ACG 2071 Chapter 3: Chapter 3

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6 Feb 2017
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Chapter 3: Measurement of Cost Behavior1/24/2011 11:21:00 PM
Measurement of cost behavior
Understanding and quantifying how activities of an organization
affect levels of costs
Understanding cost behavior is fundamental
Step- and Mixed-Cost behavior patterns
Step Costs
o Change abruptly at different intervals of activity because the
resources and their costs come in indivisible chunks
o EXAMPLE: for every 1000 students, the salary cost doubles..
that is because they need to add one more teacher per 1000
o When the steps are relatively small, the step cost behaves
much like a variable cost and could be used as such for
planning with little loss of accuracy
Mixed costs
o Mixed costs contain elements of both fixed and variable-cost
behavior
The fixed-cost element is unchanged over a range of
cost-driver activity
The variable-cost element varies proportionately with
cost-driver activity
Management Influence on Cost Behavior
Managers influence cost behavior through choices of:
o Process and product design
o quality levels
Capacity Costs
The fixed costs of being able to achieve a desired level of
production or to provided a desired level of service while
maintaining product or service attributes, such as quality
Committed Fixed Costs
Usually arise from the possession of facilities, equipment, and a
basic organization
There are large, indivisible chunks
Discretionary Fixed Costs
We have more control over
Determined every year by management
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They have no obvious relationship to levels of output activity but
are determined as part of periodic planning process
EXAMPLES: Advertising and promotion, employee training, research
and development, management salaries
Cost Functions
First step: measure cost behavior as a function of appropriate cost
drivers
Second step: figure the estimated cost driver activity
Then you put it into a cost function
o Y = F + VX
o Total Cost = Fixed Cost + VC per unit (# of units)
Criteria for choosing functions
Plausibility the cost function must be plausible or believable
Reliability: a cost function’s estimated of costs are the actual costs
Choice of Cost Drivers: Activity Analysis
Choosing a cost function starts with choosing cost drivers
Engineering Analysis
Systematic review of materials, supplies, labor, support services
and facilities needed for products and services
It measures cost behavior according to what costs should be, not
by what costs have been
Account Analysis
Simplest method selects a plausible cost driver and classifies each
account as a variable or fixed cost
High-Low Method
Simple method for measuring a linear-cost function from past cost
data
Focuses on the highest-activity and lowest-activity points and
fits a line through these points
EXAMPLE:
o What is the variable cost per machine hour? (FIND SLOPE)
Change in cost/Change in activity
Y = F + V(x) …. Y= M(x) + B … B=F (fixed) = Y
intercept on graph
Visual-Fit Analysis
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