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Chapter3CostBehaviourACC320.pptxChapter 3 Cost Behaviour
Variable Cost Per Unit
The long distance cost per minute talked is constant. For example, 10 cents per minute.
Minutes Talked
Per Minute Telephone Charge
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Cost Classifications for Predicting Cost Behaviour
How a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.
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Total Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local calls.
Number of Local Calls
Monthly Basic Telephone Bill
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Fixed Cost Per Unit
The average cost per local call decreases as more local calls are made.
Number of Local Calls
Monthly Basic Telephone Bill per Local Call
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Cost Classifications for Predicting Cost Behaviour
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Cost Behaviour
Variable Cost & Fixed cost are usually characterized by:
a. Unit costs that remain constant. [VC]
b. Total costs that increase as activity decreases. [VC]
c. Total costs that increase as activity increases. [VC]
d. Total costs that remain constant. [ FC] but unit FC changes with larger activity
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Cost Behaviour
Fixed costs are usually characterized by:
a. Unit costs that remain constant.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
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Cost Behaviour
Variable costs are usually characterized by:
a. Unit costs that decrease as activity
increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
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Cost Behaviour
Variable costs are usually characterized by:
a. Unit costs that decrease as activity increases.
b. Total costs that increase as activity decreases.
c. Total costs that increase as activity increases.
d. Total costs that remain constant.
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Cost Classifications for Assigning Costs to Cost Objects
Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost object.
Examples: direct material and direct labour
Indirect costs
Costs cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
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Cost Classifications for Decision Making
Differential costs and revenues are costs and revenues that differ among alternatives.
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighbouring city that pays $2,000 per month. The commuting cost to the city is $300 per month.
Differential revenue is:
$2,000 – $1,500 = $500
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Differential Costs and Revenues
Costs and revenues that differ among alternatives.
Differential revenue is:
$2,000 – $1,500 = $500 Differential cost is: $300
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighbouring city that pays $2,000 per month. The commuting cost to the city is $300 per month.
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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you were not attending college, you could be earning $25,000 per year. Your opportunity cost of attending college for one year is $25,000.
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Sunk Costs
Sunk costs are costs that have already been incurred and cannot be changed by any decision. They are not differential costs and should be ignored when making decisions.
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.
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Quality Costs
Costs incurred to prevent, detect, or deal with defective products.
Four types of quality costs
Prevention costs
Appraisal costs
Internal failure costs
External failure costs
Quality Costs
Prevention costs are incurred to keep defects from happening.
Appraisal costs are incurred to ensure that defective products, once made, are not shipped to customers.
Internal failure costs are incurred as a consequence of detecting defective products before they are shipped to customers.
External failure costs are the consequences (in terms of repairs, servicing, and lost future business) of delivering defective products to customers.
Quality Cost Report
Quality costs are summarized on a quality cost report that shows the type of quality costs being incurred and their significance and trends.
The report helps managers understand the importance of quality costs, spot problem areas, and assess the way in which the quality costs are distributed.
Methods to calculate variable & fixed cost
3 methods to calculate
High and low method
Scatter graph method
Regression method using calculation
High and Low method
Use two points on the datea provided
Highest cost and highest activity
Lowest cost and the lowest activity
Slope or varianle cost per unit of activity is calculated as
VC = ( Change in cost [H-L] ) / change ange in output [H – L]
Fixed cost using High & low method
FC = Total cost - [VC per unit x high output]
OR
FC = [TC – VC per unit x low output ]
COST FUNCTION
Y = [Fixed cost + VC per unit ( X)]
Y = dependent variable
X = independent variable
2nd Method to find cost function
Scatter graph
Find the co-ordinates [x,y]
Plot the co-ordinates on a graph
Find the line of best fit
Find the slope : b1 = dy / dx
dy = [Y1 – Y 0 ]
dx =[X1 – X0 ]
VC per unit = dy/dx
FC = point on the line of best fit touches Y axis
Graph
y
x
(x,y)
Line of best fit
b0
b1= [ Y1 – Yo]/ [X 1 - Xo] bo = Fixed Cost
Illustration
x
y
0
Line of best fit
b0
x0
x1
y0
y1
b1
Graph to find the slope
Y= FC + VC (X)
b0
b1
FC (total )
Vc per
Unit
Cost function using calculation
b1 = [Covariance x y / Variance x ]
b0 = Mean Y – [b1 ( Mean X)]
Mean Y = average of y data
Mean X = average of x data
End of Chapter 2
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