TASMANIAN SCHOOL OF

BUSINESS AND ECONOMICS

BFA312: MANAGEMENT ACCOUNTING

Week2: COST BEHAVIOR

 Learning objectives
• Explain the meaning of cost behavior, and define and
describe fixed and variable costs.

• Separate mixed costs into their fixed and variable

components using the high-low method, the scatter
graph method and the method of least squares.

• Use a personal computer spreadsheet program to

perform the method of least squares.
2 10/14/2021
 Basics of cost behavior
• Cost behavior describes whether a cost
changes when the level of output changes.
Examples of cost behavior include:
– fixed cost: a cost that does not change in total as output changes.
– variable cost: a cost that increases in total with an increase in output and decreases
in total with a decrease in output.

• Fixed and variable costs have meaning only when related to some output
measure.
 Fixed Costs
Cost of Supervision
Number of Output Total Cost of Supervision Unit Cost

10,000 $500,000 $50

20,000 500,000 25
30,000 500,000 16.67
40,000 500,000 12.5
50,000 500,000 10
60,000 500,000 8.333

In this example, notice that while the total fixed cost of supervision remains the
same, the unit cost decreases as more units are produced.
Fixed Costs
 Variable Costs
Number of unit produced Cost of material= $10/ unit Total variable costs

0 $10 $0
10,000 $10 $100,000
20,000 $10 $200,000
30,000 $10 $300,000
40,000 $10 $400,000
50,000 $10 $500,000
60,000 $10 $600,000

Unlike the fixed cost, in this example, notice that while the total variable cost of materials
increase as more units are produced, the unit cost remine the same.
• Total cost = Total fixed cost + (Variable rate × Units of
output)
 Mixed costs
• Mixed costs: Those costs that have a component
that is fixed and a component that is variable
• Electricity costs are an example of a mixed cost
• There are three methods of separating a mixed cost into its fixed and variable
components:
– high-low method
– scatter graph method
– method of least squares.
• Each method requires the simplifying assumption of a linear cost relationship.
 Methods for separating mixed costs

• The cost equation

• Total cost = Fixed component + Variable component per
unit x Units of output;
• Y = a + bx
• Y = total cost----------------Dependent variable
• a = fixed cost----------------Intercept
• b = unit variable cost------Slope
• x = activity level-------------Independent Variable
 Mowen Exercise 3-16
Month Labour Cost Employee Hours
January $ 7,000 360
February $ 8,140 550
March $ 9,899 630
April $ 9,787 610
May $ 8,490 480
June $ 7,450 350
July $ 9,490 570
August $ 7,531 310
 Solution
• Step 1: Find the high point and the low point for a given data
set.
• High point output= 630 hours with cost $9,899
• Low point output= 310 hours with cost $7,531
• Step 2: Using the high and low point, calculate the variable rate.
(High point cost − Low point cost)
Variable cost/ per unit
•= (High point output − Low point output)
= ----------------------------------------------
$9,899 − $7,531
• Variable cost/ hour = ---------------------------=
630 − 310
• Variable cost= $7.40/ hour
•• Step
  3: Calculate the fixed cost using the variable rate (from
Step 2) and either the high point or low point.
Fixed cost Total cost at high point or low point −
(Variable cost × Output at high point or low point)

Fixed cost $9,899 – ($7.40 x 630) = $5,237

• Fixed cost= $7,531 – ($7.40 x 310)= $5,237
• Step 4: Form the cost formula for materials handling based
on the high-low method.

y $5,237 + ($7.40 x)
 Mowen Exercise 3-18:
Assume that 4000 employee hours are budgeted for the coming year.
•• A-
  Calculate total variable labour cost for the year.
• y $5,237 + ($7.40 x)
• Total variable cost= $7.40 x 4,000
= $29,600
• Calculate total fixed labour cost for the year.
• Total fixed cost = $5,237 x 12 months
= $62,844
• Calculate total labour cost for the year.
• 3. Total labour cost = $62,844 + $29,600
= $92,444
 Mowen Exercise 3-19 (check the excel
spreadsheet)
• Refer to Excel spreadsheet to demonstrate calculation of
the cost equation using regression analysis
• Fixed cost = $4,517 per month
• Variable cost = $8.20 per labour hour
• Total cost equation:
– Y = $4,517 + $8.20x
• For 675 employee hours the total cost is:
– $4,517 + $8.20 x 675
– $10,052