chap 016 man acc behavior of costs

8/9/2019 Chap 016 Man Acc Behavior of Costs

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McGraw-Hill/Irwin

Chapter 16

The Behaviorof Costs

Copyright 2011. The McGraw-Hill Companies. All ights eser!e".


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Cost-VolumeRelationships

Higher volume causes higher costs. However, percentage increase in costs

is usually less than increase in volume. Depends on behavior of costs.

Variable costs. i!ed costs.

"emivariable costs.# $art variable, part %!ed.# &lso called semi%!ed costs or mi!ed costs.


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Variable Costs

'n T(T&), varies directly andproportionately with volume of activity.

Cost $*+ -'T of activity remainsconstant.

*!amples /aterial costs varies with units sold. Vehicle fuel costs varies with miles driven. "alespersons0 commissions varies with

sales dollars generated.


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Fixed Costs

'n T(T&), does not change withvolume of activity.

However, are %!ed for a range of

activity and a limited period of time. Cost $*+ -'T of activity decreasesas the level of activity increases .

*!amples Building rent. $roperty ta!es. /anagement salaries.


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Semivariable Costs $art variable cost, part %!ed cost. 'n T(T&), varies less than

proportionately with volume of activity.

*!ample *lectricity cost in a factory. Variable component Cost of powering

production e1uipment. i!ed component Cost of lighting.

To e2ectively analy3e, will need tobrea4 down into variable and %!edcomponents.


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Cost-Volume (C-V)Diagram

'llustrations 5675 and 5678. 9 or vertical a!is re:ects total cost. ; or hori3ontal a!is re:ects volume. y < m! = b.

Total cost < total variable cost = total %!edcost.

y is the total cost at a volume of !. m is the rate of cost change per unit of volume

change, or the slope >i.e., variable costs?. b is the vertical intercept, which represents the

%!ed cost component.


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TC TFC !("VC #$) TC < total cost@ T C < total %!ed cost >per time period?, VC < nit variable cost >per unit of

volume?, ; < volume. *1uations for

Variable cost line TC < > VC A;?. i!ed cost line TC < T C. "emivariable cost TC < T C =

> VCA;?.


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"nit Costs

&verage cost per unit. Total cost volume of activity.

&s volume goes upT%pe o&Cost

Total Cost Cost 'er"nit

Variable 'ncreases "tays thesame

i!ed "tays thesame

Decreases

"emivariabl 'ncreases Decreases


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nherent Conditions o& C-V nal%sis

+elevant range. & straight line appro!imates cost

behavior only within a certain range ofvolume.

hen volume approaches 3ero,management ta4es steps to reduce

%!ed costs. hen volume e!ceeds relevant range,

%!ed costs increase.


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+elevant time period. &mount of variable costs depends

on the time period over whichbehavior is estimated.

'f the time period is one day, fewcosts are variable.

(ver an e!tremely long timeperiod, no costs are %!ed.



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E"tic4y Costs.F# /any costs considered variable actually

fall less with decreases of activity than

they rise with increases.# hyG /anagers tend to increaseresources more 1uic4ly than theydecrease.

# *!amples "ales commissions with minimum guarantees. /anagers slower to %re employees than to hire.



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*nvironment. C7V analysis only shows how costs

vary with volume. /any other environmental

in:uences a2ecting cost. *.g., changes in wage rates, fringe

bene%ts, material prices,technology.



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)inear assumption. C7V relationship is often not linear. "ome cost functions are curved or occur

in steps >i.e., curvilinear, step7function?. "olutionG "egments of the C7V

relationship can be appro!imated by a

straight line, each with its own relevantrange.



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Step-Fun*tion Costs

'ncurred when costs are added in discretechun4s.

*.g., a supervisor is needed for every 5 wor4ers.

&dding the new step or Echun4F of costsincreases capacity. Height of step >riser? indicates the cost of

adding incremental capacity. idth of step >tread? shows how much

additional volume of activity can be servicedby the new step up in cost.


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Step Fun*tion Costs

'f steps are small, then relationshipcan be appro!imated by a variable

cost line. 'f steps are wider, then relationshipcan be appro!imated by a %!edcost line >but only if activity iswithin relevant range and relevanttime period?.


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+stimating The C-VRelationship

5. Iudgment. &lso called account7by7account

method. *ach account in cost structure is

estimated and divided between%!ed and variable costs.


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8. High7)ow method. *stimate total costs for two volume levels,

preferably one high level and one low level. To determine slope or variable cost per unit

>Change in total cost between the twopoints? >change in units of activity?.

To determine %!ed costs Ta4e total cost at either point and

subtract out variable cost >i.e., variablecost per unit multiplied by units ofactivity?.


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J. "catter diagram $lot actual costs and volume on C7V diagram. Visually draw a line of best %t. +ead across on diagram to determine total

cost for any level of activity.

K. )inear regression & statistical method to determine line of best

%t. Best to eliminate outliers or unusual

observations >e.g., a period during whichthere was a stri4e?.


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o en a ro ems,ith +stimating The C-

V Relationship se of past data to predict the future. (ther factors >other than volume? may

be a2ecting cost.

*.g., may be due to trend >or drift? of costover time, not relationship of cost to volume. )inear appro!imations can hide step

function characteristics. Costs may appear to be %!ed in short

run, but are actually variable in long run>i.e., long7term variable costs?.


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easures o& Volume

Best measure is one that is thecause of the change in cost.

nits producedG

# Can be reliable when considering asingle7product.# -ot as reliable when producing multiple

products with di2erent cost structures.

Common measures used )abor hours, labor dollars, machinehours, weightLvolume measures >e.g.,tons, barrels?, sales value.


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in Sele*ting a Volume

easure 'nput measure >resources used?or output measure >goods or

services produced?G /onetary measure >e.g., labor

dollars? or -onmonetarymeasure >e.g., labor hours?G


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nput vs/ 0utputeasures

'nput measures >resources used?. *.g., labor hours wor4ed, labor cost, machine

hours, 4ilowatt hours of electricity, pounds ofmaterial.

Commonly used in manufacturing settings. (utput measures >goodsLservices

produced?. *.g., units of productLservice sold, revenue

dollars. Commonly used in retailLservice settings.


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easure2 3eneral

Considerations 'ra*ti*alit% >i.e., the availability of dataon volume measure?.

Causalit% >i.e., the volume measure

causes the cost to be incurred?. S*ope >i.e., the more items of cost thatare combined in the cost function themore diMcult it is to relate causality to a

single measure?. ppropriateness >i.e., changes in

conditions may change current usefulnessof a measure?.


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'ro4tgraph

&dd revenue line to C7V diagram. &ssumes constant selling price. $ < unit selling price. T+ < total revenue.


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5rea -even nal%sis

T+ < > $ A ;?. TC < T C = > VC A ;?. &t brea47even T+ < TC. Brea47even volume

> $A

;? < T C = > VCA

;?, or ; < T C > $ 7 VC?.


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5rea -even nal%sis

nit contribution. &mount each unit contributes to covering

%!ed costs >%rst? and toward generating pro%t

>second?. > nit selling price? # >variable cost per unit?. $ 7 VC. Constant >unchanging? for all volumes within

relevant range. &lso 4nown as unit contribution margin or

marginal income.


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5rea -even nal%sis

Contribution margin percentage. Contribution as a percentage of

revenues. > $ 7 VC? $. Brea47even in units

i!ed costs unit contribution. Brea47even in revenue dollars

i!ed costs contribution percentage.


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Related nal%sis

Target $ro%t. Calculate volume needed to achieve a target >T?

level of pro%t. > $ A;? < T C = > VC A;? = T, or ; < >T C=T? > $ 7 VC?.

(perating )everage. N change in pro%t caused by a N change in volume. Caused by degree >N? of %!ed cost in company. Higher operating leverage means higher changes in

pro%t.


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"sing the 'ro4tgraph

Contribution pro%tgraph.# +eplace total costLrevenue on vertical

a!is with income.

# ocuses on activity above brea47even. Cash amounts vs. accrual amounts.

Depends on desired focus >i.e., ade1uate

cash :ow vs. ade1uate pro%tability?. Consistency is crucial >i.e., sales volume

should e1ual production volume?.


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C V ' i h l i l


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C-V-' ,ith ultiple'rodu*ts

&nalysis is similar if *ach product has a similar contribution

margin percentage.

$roduct mi! >proportion of each productin sales total? remains relatively constant. se weighted7average unit contribution.

'f conditions above do not e!ist

Calculate C7V7$ for each productindividually. +e1uires allocation of %!ed costs to individual

products.

0 h 7 *


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0ther n7uen*es onCosts

Changes in input prices. +ate at which volume changes.

# *.g., rapid changes in volume mayma4e it more diMcult to changepersonnel costs.

Direction of change in volume.

# Tends to be a lag in cost changes. Duration of change.# Temporary changes a2ect costs less

than long7term changes.

0 h 7 *


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0ther n7uen*es onCosts

$rior 4nowledge of change.# &llows planning to occur.

$roductivity.# &s productivity changes costs change.

/anagement discretion. )earning curves.

# nit production costs decrease as acompany gains e!perience producing anew product.

chap 016 man acc behavior of costs

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