Cost Behavior Analysis

- the study of how speci c costs respond to changes in the level of

activity within a company.
- starting point in cost behavior analysis is measuring the key activities in
the company’s business.
- activity levels may be expressed in terms of:

- sales dollars (retail company)

- miles driven (trucking company)
- room occupancy (hotel)
- number of dance classes taught (dance studio)

- for an activity level to be useful in cost behavior analysis, there should be

correlation between changes in the level or volume of
activity and changes in the costs.
- activity level selected is referred to as the activity (or volume) index.
- activity index identi es the activity that causes changes in the behavior
of costs.
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Variable Costs
- are costs that vary in total directly and proportionately with changes in
the activity level.
- may also be de ned as a cost that remains the same per unit at every
level of activity.
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Fixed Costs
- are costs that remain the same in total regardless of changes in the
activity level.
- since it remain constant in total as activity changes, xed costs per unit
vary inversely with activity. As volume increases, unit cost
declines and vice versa.

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 Nonlinear Behavior of Variable
and Fixed Costs
- In reality, relationship between variable cost behavior and changes in the
activity level is often curvilinear.

Mixed Costs
- contain both a variable cost element and a xed cost element.
- can also be called semivariable costs, change in total but
proportionately

Mixed Cost Classi cation for

CVP Analysis
- mixed costs must be classi ed into their xed and variable
elements.
- rms usually ascertain variable and xed costs on an aggregate
basis at the end of a time period, using the company’s past
experience with the behavior of the mixed cost at various
activity levels.
- high-low method is a mathematical method that uses the total
costs incurred at the high and low levels of activity.
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TAKE NOTE!
*the cost of high level activity minus the cost of
the lowest act divided by highest activity minus
lowest activity.
Highest Activity: On april 50,000 (63,000-30,000)
Cost of Highest Activity: 63,000 (50,000-20,000) = 1.10
Lowest Activity: On January 20,000
Cost Lowest Activity: 30,000
The High-Low Method
- generally produces a reasonable estimate for analysis
- does not produce a precise measurement of the xed and variable elements in a
mixed cost because other activity levels are ignored in the computation.

Regression Analysis
- refers to a technique for estimating the relationship between
variables. It helps people understand how the value of a
dependent variable changes when one independent
variable is variable while another is held constant. It is used in
forecasting future data.
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