ACCT 1022 Chapter 6: Activity Analysis, Cost Behavior, and Cost Estimation

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14 Feb 2017
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Chapter 6: Activity Analysis, Cost Behavior, and Cost Estimation
Managers in almost any organization want to know how costs will be affected by
changes in the organization’s activity.
The relationship between cost and activity is called cost behavior and it is relevant to the
management functions of planning, control, and decision making.
A cost prediction is a forecast of cost at a particular level of activity
The determination of cost behavior, cost estimation, can be accomplished in a number of
ways
Cost Behavior Pattern
Cost functions smooth out fluctuations in demand for each type of product
Direct material
Direct labor
Facilities costs
Indirect labor
utlities
Variable Costs
A variable cost changes in total in direct proportion to a change in activity level
Total variable costs increase in proportion to activity level
Step Variable Costs
Some costs are nearly variable, but they increase in small steps instead of
continuously
They include inputs that are purchased and used in relatively small increments
Approximating a step variable cost
If the steps in a step variable cost behavior pattern are small, the step
variable cost function may be approximated by a variable cost function
without much loss in accuracy
Fixed Costs
A fixed cost remains unchanged in total as the activity level varies
Examples: total monthly cost of property taxes, depreciation, and maintenance
personnel
Fixed cost per unit does change as activity changes
As activity level increases, total fixed cost doesn’t change, but unit fixed cost
declines
More preferable cost analysis
Step Fixed Costs
Some costs remain fixed over a wide range of activity but jump to a different
amount for activity levels outside
Semi-variable cost
Both fixed and a variable component
Curvilinear cost
Behavior pattern has a curved graph
For low levels activity, this cost exhibits decreasing marginal costs
Solid curve
For activity that is large, it exhibits increasing marginal costs
Relevant range
The range of activity within which management expects the company to
operate
Approximating within the range
Represents a semi variable cost behavior pattern
Using Cost Behavior Patterns to Predict costs
Sales forecast
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