relationship between cost and activity ~ as to how costs react to changes in an activity ike production. As production increases, some casts remain the same ((-e., fixed) while some costs increase or decrease (}-e., the following (assuming activity 1s based on production): PER UNIT amount Decreases as production increases T | Constant L _ pees ‘.e., inverse relationship) Thefensee as prowetan inca {2 z (ie., direct relationship) —_ Constant | 3. MIXED Increases less proportionately (vs. total | Decreases less proportionately (vs. unit Lisemevorane | Nnabie costs) ox progucienssereases_| ned costs) os production nreases FREED COST (a) VARIABLE COST (0%) Discretionary Fes <——}_\ ) | True Variable etree cree Commtted Fixed <—— > step variaie mixeo cos Where: [¥] - the total costs (¢ependent variable) [a] - the total fixed costs (vertical/y-axie intercept) [b] - the variabie cost (Slope of the line) DX] - the activity of cost criver {mndependent variable) [bx] - the total variabie costs COST BEHAVIOR ASSUMPTIONS and LIMITATIONS RELEVANT RANGE Assumption Relevant range refers to the range of activity within which the cost behavior patterns are valid. Any evel of activity outside this range may show a rifferent cost behavior pattern. TIME Assumption ‘The cost behavior patterns identified are true only over a specified period of time. Beyond this, the cost may show a different cost behavior pastern LINEARITY Assumption The cost is assumed to manifest # heer rel show otherwise over the long run COST ESTIMATION: SEGREGATING VARIABLE & FIXED COSTS 1) HIGH-LOW POINTS Method ‘The fixed and variable portions of the mixed costs are computed from two sampled data points - the highest and lowest points based on activity or cost driver. Change 1h Costs Ya —YO) ~_Ghange in Activity (Xa ~ X) {uonship over a relevant range despite its tendency to Variable cost per init (b) = 2) SCATTERGRAPH (Scatter Diagras ) Metno* All observed costs at different actwity levels are plotted on a graph. Based on sound judgment, 9 fegression line 1s then fitted to the piotted pomts to represent the line function 3) LEAST-SQUARES REGRESSION Method Least-squares method is 2 statistical t2chnique that investigates the association between dependent land independent varabies. This method determines the line of best fit for a set of observations by Imizing the sum of the squered deviations between cost line and the data points, If there is only one independent variable, the analysis is known as SIMPLE REGRESSION. iole independent variables, «tis known as MULTIPLE REGRESSION. mi + If the analysis involves mu! 4) Other Cost Estimation Methods A). Industral Engineering Method ~ based on the p> PER UNIT COSTS. (0) Vanable costs» (©) Freed costs, Po? REQUIRED: Determine the correct amounts of those with (2) mark. Which two (2) specific costs remain constant over the relevant range? Which two (2) specific costs are directly related with production? Which specific cost is inversely related with production? Express the cost formula based an ine line equation form '¥ = a + DX. If the company produces 110 units, tien hows much is the expected total costs? Adapted Managerial Accounting by Garrison & Noreen) 2. High-Low Method ‘The controller of DEADBAL( Hoepital wovld like to come up with a cost formula that links Admitting Department cost to the number of patien.s admitted dunng a month. The Admitting Department's costs ‘and the number of patients admitted during the past nine months follow: Month Number of Patients Admitting Department's Cost 18 ‘April P 15,600 May 19 P 15,200 June v 13,700, uly 15 » £4,600, ‘August 15 P 14:30 September a P 13,200, October n P 12,800 November 48 P 72,500 December 16 P 14,000, REQUIRED: Using the high-low method, determine: 1. Variable cost per unit, 2. Annual fixed costs 3. Monthly cost function 4. Department's estimated cost arsumirg 17 pwients will be admitted next month. ehdgpted: Managerial Accounting by Garrison & Noreen Pane 2 of A pagesRSQ The Review School of Oeconritowrey MAS-01 COST BEHAVIOR ANALYSIS 3. Correlation Analysis 1A) The closeness of the linear rolntanstip between the Cost and the actiity Is Known as a. Variation ©. Deviation b. Cortelation d, Standard error 28) Looking at the following scatter diagrams, we can conclude that: Cost. Cost 8 costs (P) : Costs (P) a. Cost A will be easier to predict than cost B. Cost B wll be easier to predict than cast A, © Cost B has no variable component 4. Cost A is out-of control 40) Which of these correlation coefficients represents strongest relationship between two variables? a +0.50 © 0.05 b "0.75 a +105 (Adapted: Managerial Accounting by Louderback) 4. Least-Squares Regression Method Sydney Company's total overhead costs at various levels of activity are presented below: Month Machine Hours Total Overhead Costs Maren 500 970 Apri 400 Pest May 600 P 1,089 une 700 P 1,208 The breakdown of the overhead costs in Apr: at 400 machine-hour level of activity is as follows: Supplies (Variable) 260 Salaries (Fixeo) 300 Utilities (Moxed) 291 Total Pest REQUIRED. How much of June's overhead cast of P 1,208 consisted of utities cost? 2. Using gn-iow metnoe, determi tne cot hueton fr athena 3) Using high-low metned, determine the cost function for total overhead cost. 4. Using least-squares method, determine the cost function for total overhead costs. 5. What would be the total overhead coste “ uperating level Isat 200 machine hours? (Adapted: Managerial Accounting by Garrison & Noreen) SOLUTION GUIDE (requirement 1) April (400 hrs) June (700 hrs) Supplies (Variable) P 260 Salaries (Fixed) 300 Utilities (Mixed) 291 Total Overhead Costs P85 SOLUTION GUIDE (requirement 4 - Least Squares Month Hours (x) Costs (¥) x Mar 500 970 Apr 400 851 May 600 1,089, Jun 700 1,208 ogee sum Page 3 o! 4 pagesRSA. The Rerrew Schoot of Ueconntorey MAS-01 COST BEHAVIOR ANALYSIS WAAN-UP EXERCISES (TRUE OR FALSE; MULTIPLE-CHOICE) 1. Unit variable costs are costs that change in direct proportion to changes in the activity level. 2. Consider the following graphic representation of certain costs: Costs (Py | Peet Units Which of the following costs are most likely represented by the above graph? 2. Total fixed costs and total variable costs 5. Total fixed costs and unit variable casts ©. Unit fixed costs and total variabie costs dd. Unit fixed costs and unit variable costs 3. In cost analysis using the line equation ¥ = a + BX, the total fixed cost (a) 's regarded as the 2. Independent variable c." Slope of the line b. Dependent variable di. Yeaxis intercept 4. A company has developed @ production cost equation for its fone product: Y = $0 + 4X, where X is based on the number of labor hours, Assutning a relevant range of 10 to 20 labor hours, what 1s the estimated production cost at zero (0) labor hour” a PSO. b P90 © P130 4d. The exact amount cannot be determined without additional information 5. If the coefficient of correlation (+) between two vanables is + 1, then a scatter diagrarn wall appear to be a regression line that slopes upward to the left 6. Ana Company is interested in the relationship between sales (dependent variable) and occurrence of rain (independent variable), Using the proper formula, the coefficient of correlation (r) 1s computed as 70.99. What conclusion about the sales and rain cccurrence could one make? "iP occurrence ’a. An increase in sales causes an increase b. An increase in sales causes a decrrese in rein occurrence. An increase in rain occurrence causes « uecrease in sales. 6. An increase in rain accurrence causes a1 increase in sales 7. What is the appropriate range for the coctficwat of determination (F?)? ‘a. Oto +h < 1tod b. Oto-1 to + 8. Using statistical normal relationships, the least-squares method uses which of the following equations? 12 + bx ab + bE b. yenas bix by = ax + OD c yrat be ty = nas bo . 3y=na+ dix by = ax + bt 9. What cost segregation technique gives the most mathematically precise cost estimate? a. Scatter diagrain method . High-low method b. Least-squares method d. Calendar method 10. Under Cost-Volume-Profit (CVP) analysis, 2 "ixert cost stould be a. Disregarded b. Treated as a fixed cost Treated as a vanabie cost 4. Separated into fixed and vanatle components Paye 4 of 4 pages