COST BEHAVIOR: ANALYSIS AND USE THE HIGH-LOW METHOD- analyzing mixed costs is

based on costs observed at both the high and low levels

Cost behavior
 How cost will react as changes take place in the
level of business activity
IMPORTANCE OF UNDERSTANDING COST BEHAVIOR
PLANNING- the management make decisions based in
on expectations as to the future
CONTROL- the process of using feedback information
COST ANALYSIS- an integral part of planning and control
function
TYPES OF COST BEHAVIOR
1. VARIABLE COSTS- the costs that change in total
as the level of activity changes in the short-run
RELEVANT CHANGE- range activity
2. FIXED COSTS- costs that remain constant in
total regardless of changes in the level of
activity within the relevant change
of activity within the relevant range
REGRESSION ANALYSIS METHOD- all available data to
estimate the cost function
LEAST-SQUARE REGRESSION METHOD- statistical;
technique which is often used in separating mixed costs
into their fixed and variable components is least squares
regression
SCATTERGRAPH OR VISUAL FIT- rough guide for cost
estimation which plot the cost against past activity
levels
CORRELATION ANALYSIS- in the process of estimating
and controlling costs
THE LEARNING CURVE THEORY- one assumption in
estimating cost behavior is that the cost of each input is
a linear function of the quantity assigned.

TYPES OF FIXED COSTS

 COMMITTED FIXED COSTS- thr investments in

facilities, equipment and the basic
organizational structure of a firm
 DISCREATIONARY FIXED COSTS- managed fixed
costs usually arise from annual decisions by
management to spend in certain fixed
 MIXED COSTS- semivariable costs
- Contains both variable and
fixed cost elements

ACCOUNT ANALYSIS- considered very useful and easier

way to estimate costs

FIXED PORTION- missed cost represents the basic,

minimum costs of just having a service ready and
available for use

INDUSTRIAL ENGINEERING METHOD- estimates cost

functions by analyzing the relationship between inputs
and outputs in physical forms

CONFERENCE METHOD- cost functions are estimated

based on the analysis and opinions about costs and
their drivers obtained from various departments of an
organization