Ch 05 PowerPoint Presentation 3rd Edition

Ch 05 PowerPoint Presentation 3rd Edition - Chapter 5 Cost...

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Unformatted text preview: Chapter 5 Cost Behavior ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 1 ­ LO1 Common Cost Behavior Patterns • Laura Jorgensen is planning a party. Laura • She identifies two major costs: She 1. Entertainment (a live band) 2. Food and drinks • $3,650 was spent last year on this party: $3,650 ♫ $525 for entertainment $525 ☺ $3,125 for food and drinks $3,125 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 2 Common Cost Behavior Patterns LO1 Describe the differences between fixed costs and variable costs. • Cost behavior is the reaction of costs to Cost changes in levels of business activity. • Fixed costs remain constant in total remain regardless of the level of activity. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 3 LO1 Common Cost Behavior Patterns • The spending limit for this event, this The year, is $5,500. • Prices for entertainment and food and Prices drinks are expected to remain the same. • 175 guests are expected to attend this 175 year’s party, compared to 125 last year. • What is the fixed cost per guest? What ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 4 LO1 Common Cost Behavior Patterns Total fixed cost: 125 Guests $525 175 Guests $525 125 Guests Cost per guest: $525 ÷ 125 = $4.20 175 Guests Cost per guest: $525 ÷ 175 = $3.00 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 5 LO1 Common Cost Behavior Patterns • Variable costs are costs that change in direct Variable proportion with changes in the level of activity. • What is the variable cost per guest? What • Cost per guest: $3,125 ÷ 125 = $25.00 Cost ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 6 LO1 Common Cost Behavior Patterns • What is the total variable cost for 175 guests? What ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 7 Comparison of Cost Behaviors LO2 Classify costs by cost behavior. • The measure of activity is shown The on the horizontal axis (the x-axis). • The x-axis is the independent variable. The • The type of cost is shown on The the vertical axis (the y-axis). • The y-axis is the dependent variable. The ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 8 LO2 Graph of a Fixed Cost Cost of the Band y $525 x Number of Guests ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 9 LO2 Graph of a Variable Cost Cost of Catering y $4,375 175 x Number of Guests ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 10 Determining Total Cost Total costs = Fixed costs + Variable costs ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 11 Determining Total Cost • What is the total cost for 175 guests? What • Total fixed cost = $525 Total • Total variable cost: $25 × 175 = $4,375 Total • Total cost: $525 + $,4375 = $4,900 Total ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 12 Graph of Total Costs y $6,000 $4,900 $4,000 $2,000 $525 $0 0 100 175 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 200 x 5 ­ 13 Relevant Range LO3 Explain the concept of relevant range and its effect on cost behavior information. • The range of activity within which The cost behavior assumptions are valid is called the relevant range. valid relevant ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 14 LO3 Relevant Range of Fixed Costs Fixed Cost y Relevant range Activity ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones x 5 ­ 15 LO3 Relevant Range of Variable Costs Variable Cost y Relevant range Activity ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones x 5 ­ 16 Mixed Costs LO4 Describe the characteristics of a mixed cost and the four basic approaches to separating a mix cost into its fixed and variable components. • Mixed costs contain elements of both Mixed fixed- and variable-cost behavior. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 17 LO4 Graph of a Mixed Cost y Cost Total cost Variable cost Fixed cost Activity x ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 18 Identifying the Fixed and Variable Elements of a Mixed Cost LO4 The engineering approach Scatter graphing The high-low method Regression analysis ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 19 LO4 The Engineering Approach • This approach relies on engineers or This other professionals who are familiar with the technical aspect of the activity and the associated cost. • The engineering approach may employ The time-and-motion studies or other aspects of scientific management. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 20 LO4 Scatter Graphing • The scatter graph plots historical activity The and cost data on a graph to see how a cost relates to various levels of activity. • The analyst places a straight line through The the visual center of the points plotted on the graph, so roughly half the dots are above the line and half are below the line. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 21 LO4 A Scatter Graph y Cost Activity ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones x 5 ­ 22 LO4 The High-Low Method • In the high-low method, only high-low two of the data points are used to determine the fixed and variable cost components. • The highest and lowest The observations are picked. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 23 LO4 Regression Analysis • Regression analysis, also called the Regression lleast-squares method or linear east-squares linear regression analysis, is a mathematical approach to determining fixed and variable cost with statistical accuracy. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 24 LO4 Regression Analysis The basic mathematical equation is: Y = a + bX Y = The dependent variable a = The Y intercept, or the amount for Y when X is zero b = The slope coefficient X = The independent variable ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 25 LO4 Regression Analysis • When applying regression analysis When to find the fixed and variable elements of a mixed cost, the variables in the regression equation are defined as follows: Y a b X = = = = Total cost Fixed cost Unit variable cost Activity level ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 26 Scatter Graph Example LO5 Determine the fixed and variable components of a mixed cost using scatter graphs and the high-low method. • The sales manager for Hinds Wholesale The Supply Company needs to estimate the expected delivery vehicle operating cost (maintenance) for 2010. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 27 LO5 Scatter Graph Example Truck number Miles driven Packages delivered Maintenance cost 202 204 205 301 422 460 520 15,000 11,000 24,000 30,000 31,000 26,000 20,000 1,200 1,000 1,500 1,500 500 1,000 2,000 $2,000 $1,600 $2,200 $2,400 $2,600 $2,200 $2,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 28 LO5 Scatter Graph Example Estimated line M a int ena nce Cost $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 0 10,000 20,000 30,000 40,000 Miles ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 29 LO5 Scatter Graph Example Total cost = Fixed cost + Variable cost Total mixed cost = Fixed cost element + Variable cost element Total mixed cost = $1,100 + Variable cost element ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 30 LO5 Scatter Graph Example M a int ena nce Cost $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 0 10,000 20,000 30,000 40,000 Miles ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 31 LO5 Scatter Graph Example Miles 34,000 0 34,000 Cost $2,700 1,100 $1,600 $1,600 ÷ 34,000 = $0.047059 or 4.7 cents per mile ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 32 LO5 Scatter Graph Example Vehicle maintenance cost = $1,100 + $0.047 per mile driven • What is the estimated maintenance cost for What a truck that will be driven 28,000 miles? $1,100 + ($0.047 × 28,000) = $2,416 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 33 LO5 Scatter Graph Example Truck number Miles driven Packages delivered Maintenance cost 202 204 205 301 422 460 520 15,000 11,000 24,000 30,000 31,000 26,000 20,000 1,200 1,000 1,500 1,500 500 1,000 2,000 $2,000 $1,600 $2,200 $2,400 $2,600 $2,200 $2,000 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 34 LO5 Scatter Graph Example M a int ena nce Cost $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 0 500 1,000 1,500 2,000 2,500 Packages Delivered ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 35 LO5 High-Low Method Example ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 36 LO5 High-Low Method Example • What is the fixed cost element? What ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 37 LO5 High-Low Method Example $2,600 = Fixed cost + (31,000 × $0.05) Fixed cost = $2,600 – $1,550 = $1,050 • $1,050 is the fixed cost element. $1,050 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 38 LO5 High-Low Method Example $1,600 = Fixed cost + (11,000 × $0.05) Fixed cost = $1,600 – $550 = $1,050 • What is the estimated maintenance cost What for a truck to be driven 28,000 miles? $1,050 + (28,000 × $0.05) = $2,450 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 39 Microsoft Excel LO6 Use Microsoft Excel’s Chart Wizard to prepare a cost behavior scatter graph. • Microsoft excel uses regression analysis and an easy-to-use chart wizard to and prepare precise, high quality scatter graphs for mixes costs. ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 40 End of Chapter 5 ©2009 Michael Werner and Kumen Jones, Introduction to Management Accounting, 3e Werner/Jones 5 ­ 41 ­ ...
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This note was uploaded on 01/19/2012 for the course ACC 212 taught by Professor Quintanna during the Spring '08 term at University of Miami.

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