Measurement of Cost Behavior
-
Upload
barbara-pomales -
Category
Documents
-
view
319 -
download
7
Transcript of Measurement of Cost Behavior
This is the html version of the file http://www.freewebs.com/accountingforengineers/KT4982/Week5.ppt.Google automatically generates html versions of documents as we crawl the web.
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 1
Measurement of CCoosstt Behaviour
Chapter 3İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 2
Step- and Mixed-CCoosstt Behaviour Patterns
Step costs change abruptly at intervals
of activity because the resources and
their costs come in indivisible chunks.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 3
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
1 of 28 10/9/10 5:19 PM
Step- and Mixed-CCoosstt Behaviour Patterns
Lease cost example
Oil and gas exploration activity
Relevantrange
Actual costbehavior
Fixed costapproximation
Lease costİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 4
Step- and Mixed-CCoosstt Behaviour Patterns
Supermarket checker wage cost example
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
2 of 28 10/9/10 5:19 PM
Shoppers per hour
Relevant range
Variablecost
approximation
Actual costbehaviour
40
440
Wage costİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 5
Step- and Mixed-CCoosstt Behaviour Patterns
Mixed costs contain elements of both
fixed- and variable-cost behavior.
The fixed-cost element is unchanged
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
3 of 28 10/9/10 5:19 PM
over a range of cost-driver activity.
The variable-cost element varies
proportionately with cost-driver activity.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 6
Step- and Mixed-CCoosstt Behaviour Patterns
Facilities maintenancedepartment cost
Number of patient-days per month
$10,000
1,000
5,000
Totalvariablecost Fixed
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
4 of 28 10/9/10 5:19 PM
cost Relevant range
$5.00 perpatient day
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 7
Product and Service Decisions and the Value Chain
Distribution channels
Choice of process and product design
Quality levels
Product features
Management influence on cost behaviour
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 8
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
5 of 28 10/9/10 5:19 PM
2. Capacity Decisions
What are capacity costs?
They are the fixed costs of being able
to achieve a desired level of production or
to provide a desired level of service while
maintaining product or service attributes,
e.g. qualityİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 9
2. Capacity Decisions (Contd.)
Full capacity,
New plant
& assembly lines
Cannot recover
fixed costs
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
6 of 28 10/9/10 5:19 PM
Overtime, oursource
production
Good economic conditions
Can be eliminated
Adverse economic conditionsİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 10
3. Committed Fixed Costs
Salaries of key personnel
Committed fixed costs usually arise
from the possession of facilities,
equipment, and a basic organization.
Lease payments
Property taxesİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 11
4. Discretionary Fixed Costs
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
7 of 28 10/9/10 5:19 PM
Discretionary fixed costs are costs fixed
at certain levels only because managementdecided that these levels of cost should be
incurred to meet the organization’s goals.
These discretionary fixed costs have no
obvious relationship to levels of output
activity but are determined as part
of the periodic planning process.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 12
4. Discretionary Fixed Costs (Contd.)
Each planning period, managementwill determine how much to
spend on discretionary items.
These costs then become fixed
until the next planning period.
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
8 of 28 10/9/10 5:19 PM
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 13
Examples of Discretionary Fixed Costs
Advertising and promotion
Research and development
Management salaries
Employee trainingİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 14
5. Technology Decisions
Choice of technology (e-commerce vs.
in-store or mail-order sales) positions the
organization to meet its current goals and
to respond to changes in the environment.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 15
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
9 of 28 10/9/10 5:19 PM
6. CCoosstt-Control Incentives
Managers use their knowledge of costbehaviour to set cost expectations.
Employees may receive rewards that
are tied to meeting these expectations.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 16
CCoosstt Functions
Planning and controlling the activities
of an organization require accurate
and useful estimates of future
fixed and variable costs.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 17
CCoosstt Functions (Contd.)
Understanding relationships between costs
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
10 of 28 10/9/10 5:19 PM
and their cost drivers allows managers to...
evaluate strategic plans and
operational improvement programs.
make short- and long-run decisions.
plan or budget the effects of future activities.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 18
CCoosstt Functions (Contd.)
The 1st step in estimating or predicting
costs is measuring cost behaviour as a
function of appropriate cost drivers.
The 2nd step is to use these costmeasures to estimate future costs at
expected levels of cost-driver activity.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 19
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
11 of 28 10/9/10 5:19 PM
CCoosstt Function Equation
Y = Total cost
F = Fixed cost
V = Variable cost per unit
X = Cost-driver activity in number of unitsİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 20
CCoosstt Function Equation (Contd.)
Mixed-cost function:
Y = F + VX
The mixed-cost function is
called a linear-cost function.
Y = $10,000 + $5.00Xİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 21
Developing CCoosstt Functions
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
12 of 28 10/9/10 5:19 PM
Plausibility:A cost function’s estimates of costs
at actual levels of activity must reliably
conform with actually observed costs.
The cost function must be believable.
Reliability:İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 22
Choice of CCoosstt Drivers: Activity Analysis
Choosing a cost function starts
with choosing cost drivers.
Managers use activity analysis to
identify appropriate cost drivers.
Activity analysis directs management
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
13 of 28 10/9/10 5:19 PM
accountants to the appropriate
cost drivers for each cost.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 23
Choice of CCoosstt Drivers: Activity Analysis
Northwestern Computers makes 2
products: Mozart-Plus and Powerdrive
In the past, most of the support costs
were twice as much as labour costs.
Northwest has upgraded the production
function, which has increased support
costs and reduced labour cost.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 24
Choice of CCoosstt Drivers:
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
14 of 28 10/9/10 5:19 PM
Activity Analysis
Using the old cost driver, labour cost, the
prediction of support costs would be:
Labour cost $ 8.50 $130.00
Support cost:2 × Direct labour cost $17.00 $260.00
Mozart-Plus
Powerdriveİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 25
Choice of CCoosstt Drivers: Activity Analysis
Using the more appropriate cost driver,
the number of components added to
products, the predicted support costs are:İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
15 of 28 10/9/10 5:19 PM
3 - 26
Choice of CCoosstt Drivers: Activity Analysis
Support cost at $20/component
$20 × 5 components $100.00
$20 × 9 components $180.00
Difference in predicted
support cost $ 83.00 $ 80.00
higher lower
Mozart-Plus
Powerdriveİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 27
Methods of Measuring CCoosstt Functions
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
16 of 28 10/9/10 5:19 PM
1. Engineering analysis2. Account analysis3. High-low analysis4. Visual-fit analysis5. Least-squares regression analysisİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 28
1. Engineering Analysis
It measures cost behaviour according to what
costs should be, not by what costs have been.
Engineering analysis entails a systematic
review of materials, supplies, labor,
support services, and facilities
needed for products and services.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 29
2. Account Analysis
The simplest method of account
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
17 of 28 10/9/10 5:19 PM
analysis selects a plausible
cost driver and classifies each
account as a variable or fixed cost.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 30
Account Analysis Example
Supervisor’s salary and benefits $3,800 $3,800Hourly workers’ wages and benefits 14,674 $14,674Equipment depreciation and rentals 5,873 5,873Equipment repairs 5,604 5,604Cleaning supplies 7,472 7,472Total maintenance costs $37,423 $9,673 $27,750
Monthly cost
Amount
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
18 of 28 10/9/10 5:19 PM
Fixed
Variableİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 31
Account Analysis Example
Fixed cost per month = $9,673
Variable cost per patient-day
= $27,750 ÷ 3,700
= $7.50 per patient-day
3,700 patient-days
Y = $9,673 + ($7.50 × patient-days)İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 32
3. High-Low Method
The focus of this method is normally on
the highest- and lowest-activity points.
The first step is to plot the historical
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
19 of 28 10/9/10 5:19 PM
data points on a graph.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 33
High-Low Method Example
High month: April
Maintenance cost: $47,000
Number of patient-days: 4,900
Low month: September
Maintenance cost: $17,000
Number of patient-days: 1,200
What is the variable cost?İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 34
High-Low Method Example
($47,000 – $17,000) ÷ (4,900 – 1,200)
= $30,000 ÷ 3,700 = $8.1081
What is the fixed cost?
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
20 of 28 10/9/10 5:19 PM
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 35
High-Low Method Example
$47,000 = Fixed cost + ($8.1081× 4,900)
$47,000 – $39,730 = $7,270
$17,000 = Fixed cost + ($8.1081× 1,200)
$17,000 – $9,730 = $7,270İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 36
4. Visual-Fit Method
In the visual-fit method, the cost analyst
visually fits a straight line through a plot
of all of the available data, not just
between the high point and the
low point, making it more reliable
than the high-low method.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
21 of 28 10/9/10 5:19 PM
3 - 37
5. Least-Squares Regression Method
Regression analysis measures
a cost function more objectively
by using statistics to fit a costfunction to all the data.
Regression analysis measures
cost behavior more reliably than
other cost measurement methods.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 38
Coefficient of Determination
One measure of reliability,
or goodness of fit, is the
coefficient of determination,
R² (or R-squared).
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
22 of 28 10/9/10 5:19 PM
The coefficient of determination
measures how much of the
fluctuation of a cost is explained
by changes in the cost driver.İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 39
Exercise 3-50 (Page 120)
Sandra, a cost analyst at ABC Company, was asked to predict overhead costs for the company’s operations in 2005, when 510 units are expected to be produced. She collected the following quarterly data:
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 40
991
90
3/04
1050
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
23 of 28 10/9/10 5:19 PM
122
2/04
835
84
1/04
957
84
4/03
996
115
3/03
1066
129
2/03
997
124
1/03
1042
133
4/02
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
24 of 28 10/9/10 5:19 PM
1119
125
3/02
1111
128
2/02
1001
125
1/02
1131
136
4/01
655
72
3/01
715
79
2/01
721
76
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
25 of 28 10/9/10 5:19 PM
1/01
Overhead costs (RM)
Production (units)
Quarterİ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 41
Exercise 3-50 (Page 120) (Contd.)
Using the high-low method to estimate costs, prepare a prediction of overhead costs for 2005.
Variable cost/unit
= ($1,131 - $655) (136 - 72)
= $476 64 = $7.4375
Fixed cost= $1,131 - (136 x 7.4375)
= $119.50İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 42
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
26 of 28 10/9/10 5:19 PM
Exercise 3-50 (Page 120) (Contd.)
Predicted cost for 510 units
= ($119.50 x 4) + (510 x $7.4375)
= $4,271.13
Notice that the data are quarterly observations. Thus, the annual fixed cost is 4 times the computed (quarterly) fixed cost.
İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,Horngren/Sundem/Stratton
3 - 43
Exercise 3-50 (Page 120) (Contd.)
2. Sandy ran a regression analysis using the data she had collected. The result was:
Y = RM337 + 5.75X
Using this cost function, predict costs for 2005.
Predicted cost for 510 units
= ($337 x 4) + (510 x $5.75)
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
27 of 28 10/9/10 5:19 PM
= $4,280.50İ2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e,
Horngren/Sundem/Stratton
3 - 44
Exercise 3-50 (Page 120) (Contd.)
3. Which prediction do you prefer? Why?
The regression analysis gives better cost estimates because it uses all the data to form a cost function.
The 2 points used by the high-low method may not be representative of the general relation between costs and volume.
Measurement of Cost Behavior http://webcache.googleusercontent.com/search?q=cache:Rpw2...
28 of 28 10/9/10 5:19 PM