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Chapter 1 - 1
AGUS SISWANDI
01153056
MANAGEMENT
ACCOUNTING
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Chapter 1 - 2
Chapter ThreeActivity Cost
Behavior
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Chapter 1 - 3
Learning Objectives
Define and describe cost behavior forfixed, variable, and mixed costs.
Explain the role of the resource usagemodel in understanding cost behavior.
Separate mixed costs into their fixed and
variable components using the high-lowmethod, the scatterplot method, and themethod of least squares.
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Chapter 1 - 4
Learning Objectives (continued)
Evaluate the reliability of a cost equation.
Explain the role of multiple regression inassessing cost behavior.
Describe the use of managerial judgment
in determining cost behavior.
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Chapter 1 - 5
Cost Behavior
Fixed-Cost Behavior Variable-Cost Behavior
$ $Relevant Range
Units Produced Units Produced
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Chapter 1 - 6
Mixed-Cost Behavior
Total Costs
Cost
Number of Units Produced
Fixed Costs
Variable Costs
Linearity Assumption
Total cost = Fixed cost + Total variable cost
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Chapter 1 - 7
Activity Cost Behavior Model
Inputs:
Materials
Energy
Labor
Capital
Cost Behavior
Activities Activity Output
Changes in Input Cost Changes in Output
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Chapter 1 - 8
Basic Terms
The linearity assumption assumes that variable
costs increase in direct proportion to the number
of units produced (or activity units used).Practical capacityis the efficient level of activity
performance.
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Chapter 1 - 9
Types of Fixed Resources
Flexible Resources
Committed Resources
Discretionary Fixed Expenses
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Chapter 1 - 10
Flexible Resources
Flexible resources are supplied as used and needed.
They are acquired from outside sources, where the terms
of acquisition do not require any long-term commitment
for any given amount of the resource
Example: Materials and energy
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Chapter 1 - 11
Committed Resources
Committed resources are resources that are supplied in
advance of usage.They are acquired by the use of either an explicit or implicit
contract to obtain a given quantity of resource, regardless of
whether the amount of the resource available is fully used or
not. Committed resources may have unused capacity.
Example: Buying or leasing a building or equipment
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Chapter 1 - 12
Discretionary Fixed Expenses
Discretionary fixed expenses are shorter-term
committed resources.
Example: The hiring of new receiving clerks
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Chapter 1 - 13
Step-Cost Function
Cost
Activity Output (units)
Narrow Width
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Chapter 1 - 14
Step-Fixed Costs
Cost
Activity Usage
Normal
Operating
Range
(Relevant Range)
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Chapter 1 - 15
Resource Relationships
The relationship between resources supplied and
resources used is expressed by the following
equation:
Resources available = Resources used + Unused capacity
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Chapter 1 - 16
Resource Relationships Example
Three engineers hired at $50,000 each
Each engineer is capable of processing 2,500 change
orders
$90,000 was spent on supplies for the engineering
activity
There were 6,000 orders processed
R R l ti hi E l
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Chapter 1 - 17
Resource Relationships Example
(continued)
Available orders = Orders used + Orders unused
7,500 orders = 6,000 orders + 1,500 orders
Fixed engineering rate = $150,000/7,500
= $20 per change order
Variable engineering rate = $90,000/6,000
= $15 per change order
R R l ti hi E l
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Chapter 1 - 18
Resource Relationships Example
(continued)
Cost of orders supplied = Cost of orders used + Cost of unused orders
= [($20 + $15) x 6,000] + ($20 x 1,500)
= $240,000
Of course, the $240,000 is precisely equal to the $150,000 spent on engineers
and the $90,000 spent on supplies.
The $30,000 of excess engineering capacity means that a new product could
be introduced without increasing current spending on engineering.
M th d f S ti Mi d C t
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Chapter 1 - 19
Methods for Separating Mixed Costs
into Fixed and Variable Components
The High-Low Method
The Scatterplot Method
The Method of Least Squares
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Chapter 1 - 20
Month Setup Costs Setup Hours
January $1,000 100
February 1,250 200
March 2,250 300
April 2,500 400
May 3,750 500
High-Low Method: An Example
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Chapter 1 - 21
The High-Low Method (continued)
Variable
Rate (V) = Change in cost/Change in output
V = (High cost - Low cost) / (High output - Low output)
V = ($3,750 - $1,000) / (500 - 100)
V = $2,750 / 400
V = $6.875 per setup hour
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Chapter 1 - 22
The High-Low Method (continued)
$3,750 = Fixed costs + $6.875 (500)
Fixed costs = $3,750.00 - $3,437.50
Fixed costs =$312.50
The cost formula using the high-low method is:
Total cost = $312.50 + ($6.875 x setup hours)
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Chapter 1 - 23
Activity Hours
Activity
Cost
$4,000
3,000
2,000
1,000
0100 200 300 400 500
.
Scatterplot Method
.
..
.
Analyst can fit line
based on his or her
experience
Important: Cost function is only
relevant within relevant range
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Chapter 1 - 25
Upward Shift in Cost Relationship
Activity
Cost
0 Activity Output
**
*
*
*
*
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Chapter 1 - 26
Presence of Outliers
Activity
Cost
0 Activity Output
**
*
*
*
*
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Chapter 1 - 27
Least Squares
Constant 125
Std Err of Y Est 299.304749934466
R squared 0.944300518134715No. of Observations 5
Degrees of Freedom 3
X Coefficient(s) 6.75
Std Err of Coef. 0.9464847243
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Chapter 1 - 28
Least Squares (continued)
The results give rise to the following equation:
Setup Costs = $125 + ($6.75 x # of setup hours)
R2 = .944, or 94.4 percent of the variation in setup costs is explained by
the number of setup hours variable.
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Chapter 1 - 29
TC = b0 + b1X1 + b2X2 + . . .
b0 = the fixed cost or intercept
bi = the variable rate for the ith independent variable
Xi = the ith independent variable
Multiple Regression
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Chapter 1 - 30
Multiple Regression (continued)Utility
Month MHrs Summer CostJanuary 1,340 0 $1,688
February 1,298 0 1,636
March 1,376 0 1,734
April 1,405 0 1,770
May 1,500 1 2,390
June 1,432 1 2,304
July 1,322 1 2,166
August 1,416 1 2,284
September 1,370 1 1,730
October 1,580 0 1,991
November 1,460 0 1,840
December 1,455 0 1,833
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Chapter 1 - 31
Multiple Regression (continued)
Constant 243.11149907159
Std Err of Y Est 55.5082829356447
R squared 0.96717927255452No. of Observations 12
Degrees of Freedom 9
X Coefficient(s) 1.09715750519456 510.49073361447
Std Err of Coef. 0.210226332115593 32.5489645352191
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Chapter 1 - 32
Multiple Regression (continued)
The results gives rise to the following equation:
Utilities cost = $243.11 + $1.097(MH) + $510.49(Summer)
R2 = .967, or 96.7 percent of the variation in utilities cost is explained by
the machine hours and summer variables.
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Chapter 1 - 33
Cost Behavior and Managerial
Judgment
Use past experience
Try to confirm results with operating personnel
Use common sense to confirm statistical studies
Some Tips
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Chapter 1 34
End of Chapter 3