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Chapter 6

Activity Analysis, Cost Behavior, and Cost Estimation

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

Inc.Learning Objective 2 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. . All rights reserved.

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.

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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 .

. Inc.Learning Objective 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. All rights reserved.

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 .

Learning Objective 5 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. Inc. All rights reserved. .

Account Classification Method Cost estimates are based on a review of each account making up the total cost being analyzed. 6-18 .

000. approximately $16. 1. Estimated fixed cost = $10.Visual-Fit Method A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.000’s of Dollars 20 10 * * * * * ** * Vertical distance ** is total cost. 0 0 1 2 3 4 Activity.000’s of Units Produced 6-19 .000 Total Cost in 1.

The High-Low Method OwlCo recorded the following production activity and maintenance costs for two months: Units 9. 6-20 .  the total fixed cost.000 Cost $ 9.000 5.100 High activity level Low activity level Using these two levels of activity. compute:  the variable cost per unit.700 6.

600  Unit variable cost = $3.700 – $8.000 units) Fixed cost = $9.100 = $1.The High-Low Method High activity level Low activity level Change Units 9.000 4.000 5.000 units = $.000 Cost $ 9.600 6-21 .700 6.100 $ 3.600 ÷ 4.90 per unit  Fixed cost = Total cost – Total variable cost Fixed cost = $9.700 – ($.90 per unit × 9.

Learning Objective 5 cont. 6 and 7 can be found in the Text Book McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. . Inc.. All rights reserved.

End of Chapter 6 6-23 .