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# CN10HO - Determining How Costs Behave Chapter 10 2009...

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2009 Foster School of Business Cost Accounting L.DuCharme 1 Determining How Costs Behave Chapter 10

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2009 Foster School of Business Cost Accounting L.DuCharme 2 Overview 1) Assumptions 2) Model: Y = a + bX 3) Determinates of Fixed vs. Variable costs 4) Cost Estimation Industrial Engineering Conference Method Account Analysis Quantitative Analysis: H-L & OLS 5) Non-linear cost functions
2009 Foster School of Business Cost Accounting L.DuCharme 3 Two assumptions frequently used in cost-behavior estimation 1. Changes in total costs can be explained by changes in the level of a single activity. 2. Cost behavior can adequately be approximated by a linear function of the activity level within the relevant range.

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2009 Foster School of Business Cost Accounting L.DuCharme 4 Cost Function What is a cost function? It is a mathematical expression describing how costs change with changes in the level of an activity.
2009 Foster School of Business Cost Accounting L.DuCharme 5 Cost Function—variable cost La Playa Hotel offers an airline three alternative cost structures to accommodate its crew overnight: 1. \$60 per night per room usage y = \$60 x The slope of the cost function is \$60.

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2009 Foster School of Business Cost Accounting L.DuCharme 6 Cost Function \$0 \$5,000 \$10,000 \$15,000 \$20,000 0 100 200 300 x = Number of rooms y = Cost
2009 Foster School of Business Cost Accounting L.DuCharme 7 Cost Function—fixed cost 2. \$8,000 per month y = \$8,000 \$8,000 is called a constant or intercept. The slope of the cost function is zero.

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2009 Foster School of Business Cost Accounting L.DuCharme 8 Cost Function \$0 \$5,000 \$10,000 \$15,000 \$20,000 0 100 200 300 x = Number of rooms y = Cost
2009 Foster School of Business Cost Accounting L.DuCharme 9 Cost Function—mixed cost 3. \$3,000 per month plus \$24 per room This is an example of a mixed cost. y = \$3,000 + \$24 x y = a + bx

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2009 Foster School of Business Cost Accounting L.DuCharme 10 Cost Function \$0 \$5,000 \$10,000 \$15,000 \$20,000 0 100 200 300 x = Number of rooms y = Cost
2009 Foster School of Business Cost Accounting L.DuCharme 11 Cost Classification and Estimation Function Choice of cost object Time span Relevant range

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