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    Lec5 CostBehavior

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    hello1928
    The document summarizes different methods for estimating cost behavior: 1. Variable costs increase linearly as activity increases, while fixed costs remain constant. 2. Three linear methods are described to estimate total fixed and variable costs: scattergraph, high-low method, and least-squares regression. The least-squares regression provides estimates of total fixed cost and variable cost per unit. 3. Mixed costs have both fixed and variable portions, with total mixed costs increasing and per unit costs decreasing as activity rises. That's a high-level 3 sentence summary of the key points about cost estimation methods from the document.

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    Lec5 CostBehavior

    Uploaded by

    hello1928
    17 views23 pages
    The document summarizes different methods for estimating cost behavior: 1. Variable costs increase linearly as activity increases, while fixed costs remain constant. 2. Three linear methods are described to estimate total fixed and variable costs: scattergraph, high-low method, and least-squares regression. The least-squares regression provides estimates of total fixed cost and variable cost per unit. 3. Mixed costs have both fixed and variable portions, with total mixed costs increasing and per unit costs decreasing as activity rises. That's a high-level 3 sentence summary of the key points about cost estimation methods from the document.

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    Lec5_CostBehavior

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    The document summarizes different methods for estimating cost behavior: 1. Variable costs increase linearly as activity increases, while fixed costs remain constant. 2. Three linear methods are described to estimate total fixed and variable costs: scattergraph, high-low method, and least-squares regression. The least-squares regression provides estimates of total fixed cost and variable cost per unit. 3. Mixed costs have both fixed and variable portions, with total mixed costs increasing and per unit costs decreasing as activity rises. That's a high-level 3 sentence summary of the key points about cost estimation methods from the document.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    17 views23 pages

    Lec5 CostBehavior

    Uploaded by

    hello1928
    The document summarizes different methods for estimating cost behavior: 1. Variable costs increase linearly as activity increases, while fixed costs remain constant. 2. Three linear methods are described to estimate total fixed and variable costs: scattergraph, high-low method, and least-squares regression. The least-squares regression provides estimates of total fixed cost and variable cost per unit. 3. Mixed costs have both fixed and variable portions, with total mixed costs increasing and per unit costs decreasing as activity rises. That's a high-level 3 sentence summary of the key points about cost estimation methods from the document.

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    © All Rights Reserved
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    Download as pdf or txt
    of 23

    Chapter 5

    Cost Behavior
    Variable Costs

    Total variable costs Variable cost per unit is


    increase as constant as
    activity increases. activity increases.
    Fixed Costs

    Total fixed costs remain Cost per cup


    constant as activity declines as
    increases. activity increases.
    Cost Behavior Patterns

    Cost behavior describes the way total cost behaves, or


    changes, when some measure of activity changes.

    The range of activity within which


    assumptions about cost behavior hold
    true is the relevant range.

    Unit variable costs Total fixed costs


    remain unchanged. remain unchanged.
    Name and Tell
    Go over the bills you have to pay this month. Or
    imagine that you are the CEO of the company that
    you have always wanted to build.

    Give us an example of a variable cost and another


    example of a fixed cost. Explain why it is
    variable/fixed.
    Mixed Costs

    Mixed costs contain a fixed portion that is incurred even when


    the facility is unused, and a variable portion that increases
    with usage. Utilities typically behave in this manner.
    Total Utility Cost

    Variable
    Cost per KW

    Fixed Monthly
    Activity (Kilowatt Hours)
    Utility Charge
    Mixed Costs

    Total mixed costs Per unit mixed costs


    increase as decrease as
    activity increases. activity increases.
    Linear Approaches to Estimate Cost Behavior
    Linear approach 1: Scattergraph
    A scattergraph is a graph with total cost plotted on the
    vertical (y) axis and some measure of activity on the
    horizontal (x) axis.
    Linear Approach 1: Scattergraph

    Customers Total OH
    Served (x) Cost (y)
    January 9,000 $ 15,000
    February 15,000 15,750
    March 12,500 16,000
    April 6,000 12,500
    May 5,000 13,250
    June 10,000 13,000
    Linear Approach 2: High-Low Method
    Linear Approach 2: High-Low Method

    Using February Estimate


    _
    Total Fixed Cost = $15,750 $0.25 × 15,000
    Total Fixed Cost = $12,000

    Using May Estimate


    _
    Total Fixed Cost = $13,250 $0.25 × 5,000
    Total Fixed Cost = $12,000
    Linear Approach 2: High-Low Method
    Sparrow, Inc. used the high-low method to estimate that
    its fixed costs are $105,000. At its low level of activity,
    50,000 units, average cost was $2.60 per unit. What would
    Sparrow predict as its variable cost per unit?
    A.$0.50
    B.$1.55
    C.$2.10
    D.$2.60
    Ajax uses the high-low method of estimating costs. Ajax
    had total costs of $50,000 at its lowest level of activity,
    when 5,000 units were sold. When, at its highest level of
    activity, sales equaled 12,000 units, total costs were
    $78,000. Ajax would estimate fixed costs as:
    A.$28,000
    B.$30,000
    C.$64,000
    D.$128,000
    High-Low Method

    Month MOH Cost Drivers(hrs)


    Jan $37 27 Which two months of
    Feb $35 32 data should we use to
    Mar $34 29 implement the high-low
    Apr $33 25 method?
    May $28 24 A. Jan and May
    June $30 21 B. Feb and July
    Jul $29 16 C. Feb and May
    Aug $32 26 D. Jan and July
    Linear Approach 3: Least-Squares Regression Method

    The goal of this method is to


    minimize the sum of the squared errors.
    Linear Approach 3:Least-Squares Regression Method

    SUMMARY OUTPUT

    Regression Statistics R2 tell us how closely we can


    Multiple R 0.802489134 explain the relationship between our
    R Square 0.643988811
    Adjusted R Square 0.554986013 two variables. In our example, the
    Standard Error 1011.697667
    Observations 6
    number of customers explains about
    64% of the overhead costs.
    ANOVA
    df SS
    Regression 1 7405871.321
    Residual 3 4094128.679 The intercept and x coefficient,
    Total 4 11500000
    respectively, are estimated
    Coefficients Standard Error total fixed cost and variable
    Intercept 11180.90017 1213.424073
    Customers Served (X) 0.320253895 0.11905759 cost per unit.
    Linear Approach 3:Least-Squares Regression Method

    Total Total Fixed Total Variable Cost


    Cost
    = Cost
    + (Variable Cost per Unit × X)

    Using our regression output, if Starbucks expected to


    serve 8,000 customers in July, we would estimate total
    overhead costs as follows:

    $0.32 × 8,000 =
    $13,741 = $11,181 + $2,560
    • Star, Inc. used Excel to run a least-squares regression analysis, which
    resulted in the following output
    Regression Statistics Standard
    Coefficients T Stat P-Value
    Multiple R 0.9755 Error
    R Square 0.9517 Intercept 175003 61603 2.84 0.021
    Observations 30 Production (X) 11.57 0.9213 12.55 0.000

    What is Star’s variable cost per unit?


    A. $0.92
    B. $2.84
    C. $11.57
    D.$12.55
    Summary of Linear Methods

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