Chapter 2B

Cost Estimation

Why Know How Costs Behave? Must cover all costs!! Ability to predict future costs under different

circumstances and activity levels

WHY?

True (always) Variable – ex: Material Step Variable – Technicians

5 computers = 1 tech 6 -10computers = 2 tech Would it cost you the same for 6 computers as 10?

Relevant Range Range: 100,000 110,000

Machines 5 6 Manpower 5 6 Facilities 2000sqft 5000sqft

TERMINOLOGY

Defined: remain the same every month Can change but will remain the same after that

Committed Costs – Can’t be significantly reduced – locked in (rent)

Discretionary Costs –Can be managed – not locked in (advertising)

FIXED COSTSpg 30-32

Semi Variable - includes both a fixed costs and a variable cost

Examples: Utilities, licenses, maintenance costs, nursing wages

MIXED COSTS(pg 33)

To estimate the mixed cost use this formula

Total Cost = Fixed Cost + Variable Cost a + bx

Total Utilities Costs = $200 + .30 per kilowatt(2000 kilowatt) $260 = $200 + $60

COST FORMULA (pg 34)

Fixed Cost - $5,000 Variable Cost- $3.00/per unit

If we sold 10,000 units what would be the cost? $5,000 + 3.00 (10,000) = $35,000 Per Unit Cost 3.50

Bad Times only sell ½ 5,000 units: Cost? $5,000 + 3.00(5,000) = $20,000 Per Unit 4.00

Exercise 2-3 pg 53

Application

To determine the fixed cost and variable cost from total cost

SCATTERGRAM (quick and dirty) HIGH LOW (easy but not accurate) REGRESSION (Computer and accurate)

Three Ways

Y= dependent variable = $$$$ X=independent variable= activity or

volume (causes the cost) Fixed cost is where the line crosses the Y axis

SCATTERGRAM(pg 35-38)

Fixed Costs

Y

X

1. 0 is the corner where X and Y meet 2. For Y axis take the highest # to an even # add 20%

for the maximum # 3. Divide in ¼ spans. 4. Do same for X axis. To plot the dots 1. go over to the x axis then up to the matching $ on y

axis. Put a dot. Do same for all total cost per activity 2. Draw a straight line that has the smallest space

between the line and the dots. 3. Where this line meets the y line is the fixed cost. The

difference between the line and the dot is the variable cost.

Exercise 2-10 pg 56

HOW DO YOU PLOT THE GRAPH

1. Highlight table 2. Select Chart Wizard 3. Select Scattergram

Do it on the computer?

Rough Estimate Not exact Good Excel worksht

1. Determine high driver and associated cost 2. Determine low driver and associated cost 3. Subtract two driver and the two costs 4. divide cost by driver = variable cost per

unit 5. units variable cost x driver = total variable

$ 6. Subtract total cost from variable $ = Fixed

$ Exercise 2-4 pg 54

High Low Method pg 38-40

Best if use computer 1. Create table with driver and $ 2. Tools 3. Data Analysis 4. Identify what column is the x (driver) 5. Identify what column is the y 6. Identify where you want the graph

(output) Manual formula pg 67 Exercise 2A-2

Regression Analysis(pg 40-42)

1.Office Icon 2. Excel options at bottom 3. Add Ins 4. Analyses Tool Pak 5. Go

Xxx.sixsigmafirst.com/regresexcel/tut.htm

2007

Traditional Contrib Margin Sales Sales -COGS -VC(COGS,VS, VA)

=GM =CM -S&A -FC(FS, FA)

=Net Income =Net Income

Exercise 2-5 pg 54

Contribution Margin (CM) Format

Common – cannot be traced to a particular project

Differential – cost of selling one more unit

Opportunity- benefit given up when you choose one alternative over another

Sunk Costs –already incurred – cannot be changed

Review Problem pg 47-48

Cost Vocabulary

Prevention –before making product

Appraisal - during making

Internal – After made

External – After sold

Cost Report pg 76 Exercise 2B-2 pg 80

Cost of Quality