ACTG102-Managerial Accounting MODULE 2

MODULE 2

COST BEHAVIOR:
ANALYSIS & USE
ACTG102 - MANAGERIAL ACCOUNTING

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INTRODUCTION
OIL & GAS MEGAPROJECTS
53
% of projects budget overruns 69
41
70

78
% of projects facing schedule delays 79
50
68

65
% of projects facing cost overruns 62
64
67

0 10 20 30 40 50 60 70 80 90
Upstream Refining Pipeline Liquefied natural gas
SOURCE: https://www.ey.com/gl/en/industries/oil—gas/ey-spotlight-on-oil-and-gas-megaprojects#.XHXzqohKi71

WHAT COULD BE THE POSSIBLE REASONS FOR THESE ISSUES?

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“IF YOU FAIL TO PLAN,

YOU PLAN TO FAIL.”
—B enjamin Frankli n

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COST BEHAVIOR, DEFINED

COST BEHAVIOR means how a cost will react as changes take place in the
level of business activity.

“When an activity happens,

will the cost increase, decrease, or not
change at all?”

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TYPES OF COST BEHAVIOR PATTERNS

VARIABLE MIXED FIXED

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VARIABLE VS FIXED VS MIXED COSTS

14000

12000

10000

8000

6000

4000

2000

0
0 100 200 300 400
VARIABLE FIXED MIXED

WHAT DO YOU OBSERVE?

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OBSERVATIONS
FIXED COST VARIABLE COST
Remains constant regardless of the level Directly changes in relationship with
of production. changes in the level of production.

When production is at zero level, When production is at zero level,

fixed costs are still incurred. no variable costs are incurred.

On a per unit basis, fixed costs change. On a per unit basis, variable costs are
constant.
*Example *Example

RELEVANT RANGE
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OBSERVATIONS

HOW ABOUT MIXED COSTS?

THEY CAN CHANGE OR REMAIN CONSTANT.

THEIR BEHAVIOR IS ENTIRELY DRIVEN BY THE COMPONENTS.

Y = a + bX P100,000 = P10,000 + P9 (10,000 machine hours)

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COST ESTIMATION
The basic idea in cost estimation is to evaluate the relationship between costs and
the factors affecting the costs.

ACCOUNT ANALYSIS METHOD

INDUSTRIAL ENGINEERING METHOD
CONFERENCE METHOD
QUANTITATIVE ANALYSIS OF CURRENT & PAST COSTS RELATIONSHIPS
1. High-low Method
2. Regression Analysis
a. Least-squares Regression
b. Scattergraph or Visual Fit

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ACCOUNT ANALYSIS METHOD

Uses experience and judgment of managers and accountants who are familiar with
company operations and the way costs react to changes in activity level.

1. REVIEW EACH COST ACCOUNT AND IDENTIFY AS DIRECT MATERIALS – VARIABLE

EITHER FIXED OR VARIABLE. SUPERVISOR’S SALARY – FIXED

2. EACH MAJOR CLASS OF MOH IS ITEMIZED AND

ELECTRICITY – 70% VARIABLE
THEN DIVIDED INTO ITS VARIABLE AND FIXED
30% FIXED
COMPONENTS.

• ADVANTAGE: Involves detailed examination of data.

• DISADVANTAGE: Subjective by nature.

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INDUSTRIAL ENGINEERING METHOD

Analyzes the relationship between inputs and outputs in physical forms.

1. STUDY THE PHYSICAL RELATION BETWEEN THE

QUANTITIES OF INPUTS AND EACH UNIT OF 10 SACKS OF CEMENT = 100 FT. WALL
OUTPUT.

1 SACK OF CEMENT = P500

2. ASSIGN COST TO EACH PHYSICAL INPUTS TO TRANSPORTATION PER
ESTIMATE THE COST OF THE OUTPUTS. SACK OF CEMENT = P50
100 FT. WALL = P5,500

• ADVANTAGE: Each step is detailed enabling the business to review its manufacturing
productivity.
• DISADVANTAGE: Costly and timely.

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EXAMPLE:

JUAN is the CFO of a large business that manufactures curtains. The inputs for these
curtains include thread, dye, metal, machine hours, and labor. The output, of course, is
the finished curtain. His business uses the industrial engineering method to help
estimate costs. It allows her to discover how much of an input produces a certain
amount of output. He discovers that it takes 2 hours of direct labor to produce 20
square feet of curtain.

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CONFERENCE METHOD
Cost functions are estimated based on the analysis and opinions about costs and their
drivers obtained from various departments of an organization.

₱60 ₱10 ₱15 ₱70

PURCHASING MANAGER HR MANAGER SALES MANAGER OPERATIONS MANAGER

• ADVANTAGE: Cost estimation is quicker and credible as coming from experts.

• DISADVANTAGE: Accuracy is just based on information provided by the expert.

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QUANTITATIVE ANALYSIS: HIGH-LOW METHOD

1. OBTAIN RELEVANT DATA ON PAST COSTS AND RELATED ACTUAL ACTIVITY LEVELS.

2. ESTIMATE THE VARIABLE COST PER UNIT OR RATE USING THE FORMULA:

VCPU = COST AT HIGHEST ACTIVITY – COST AT LOWEST ACTIVITY

HIGHEST ACTIVITY – LOWEST ACTIVITY

3. COMPUTE THE FIXED COSTS USING THE FORMULA:

FC = TOTAL COST AT H.A. OR L.A. – (VARIABLE COST PER UNIT X H.A. OR L.A.)

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ILLUSTRATIVE PROBLEM:
Data for the past 10 months were collected for Kristal, Inc. to estimate the variable and fixed
manufacturing overhead. The following data on supplies cost and direct labor hours from January to
October are available:
MONTH DIRECT LABOR HOURS (X) SUPPLIES COST (Y)
January 20 50
February 40 110
March HA 60 HC 150
April 20 70
May 30 80
June 40 100
July 50 150
August LA 10 LC 60
September 30 110
October 50 120

Determine the variable cost per hour and the fixed cost portion using the high-low method.

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SOLUTION:
VARIABLE COST RATE PER HOUR = ₱150 - ₱60
60 – 10
= ₱90
50
= ₱1.80

FIXED COST = ₱150 – (₱1.80 X 60)

= ₱150 - ₱108
= ₱42

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IMPORTANT NOTES:
All of these assumptions are valid within the RELEVANT RANGE.
Ignore the OUTLIERS.

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QUANTITATIVE ANALYSIS: REGRESSION ANALYSIS METHOD

REGRESSION ANALYSIS is a powerful statistical method that examines the relationship between two
or more variables of interest.

• LEAST-SQUARES REGRESSION METHOD

• SCATTERGRAPH OR VISUAL FIT

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LEAST-SQUARES REGRESSION METHOD

MIXED COST: Y = a +bX

EQUATION 1: ΣY = Na +bΣX
EQUATION 2: ΣXY = Σxa +bΣX ²
Where:
Y = Total cost
a = Fixed cost
b = Variable cost rate
X = Level of activity
N = Number of observations
Σ = Summation

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ILLUSTRATIVE PROBLEM:
MONTH DLH(X) SUPPLIES COST (Y) XY 50 X²
January 20 50 1,000 110 400
February 40 110 4,400 150 1,600
March 60 150 9,000 70 3,600
April 20 70 1,400 80 400
May 30 80 2,400 100 900
June 40 100 4,000 150 1,600
July 50 150 7,500 60 2,500
August 10 60 600 110 100
September 30 110 3,300 120 900
October 50 120 6,000 2,500
n = 10 ΣX = 350 ΣY = 1,000 ΣXY = 39,600 ΣX² = 14,500

EQUATION 1: ΣY = Na +bΣX EQUATION 1: 1,000 = 10a + 350b

EQUATION 2: ΣXY = Σxa +bΣX ² EQUATION 2: 39,600 = 350a + 14,500b

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ILLUSTRATIVE PROBLEM:

SOLVE FOR VARIABLE COST RATE (b):

EQUATION 1: 35 {1,000 = 10a + 350b}

EQUATION 2: 39,600 = 350a + 14,500b
EQUATION 3 (EQUATION 1 X 35): (35,000 = 350a + 12,250b)
4,600 = 2,250b
b = ₱2.04
SOLVE FOR FIXED COSTS USING EQUATION 1:

1,000 = 10a + 350 (2.04)

1,000 = 10a + 714
1,000 – 714 = 10a
286 = 10a
a = ₱28.60

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SCATTERGRAPH OR VISUAL FIT

A line is drawn to represent the data as a line of conditional expected values, making sure
that distances of the observations above the line are equal to the distances of the
observations below the line by visual judgment.

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ACTG102 - MANAGERIAL ACCOUNTING

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ACTIVITIES Long Quiz on Module 2

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