Class 2 Semi Variable Cost

Concepts
MPAC 851.4
Some chapter 6

Sources: Professor Klassen, Accounting Text and Cases, Anthony et al.,

13th ed, Managerial Accounting, 6th ed, (both McGraw-Hill)
16-1
 Semivariable Costs
 Part variable cost, part fixed cost.
 In TOTAL, varies less than CFE Note:
proportionately with volume of activity.
You are often asked to
 Example: Electricity cost in a factory. forecast/budget/project
 Variable component: Cost of powering in the future
production equipment.
You will have a
 Fixed component: Cost of lighting. change in
 To effectively analyze, will need to break volume….what
happens to the cost
down into variable and fixed when volume changes
components.
May need to dissect
the cost into
fixed/variable
components to show
depth 16-2
 Estimating The C-V Relationship
CFE Comment: this is how we
can show depth if we have to slit
2. High-Low method. a cost between fixed and variable

 Estimate total costs for two volume levels,

preferably one high level and one low level.
 To determine slope or variable cost per unit:
 (Change in total cost between the two
points) ÷ (change in units of activity).
 To determine fixed costs:
 Take total cost at either point and subtract
out variable cost (i.e., variable cost per unit
multiplied by units of activity).
16-3
 High-Low
• How does the high-low method work when you
have data for more than two periods?
Patients Costs of
Admitted Admitting
March 2,510 $ 15,204
April 2,550 $ 14,976
May 2,480 $ 14,680
June 2,590 $ 15,108
July 2,670 $ 15,060

Select the two periods with the lowest and

highest level of activity.
 Note
• How does the high-low method work when you
have data for more than two periods?
Patients Costs of
Admitted Admitting
March 2,510 $ 15,204
April 2,550 $ 14,976
May 2,480 $ 14,680
June 2,590 $ 15,108
High July 2,670 $ 15,060
 Note
• How does the high-low method work when you
have data for more than two periods?
Patients Costs of
Admitted Admitting
March 2,510 $ 15,204
April 2,550 $ 14,976
Low May 2,480 $ 14,680
June 2,590 $ 15,108
High July 2,670 $ 15,060

TIP Remember it’s the high low

VOLUME NOT COST
 High-Low Method
Using the high-low method, estimate the cost
formula Y = a +bX for the patient admitting costs.
b= unit variable
$15,060 - $14,680 $380 cost or slope of
b= = = $2 the line or rise
2,670 - 2,480 190 over run

a = $15,060 - $2(2,670) = $15,060 - $5,340 = $9,720

a= fixed cost,
which is total
Y = $9,720 + $2.00X cost less the
total variable
cost

Y = total cost

Hi low problem
 Inherent Conditions of
C-V Analysis
• Relevant range.
• A straight line approximates cost behavior
only within a certain range of volume.
 When volume approaches zero,
management takes steps to reduce fixed
costs.
 When volume exceeds relevant range, fixed
costs increase.
Likely a qualitative comment on CFE… can pretty much assume
relevant range for depth quants 16-8
 Inherent Conditions of
C-V Analysis
• Relevant time period.
 Amount of variable costs depends on the
time period over which behavior is
estimated.
 If the time period is one day, few costs are
variable.
 Over an extremely long time period, no
costs are fixed.

16-9
 Inherent Conditions of
C-V Analysis
Chat Challenge: Example of
• “Sticky Costs.” sticky costs

– Many costs considered variable actually fall

less with decreases of activity than they rise
with increases.
– Why? Managers tend to increase resources
more quickly than they decrease.
– Examples:
• Sales commissions with minimum guarantees.
• Managers slower to fire employees than to hire.

16-10
 Step-Function Costs
 Incurred when costs are added in discrete chunks.
 E.g., a supervisor is needed for every 10 workers.
 Adding the new step or “chunk” of costs increases
capacity.
 Height of step (riser) indicates the cost of adding
incremental capacity.
 Width of step (tread) shows how much additional
volume of activity can be serviced by the new step
up in cost.
CFE Context Example AND Real Life: Entrepreneurs Hurdle…
•Entrepreneurs that succeed to $10-25M in sales often fail
after that…Why? 16-11