Lec 4 Cost Behavior

Analisis Biaya
Semester Gasal 2016 2017

Cost Behavior
Study Objectives
1.
Define and describe fixed, variable, and mixed costs.
2.
Explain the use of resources and activities and their

relationship to cost behavior.
3.
Separate mixed costs into their fixed and variable

components using the high-low method, the scatterplot
method, and the method of least squares.
4.
Evaluate the reliability of the cost formula.
5.
Explain how multiple regression can be used to assess

cost behavior.
6.
Define the learning curve, and discuss its impact on cost

behavior.
7.
Discuss the use of managerial judgment in determining

cost behavior.
Cost Behavior: Fixed Costs

Fixed costs are costs that in total are
constant within the relevant range as the
level of the activity driver varies.
Two production lines can process 10,000 computers
per year each. The workers on each line are
supervised by a production-line manager who is paid
$24,000 per year. For production up to 10,000 units,
only one supervisor is needed. When production is
between 10,001 and 20,000 units, two supervisors are
required.
Fixed costs are costs that in total are constant within the
relevant range as the level of the activity driver varies.
Two production lines can process 10,000 computers per year each.
The workers on each line are supervised by a production-line
manager who is paid $24,000 per year. For production up to
10,000 units, only one supervisor is needed. When production is
between 10,001 and 20,000 units, two supervisors are required.
Days Computer Inc.
Supervision
Computer
Processed
Unit Cost
$54,000
4,000
$13.50
54,000
8,000
6.75
54,000
10,000
5.40
108,000
12,000
9.00
108,000
16,000
6.75
108,000
20,000
5.40
Cost Behavior: Variable Costs

Variable costs are costs that in total vary in
direct proportion to changes in an activity
driver.
A CD-ROM disk drive is added to each computer at a cost of $30

per computer. The total cost of disk drives for each level of
production varies.
Days Computer Inc.
Total Cost of
CD-ROMs
Number of
Computers
Processed
Unit Cost of CDROMs
$120,000
4,000
$30.00
240,000
8,000
30.00
360,000
12,000
30.00
480,000
16,000
30.00
600,000
20,000
30.00
Cost Behavior: Variable Costs
Cost Behavior: Mixed Costs

Mixed costs are costs that have both a fixed
and a variable component.
Days Computer:
Ten sales representatives each earn an
annual salary of $30,000 plus a commission of
$50 per computer sold. 10,000 computers are
sold.
Total cost = Fixed cost + Total variable cost
Y = F + VX
For Days Computer, the selling cost is:
Y = $30,000 + $50X

Days Computer Inc.
Fixed Cost
of Selling
Variable
Cost of
Selling
Total Cost
Computers Selling Cost

Sold
per Unit
$300,000
$200,000
$500,000
300,000
400,000
700,000
8,000
87.50
300,000
600,000
900,000
12,000
75.00
300,000
800,000
16,000
68.75
20,000
65.00
300,000
1,000,000
1,100,000
1,300,000
4,000
$125.00
10
Resources, Activities and Cost Behavior

Flexible resources
Acquired as used and needed
Usually considered variable costs
Examples: materials, energy
Committed resources
Acquired in advance of usage
Usually considered fixed costs
Examples: buying or leasing buildings, contracts
with employees
Resources, Activities, and Cost

Behavior
Step cost behavior displays a constant
level of cost for a range of output and then
jumps to a higher level of cost at some point
Step-Variable costs
Narrow increments
Approximate as a strictly variable
assumption
Step-Fixed costs
Wide increments
Assigned to the fixed cost category

Behavior
Step-Variable Cost

Behavior
Step-Fixed Cost
Methods for Separating Mixed Costs

into Fixed and Variable Components
The High-Low Method

The Scatterplot Method
The Method of Least Squares
Methods for Separating Mixed Costs

into Fixed and Variable Components
Straight-line equation:
Y = F + VX
where
Y = Total activity cost
F = Fixed cost component
V = Variable cost per unit
X = Measure of activity output
High-Low Method
Step 1: Solve for variable cost (V)

V = Change in cost Change in activity
High-Low Method
Low Activity
High Activity
$7,500 - $2,000
Step1: V
$13.75
500 - 100
High-Low Method
Step 1: Solve for variable cost (V)
V = Change in cost Change in activity
$7,500 - $2,000
V
$13.75
500 - 100
Step 2: Using either the high cost or low cost, solve for
the total fixed costs F
Low cost
Y F V (X )
$2,000 F $13.75(100)
$625 F
High cost
Y F V(X )
$7,500 F $13.75(500)
$625 F
Scatterplot Method
Step 1: Plot the data points on a scattergraph
Scatterplot Method
Step 2: Choose the two data points most representative
of the data to describe the cost behavior line
Method of Least Squares
Regression Programs
The best-fitting line is the line with the
smallest sum of squared deviations

Regression analysis determines the linear
function with the minimum sum of
squared deviations
Utilize spreadsheet packages such as
Microsoft Excel to perform the
computation
Regression Analysis for the Method

of Least Squares
Spreadsheet Data for Anderson Company
Regression Analysis for the Method

of Least Squares
Regression Output for

Anderson Company
Regression Analysis
for the Method of Least Squares
The regression analysis gives rise to

the following equation for Andersons
material handling cost:
$854.50 + ($12.39 number of moves)
Reliability of Cost Formulas

Hypothesis test of parameters
The lower the P-value, the more likely that
the true parameter is significantly different

from 0
Traditional benchmarks of significance are
0.10, 0.05 or 0.01

Goodness of fit
R2 is the coefficient of determination

Measures the percentage of change in the
dependent variable explained by changes in

the independent variable
The closer to 1.0, the better; no benchmark

Confidence intervals
The standard error is used to determine the
range of possible values around the

predicted value:
Standard t-statistic Confidence

Error
Interval
Multiple Regression
Least-squares method is used to fit an
equation involving two or more explanatory
variables
Y = F + V1X1 + V2X2 etc.
where
X1 = first explanatory variable

X2 = second explanatory variable
Multiple Regression
Spreadsheet Data for Anderson Company
X1
X2
Multiple Regression Analysis

for the Method of Least Squares
Multiple Regression
Based on the multiple regression analysis,
the cost formula is written as:
Y = $507 + $7.84X1 + $0.11X2
In November the company expects to make
350 moves with a weight of 17,000 pounds.
The predicted cost of material handling is:
Y = $507 + $7.84(350) + $0.11(17,000)

= $507 + $2,744 + $1,870
= $5,121
Cumulative Average Time Learning

Curve with 80% Learning Rate
Cumulative
Number
of Units
(1)
1
2
3
4
5
6
7
8
16
32
Cumulative
Average Time
per Unit in Hours
(2)
Cumulative
Individual Units
Total Time:
Time for nth
Labor Hours Unit-Labor Hours
(3) = (1) (2)
(4)
100
80
(80% 100)
70.21
64
(80% 80)
59.57
56.17
53.45
51.20 (80% 64)
40.96
32.77
100
160
210.63
256
297.85
337.02
374.15
409.60
655.36
1,048.64
100
60
50.63
45.37
41.85
39.17
37.13
35.45
28.06
Graph of Cumulative Total Hours Required

and the Cumulative Average Time per Unit
Managerial Judgment
Managerial judgment is critically
important in determining cost behavior

and is by far the most widely used method
in practice
Advantage simplicity
Disadvantage poor judgment leads to
errors

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Analisis Biaya

Semester Gasal 2016 2017

Define and describe fixed, variable, and mixed costs.

Explain the use of resources and activities and their

Separate mixed costs into their fixed and variable

Evaluate the reliability of the cost formula.

Explain how multiple regression can be used to assess

Define the learning curve, and discuss its impact on cost

Discuss the use of managerial judgment in determining

Cost Behavior: Fixed Costs

Cost Behavior: Fixed Costs

Cost Behavior: Fixed Costs

Cost Behavior: Variable Costs

A CD-ROM disk drive is added to each computer at a cost of $30

Unit Cost of CDROMs

Cost Behavior: Variable Costs

Cost Behavior: Mixed Costs

Cost Behavior: Mixed Costs

Computers Selling Cost

Cost Behavior: Mixed Costs

Resources, Activities and Cost Behavior

Resources, Activities, and Cost

Resources, Activities, and Cost

Resources, Activities, and Cost

Methods for Separating Mixed Costs

The High-Low Method

Methods for Separating Mixed Costs

Step 1: Solve for variable cost (V)

Method of Least Squares

smallest sum of squared deviations

Regression Analysis for the Method

Regression Analysis for the Method

Regression Output for

The regression analysis gives rise to

$854.50 + ($12.39 number of moves)

Reliability of Cost Formulas

The lower the P-value, the more likely that

the true parameter is significantly different

Reliability of Cost Formulas

R2 is the coefficient of determination

dependent variable explained by changes in

Reliability of Cost Formulas

The standard error is used to determine the

range of possible values around the

Standard t-statistic Confidence

X1 = first explanatory variable

Multiple Regression Analysis

Y = $507 + $7.84(350) + $0.11(17,000)

Cumulative Average Time Learning

Graph of Cumulative Total Hours Required

important in determining cost behavior

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