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# Chapter 6

Activity Analysis, Cost Behavior, and Cost Estimation

McGraw-Hill/Irwin

Learning Objective 1

McGraw-Hill/Irwin

Introduction Cost estimation Process of determining cost behavior. Focus is on the future. Cost behavior Relationship between cost and activity. 6-3 . Cost prediction Using knowledge of cost behavior to forecast level of cost at a particular activity. often focusing on historical data.

Total Variable Cost Example Your total Pay Per View bill is based on how many Pay Per View shows that you watch. Total Pay Per View Bill Number of Pay Per View shows watched 6-5 .

Cost per Pay Per View show Number of Pay Per View shows watched 6-6 . For example.Variable Cost Per Unit Example The cost per Pay Per View show is constant. \$4.95 per show.

Step-Variable Costs Total cost remains constant within a narrow range of activity. Activity Cost 6-7 .

Total Fixed Cost Example Your monthly basic cable TV bill probably does not change no matter how many hours you watch. Monthly Basic Cable Bill Number of hours watched 6-8 .

Fixed Cost Per Unit Example The average cost per hour decreases as more hours are spent watching cable television. Monthly Basic cable Bill per hour watched Number of hours watched 6-9 .

and then jumps to a new higher cost for the next higher range of activity.000 Rented Area (Square Feet) 6-10 . 90 Rent Cost in Thousands of Dollars 60 30 0 1.000 2.Step-Fixed Costs Total cost doesn’t change for a wide range of activity.000 3.

Total Utility Cost Variable Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours) 6-11 .Semivariable Cost Slope is variable cost per unit of activity.

Activity 6-12 .Curvilinear Cost Curvilinear Cost Function Total Cost Relevant Range A straight-line (constant unit variable cost) closely approximates a curvilinear line within the relevant range.

Curvilinear Cost Curvilinear Cost Function Total Cost Relevant Range A straight-Line (constant unit variable cost) closely approximates a curvilinear line within the relevant range. Activity 6-14 .

Discretionary May be altered in the short term by current managerial decisions.Engineered. Engineered Physical relationship with activity measure. cannot be reduced in the short term. Committed and Discretionary Costs Committed Long-term. Depreciation on Buildings and equipment Advertising and Research and Development 6-16 Direct Materials .