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© 2006 McGraw-Hill Ryerson Ltd.. Chapter Five Cost Behaviour: Analysis and Use.
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Transcript of © 2006 McGraw-Hill Ryerson Ltd.. Chapter Five Cost Behaviour: Analysis and Use.
© 2006 McGraw-Hill Ryerson Ltd..
Learning Objectives
1. Describe how fixed and variable costs behave and how to use then to predict costs.
2. Use a scattergram plot to diagnose cost behaviour.
3. Analyze a mixed cost using the high-low method.
4. Analyze a mixed cost using least-squares regression.
After studying this chapter, you should be able to:
© 2006 McGraw-Hill Ryerson Ltd..
Learning Objectives
5. Prepare an income statement using the contribution format.
6. (Appendix 5A) Least-squares regression method elaborated.
After studying this chapter, you should be able to:
© 2006 McGraw-Hill Ryerson Ltd..
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges
level within the relevant range. of activity.
Total fixed cost remains thesame even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes up. relevant range.
Recall the summary of our cost behavior Recall the summary of our cost behavior discussion from an earlier chapter.discussion from an earlier chapter.
Types of Cost Behaviour Patterns
© 2006 McGraw-Hill Ryerson Ltd..
The Activity Base
A measure of what causes the
incurrence of a variable cost
A measure of what causes the
incurrence of a variable cost
UnitsUnitsproducedproduced
UnitsUnitsproducedproduced
Miles driven
Miles driven
labour hours
labour hours
Machine hours
Machine hours
© 2006 McGraw-Hill Ryerson Ltd..
Minutes Talked
To
tal L
on
g D
ista
nce
Tel
eph
on
e B
ill
True Variable Cost Example
A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity
level. Your total long distance telephone bill is based on how many minutes you talk.
© 2006 McGraw-Hill Ryerson Ltd..
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges
level within the relevant range. of activity.
Total fixed cost remains thesame even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes up. relevant range.
Recall the summary of our cost behavior Recall the summary of our cost behavior discussion from an earlier chapter.discussion from an earlier chapter.
Types of Cost Behaviour Patterns
© 2006 McGraw-Hill Ryerson Ltd..
Minutes Talked
Per
Min
ute
Tel
eph
on
e C
har
ge
Variable Cost Per Unit Example
A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute.
© 2006 McGraw-Hill Ryerson Ltd..
Extent of Variable Costs
The proportion of variable costs differs across organizations. For example . . .
A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend
to have to have fewerfewervariable costs.variable costs.
A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend
to have to have fewerfewervariable costs.variable costs.
A manufacturing companyA manufacturing companywill often have will often have manymany
variable costs.variable costs.
A manufacturing companyA manufacturing companywill often have will often have manymany
variable costs.variable costs.
A merchandising companyA merchandising companyusually will have a usually will have a highhigh
proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.
A merchandising companyA merchandising companyusually will have a usually will have a highhigh
proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.
A service companyA service companywill normally have a will normally have a highhigh
proportionproportion of variable costs. of variable costs.
A service companyA service companywill normally have a will normally have a highhigh
proportionproportion of variable costs. of variable costs.
© 2006 McGraw-Hill Ryerson Ltd..
Examples of Variable Costs
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labour, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials, direct labour, and variable overhead.
3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.
4. Service companies – supplies, travel, and clerical.
© 2006 McGraw-Hill Ryerson Ltd..
Volume
Co
st
True Variable Cost
Direct materials is a true or proportionately variable cost because the amount used
during a period will vary in direct proportion to the level of production activity.
© 2006 McGraw-Hill Ryerson Ltd..
Step-Variable Costs
A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or
decrease only in response to fairly wide changes in activity is known as a step-variable coststep-variable cost.
Volume
Co
st
© 2006 McGraw-Hill Ryerson Ltd..
Step-Variable Costs
Small changes in the level of production are not likely to have any effect on the number of
maintenance workers employed.
Small changes in the level of production are not likely to have any effect on the number of
maintenance workers employed.
Volume
Co
st
© 2006 McGraw-Hill Ryerson Ltd..
Step-Variable Costs
Only fairly wide changes in the activity level will cause a change in the number of maintenance
workers employed
Only fairly wide changes in the activity level will cause a change in the number of maintenance
workers employed
Volume
Co
st
© 2006 McGraw-Hill Ryerson Ltd..
RelevantRange
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
The Linearity Assumption and the Relevant Range
Accountant’s Straight-Line Approximation (constant
unit variable cost)
© 2006 McGraw-Hill Ryerson Ltd..
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges
level within the relevant range. of activity.
Total fixed cost remains thesame even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes up. relevant range.
Let’s look at fixed cost behavior on the next Let’s look at fixed cost behavior on the next screens.screens.
Types of Cost Behaviour Patterns
© 2006 McGraw-Hill Ryerson Ltd..
Number of Local Calls
Mo
nth
ly B
asic
T
elep
ho
ne
Bill
Total Fixed Cost Example
A fixed cost is a cost whose total dollar amount remains constant as the activity level changes. Your monthly basic telephone bill is probably fixed and does not
change when you make more local calls.
© 2006 McGraw-Hill Ryerson Ltd..
Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost is Variable cost per unit remainsproportional to the activity the same over wide ranges
level within the relevant range. of activity.
Total fixed cost remains thesame even when the activity Fixed cost per unit goes
Fixed level changes within the down as activity level goes up. relevant range.
Recall the summary of our cost behaviour Recall the summary of our cost behaviour discussion from an earlier chapter.discussion from an earlier chapter.
Types of Cost Behaviour Patterns
© 2006 McGraw-Hill Ryerson Ltd..
Number of Local Calls
Mo
nth
ly B
asic
Tel
eph
on
e B
ill p
er L
oca
l Cal
l
Fixed Cost Per Unit Example
Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call
decreases as more local calls are made.
© 2006 McGraw-Hill Ryerson Ltd..
ExamplesAdvertising and Research and Development
ExamplesAdvertising and Research and Development
ExamplesDepreciation on Equipment and
Real Estate Taxes
ExamplesDepreciation on Equipment and
Real Estate Taxes
Types of Fixed Costs
DiscretionaryMay be altered in the short-term by current managerial decisions
DiscretionaryMay be altered in the short-term by current managerial decisions
CommittedLong-term, cannot be significantly reduced
in the short term.
CommittedLong-term, cannot be significantly reduced
in the short term.
© 2006 McGraw-Hill Ryerson Ltd..
The Trend Toward Fixed Costs
The trend in many industries is toward greater fixed costs relative to variable costs.
As machines take overAs machines take overmany mundane tasksmany mundane taskspreviously performedpreviously performed
by humans, by humans, ““knowledge workersknowledge workers””
are demanded forare demanded fortheir minds rathertheir minds ratherthan their musclesthan their muscles
As machines take overAs machines take overmany mundane tasksmany mundane taskspreviously performedpreviously performed
by humans, by humans, ““knowledge workersknowledge workers””
are demanded forare demanded fortheir minds rathertheir minds ratherthan their musclesthan their muscles
Knowledge workersKnowledge workerstend to be salaried,tend to be salaried,highly-trained andhighly-trained and
difficult to replace. Thedifficult to replace. Thecost to compensatecost to compensate
these valued employeesthese valued employeesis is relatively fixedrelatively fixed
rather than variable.rather than variable.
Knowledge workersKnowledge workerstend to be salaried,tend to be salaried,highly-trained andhighly-trained and
difficult to replace. Thedifficult to replace. Thecost to compensatecost to compensate
these valued employeesthese valued employeesis is relatively fixedrelatively fixed
rather than variable.rather than variable.
© 2006 McGraw-Hill Ryerson Ltd..
Is Labour a Variable or a Fixed Cost?
The behaviour of wage and salary costs can differ across countries, depending on labour regulations, labour contracts, and custom.
In France, Germany, China, and Japan management has little flexibility in adjusting the size of the labour force.
Labour costs are more fixed in nature.
In France, Germany, China, and Japan management has little flexibility in adjusting the size of the labour force.
Labour costs are more fixed in nature.
In the United States and the United Kingdom management has greater latitude. Labour costs are more variable in nature.In the United States and the United Kingdom management
has greater latitude. Labour costs are more variable in nature.
© 2006 McGraw-Hill Ryerson Ltd..
Ren
t C
ost
in
T
ho
usa
nd
s o
f D
oll
ars
0 1,000 2,000 3,000 Rented Area (Square Feet)
0
30
60
Fixed Costs and Relevant Range
90
Relevant
Range
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
Total cost doesn’t change for a wide range of activity,
and then jumps to a new higher cost for
the next higher range of activity.
© 2006 McGraw-Hill Ryerson Ltd..
Fixed Costs and Relevant Range
Example:Example: Office space is Office space is available at a rental rate of available at a rental rate of
$30,000 per year in $30,000 per year in increments of 1,000 square increments of 1,000 square feet. As the business grows feet. As the business grows
more space is rented, more space is rented, increasing the total cost.increasing the total cost.
Example:Example: Office space is Office space is available at a rental rate of available at a rental rate of
$30,000 per year in $30,000 per year in increments of 1,000 square increments of 1,000 square feet. As the business grows feet. As the business grows
more space is rented, more space is rented, increasing the total cost.increasing the total cost.
The relevant range of activity for a fixed cost is the range of activity over which the graph of
the cost is flat.
© 2006 McGraw-Hill Ryerson Ltd..
How does this How does this type of fixed cost type of fixed cost differ from a step-differ from a step-
variable cost?variable cost?
Step-variable costs can be adjusted
more quickly and . . .
The width of the activity steps is
much wider for the fixed cost.
Fixed Costs and Relevant Range
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Which of the following statements about cost behaviour are true?
1. Fixed costs per unit vary with the level of activity.
2. Variable costs per unit are constant within the relevant range.
3. Total fixed costs are constant within the relevant range.
4. Total variable costs are constant within the relevant range.
Which of the following statements about cost behaviour are true?
1. Fixed costs per unit vary with the level of activity.
2. Variable costs per unit are constant within the relevant range.
3. Total fixed costs are constant within the relevant range.
4. Total variable costs are constant within the relevant range.
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Which of the following statements about cost behaviour are true?
1. Fixed costs per unit vary with the level of activity.
2. Variable costs per unit are constant within the relevant range.
3. Total fixed costs are constant within the relevant range.
4. Total variable costs are constant within the relevant range.
Which of the following statements about cost behaviour are true?
1. Fixed costs per unit vary with the level of activity.
2. Variable costs per unit are constant within the relevant range.
3. Total fixed costs are constant within the relevant range.
4. Total variable costs are constant within the relevant range.
© 2006 McGraw-Hill Ryerson Ltd..
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
A mixed cost has both fixed and variablecomponents. Consider the example of utility cost.
A mixed cost has both fixed and variablecomponents. Consider the example of utility cost.
Mixed Costs
Total mixed cost
© 2006 McGraw-Hill Ryerson Ltd..
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
X
Y
Mixed Costs
Total mixed cost
© 2006 McGraw-Hill Ryerson Ltd..
Mixed Costs Example
If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?what is the amount of your utility bill?
If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?what is the amount of your utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100$100
© 2006 McGraw-Hill Ryerson Ltd..
Analysis of Mixed Costs
Each account is classified as eitherEach account is classified as eithervariable or fixed based on the analyst’svariable or fixed based on the analyst’s
knowledge of how the account behaves. knowledge of how the account behaves.
Each account is classified as eitherEach account is classified as eithervariable or fixed based on the analyst’svariable or fixed based on the analyst’s
knowledge of how the account behaves. knowledge of how the account behaves.
Cost estimates are based on an Cost estimates are based on an evaluation of production methods, and evaluation of production methods, and
material, labour and overhead material, labour and overhead requirements.requirements.
Cost estimates are based on an Cost estimates are based on an evaluation of production methods, and evaluation of production methods, and
material, labour and overhead material, labour and overhead requirements.requirements.
Account Analysis and the Engineering ApproachAccount Analysis and the Engineering ApproachAccount Analysis and the Engineering ApproachAccount Analysis and the Engineering Approach
© 2006 McGraw-Hill Ryerson Ltd..
Plot the data points on a graph Plot the data points on a graph (total cost vs. activity).(total cost vs. activity).
Plot the data points on a graph Plot the data points on a graph (total cost vs. activity).(total cost vs. activity).
0 1 2 3 4
*
Mai
nte
nan
ce C
ost
1,00
0’s
of
Do
llars
10
20
0
***
**
**
*
*
Patient-days in 1,000’s
X
Y
The Scattergraph Method
© 2006 McGraw-Hill Ryerson Ltd..
The Scattergraph Method
Draw a line through the data points with about anDraw a line through the data points with about anequal numbers of points above and below the line. equal numbers of points above and below the line. Draw a line through the data points with about anDraw a line through the data points with about an
equal numbers of points above and below the line. equal numbers of points above and below the line.
0 1 2 3 4
*
Mai
nte
nan
ce C
ost
1,00
0’s
of
Do
llars
10
20
0
***
**
**
*
*
Patient-days in 1,000’s
X
Y
© 2006 McGraw-Hill Ryerson Ltd..
The Scattergraph Method
Use one data point to estimate the total level of activity Use one data point to estimate the total level of activity and the total cost. and the total cost.
Use one data point to estimate the total level of activity Use one data point to estimate the total level of activity and the total cost. and the total cost.
Intercept = Fixed cost: $10,000
0 1 2 3 4
*
Mai
nte
nan
ce C
ost
1,00
0’s
of
Do
llars
10
20
0
***
**
**
*
*
Patient-days in 1,000’s
X
Y
Patient days = 800Patient days = 800
Total maintenance cost = $11,000Total maintenance cost = $11,000
© 2006 McGraw-Hill Ryerson Ltd..
The Scattergraph Method
Make a quick estimate of variable cost per unit and Make a quick estimate of variable cost per unit and determine the cost equation. determine the cost equation.
Make a quick estimate of variable cost per unit and Make a quick estimate of variable cost per unit and determine the cost equation. determine the cost equation.
Variable cost per unit = $1,000 800
= $1.25/patient-day$1.25/patient-day
Y = $10,000 + $1.25XY = $10,000 + $1.25XY = $10,000 + $1.25XY = $10,000 + $1.25X
Total maintenance at 800 patients 11,000$ Less: Fixed cost 10,000 Estimated total variable cost for 800 patients 1,000$
Total maintenance at 800 patients 11,000$ Less: Fixed cost 10,000 Estimated total variable cost for 800 patients 1,000$
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
© 2006 McGraw-Hill Ryerson Ltd..
The High-Low Method
Assume the following hours of maintenance work and the total maintenance costs for six months.
© 2006 McGraw-Hill Ryerson Ltd..
The High-Low Method
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
The The variable cost variable cost per hourper hour of of
maintenance is maintenance is equal to the change equal to the change
in cost divided by in cost divided by the change in hours.the change in hours.
= $8.00/hour$8.00/hour$2,400
300
© 2006 McGraw-Hill Ryerson Ltd..
The High-Low Method
Total Fixed Cost = Total Cost – Total Variable CostTotal Fixed Cost = Total Cost – Total Variable Cost
Total Fixed Cost = $9,800 – ($8/hour Total Fixed Cost = $9,800 – ($8/hour × 800 hours)× 800 hours)
Total Fixed Cost = $9,800 – $6,400Total Fixed Cost = $9,800 – $6,400
Total Fixed Cost = Total Fixed Cost = $3,400$3,400
© 2006 McGraw-Hill Ryerson Ltd..
The High-Low Method
Y = $3,400 + $8.00Y = $3,400 + $8.00XXThe Cost Equation for Maintenance
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit $4,000 ÷ 40,000 units = $0.10 per unit
Units Cost
High level 120,000 14,000$
Low level 80,000 10,000
Change 40,000 4,000$
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
© 2006 McGraw-Hill Ryerson Ltd..
Quick Check
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
© 2006 McGraw-Hill Ryerson Ltd..
Least-Squares Regression Method
A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear
relationship between the X and Y variables.
This method uses This method uses allall of the of thedata points to estimatedata points to estimatethe fixed and variablethe fixed and variablecost components of acost components of a
mixed cost.mixed cost.
This method uses This method uses allall of the of thedata points to estimatedata points to estimatethe fixed and variablethe fixed and variablecost components of acost components of a
mixed cost.mixed cost.The goal of this method isThe goal of this method isto fit a straight line to theto fit a straight line to thedata that data that minimizes theminimizes the
sum of the squared errorssum of the squared errors..
The goal of this method isThe goal of this method isto fit a straight line to theto fit a straight line to thedata that data that minimizes theminimizes the
sum of the squared errorssum of the squared errors..
© 2006 McGraw-Hill Ryerson Ltd..
Least-Squares Regression Method
• Software can be used to fit a regression line through the data points.
• The cost analysis objective is the same: Y = a + bX
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
Least-squares regression also provides a statistic,
called the R2, that is a measure of the goodness
of fit of the regression line to the data points.
© 2006 McGraw-Hill Ryerson Ltd..
0 1 2 3 4
To
tal
Co
st
10
20
0
Activity
****
**
****
Least-Squares Regression Method
R2 is the percentage of the variation in total cost explained by the activity.
R2 is the percentage of the variation in total cost explained by the activity.
R2 varies from 0% to 100%, andthe higher the percentage the better.
X
Y
© 2006 McGraw-Hill Ryerson Ltd..
Comparing Results From the Three Methods
The three methods just discussed provide slightly different estimates of the fixed and
variable cost components of the mixed cost.
This is to be expected because each method uses differing amounts of the data points to
provide estimates.
Least-squares regression provides the most accurate estimate because
it uses all the data points.
The three methods just discussed provide slightly different estimates of the fixed and
variable cost components of the mixed cost.
This is to be expected because each method uses differing amounts of the data points to
provide estimates.
Least-squares regression provides the most accurate estimate because
it uses all the data points.
© 2006 McGraw-Hill Ryerson Ltd..
Let’s put our knowledge of cost behaviour to work
by preparing a contribution format income statement.
© 2006 McGraw-Hill Ryerson Ltd..
The Contribution Format
Total Unit
Sales Revenue 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net operating income 10,000$
Total Unit
Sales Revenue 100,000$ 50$
Less: Variable costs 60,000 30
Contribution margin 40,000$ 20$
Less: Fixed costs 30,000
Net operating income 10,000$
The contribution margin format emphasizes The contribution margin format emphasizes cost behaviour. Contribution margin covers cost behaviour. Contribution margin covers
fixed costs and provides for income.fixed costs and provides for income.
The contribution margin format emphasizes The contribution margin format emphasizes cost behaviour. Contribution margin covers cost behaviour. Contribution margin covers
fixed costs and provides for income.fixed costs and provides for income.
© 2006 McGraw-Hill Ryerson Ltd..
Uses of the Contribution Format
The contribution income statement format is used The contribution income statement format is used as an internal planning and decision making tool. as an internal planning and decision making tool.
We will use this approach for:We will use this approach for:
1.1. Cost-volume-profit analysis (Chapter 6).Cost-volume-profit analysis (Chapter 6).
2.2. Budgeting (Chapter 9).Budgeting (Chapter 9).
3.3. Segmented reporting of profit data (Chapter 12).Segmented reporting of profit data (Chapter 12).
4.4. Special decisions such as pricing and make-or-Special decisions such as pricing and make-or-buy analysis (Chapter 13).buy analysis (Chapter 13).
The contribution income statement format is used The contribution income statement format is used as an internal planning and decision making tool. as an internal planning and decision making tool.
We will use this approach for:We will use this approach for:
1.1. Cost-volume-profit analysis (Chapter 6).Cost-volume-profit analysis (Chapter 6).
2.2. Budgeting (Chapter 9).Budgeting (Chapter 9).
3.3. Segmented reporting of profit data (Chapter 12).Segmented reporting of profit data (Chapter 12).
4.4. Special decisions such as pricing and make-or-Special decisions such as pricing and make-or-buy analysis (Chapter 13).buy analysis (Chapter 13).
© 2006 McGraw-Hill Ryerson Ltd..
The Contribution Format
Used primarily forUsed primarily forexternal reporting.external reporting.
Used primarily byUsed primarily bymanagement.management.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Analysis Example
Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average
fixed cost and fixed cost and variable cost per unit. variable cost per unit.
Using the data to the Using the data to the right, let’s see how to right, let’s see how to do a regression using do a regression using
Microsoft Excel.Microsoft Excel.
Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average
fixed cost and fixed cost and variable cost per unit. variable cost per unit.
Using the data to the Using the data to the right, let’s see how to right, let’s see how to do a regression using do a regression using
Microsoft Excel.Microsoft Excel.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
You will need three pieces of You will need three pieces of information from your information from your regression analysis:regression analysis:
1.1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope)Unit (line slope)
2.2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept)intercept)
3.3. Goodness of fit, or RGoodness of fit, or R22
You will need three pieces of You will need three pieces of information from your information from your regression analysis:regression analysis:
1.1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope)Unit (line slope)
2.2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept)intercept)
3.3. Goodness of fit, or RGoodness of fit, or R22
To get these three pieces To get these three pieces information we will need to information we will need to useuse three three different Excel different Excel functions.functions.
LINEST, INTERCEPT, & RSQLINEST, INTERCEPT, & RSQ
To get these three pieces To get these three pieces information we will need to information we will need to useuse three three different Excel different Excel functions.functions.
LINEST, INTERCEPT, & RSQLINEST, INTERCEPT, & RSQ
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the
pull down menu and pull down menu and scroll down to “More scroll down to “More
Functions . . .”Functions . . .”
Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the
pull down menu and pull down menu and scroll down to “More scroll down to “More
Functions . . .”Functions . . .”
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
Scroll down to the Scroll down to the ““StatisticalStatistical”, ”,
functions. Now functions. Now scroll down the scroll down the
statistical statistical functions until you functions until you
highlight highlight ““LINESTLINEST””
Scroll down to the Scroll down to the ““StatisticalStatistical”, ”,
functions. Now functions. Now scroll down the scroll down the
statistical statistical functions until you functions until you
highlight highlight ““LINESTLINEST””
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of the estimate of the
slope of the line.slope of the line.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
With you cursor in cell With you cursor in cell F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for
special functions. special functions. Select Select Statistical Statistical and and
scroll down to scroll down to highlight the highlight the
INTERCEPTINTERCEPT function. function.
With you cursor in cell With you cursor in cell F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for
special functions. special functions. Select Select Statistical Statistical and and
scroll down to scroll down to highlight the highlight the
INTERCEPTINTERCEPT function. function.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of the estimate of the
fixed costs.fixed costs.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
Finally, we will Finally, we will determine the determine the ““goodness of goodness of fitfit”, or ”, or RR22, by , by
using the using the RSQRSQ function.function.
Finally, we will Finally, we will determine the determine the ““goodness of goodness of fitfit”, or ”, or RR22, by , by
using the using the RSQRSQ function.function.
© 2006 McGraw-Hill Ryerson Ltd..
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of estimate of RR22..