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Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
Chapter 6
Activity Analysis,Cost Behavior,
and Cost
Estimation
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Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
LearningObjective
1
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Costprediction
Using knoledgeo! cost behavior
to !orecastlevel o! cost at
a partic"laractivity# $oc"sis on the !"t"re#
%ntrod"ction%ntrod"ction
Costbehavior
&elationshipbeteencost andactivity#
'rocess o!determining
cost behavior,o!ten !oc"singon historical
data#
Costestimation
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Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
LearningObjective
(
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*ariable Cost 'er Unit E+ample*ariable Cost 'er Unit E+ample
-"mber o! 'ay 'er
*ie shos atched
Costper
'ay'er*ie
sho
)he cost per 'ay 'er *ie sho is constant# $ore+ample, ./#0 per sho#
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2tep3*ariable Costs2tep3*ariable Costs
Activity
Co
st
Total cost remainsconstant within anarrow range of
activity.
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)otal $i+ed Cost E+ample)otal $i+ed Cost E+ample
o"r monthly basic cable )* bill probably does notchange no matter ho many ho"rs yo" atch#
-"mber o! ho"rs atched
4onth
lyBasic
Cab
leBill
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$i+ed Cost 'er Unit E+ample$i+ed Cost 'er Unit E+ample
-"mber o! ho"rs atched4onthlyBasiccableBill
perho"
ratched
)he average cost per ho"r decreases as more ho"rsare spent atching cable television#
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Ren
tCostin
Thousan
dsofDollars
0 1,000 ,000 !,000Rented Area "#$uare %eet&
!0
'0
(0
)otal cost doesn5t change !or aide range o! activity,
and then j"mps to a ne higher cost !or the ne+thigher range o! activity#
2tep3$i+ed Costs2tep3$i+ed Costs
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%i)ed *onthly
+tility Charge
ariable
+tility Charge
Activity "-ilowatt ours&
Total+tilityCost
Total
semi
variableco
st
2emivariable Cost2emivariable Cost#lope is
variable costper unit
of activity.
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C"rvilinear CostC"rvilinear CostC"rvilinear
Cost $"nction
Relevant Range
Activity
TotalCos
t
C"rvilinear
Cost $"nction
A straight/line"constant unit
variable cost& closelyappro)imates a
curvilinear line withinthe relevant range.
7/23/2019 Ab.az Chapter06S
13/23Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
LearningObjective
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C"rvilinear CostC"rvilinear CostC"rvilinear
Cost $"nction
Relevant Range
Activity
TotalCos
t
C"rvilinear
Cost $"nction
A straight/ine"constant unit
variable cost& closelyappro)imates a
curvilinear line withinthe relevant range.
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Engineered, Committed andEngineered, Committed and
7iscretionary Costs7iscretionary CostsDiscretionary
*ay be altered in theshort term by currentmanagerial decisions.
Committed
ong/term, cannot bereduced in the short
term.
ngineered
2hysical relationship
with activity measure.
Depreciation on3uildings and
e$uipment
Advertising andResearch andDevelopment
Direct*aterials
7/23/2019 Ab.az Chapter06S
17/23Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
LearningObjective
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Acco"nt Classi!ication 4ethodAcco"nt Classi!ication 4ethod
Cost estimates are based on areview of each account ma4ing up
the total cost being analy5ed.
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Visual-Fit Method
ertical distanceis total cost,
appro)imately61',000.
0 1 ! 7
8
TotalCostin
1,0
00
9sofDollar
s
10
0
0
888
88
88
8
8
Activity, 1,0009s of +nits 2roduced
stimated fi)ed cost : 610,000
A scatter diagram o! past cost behavior
may be help!"l in analy8ing mi+ed costs#
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OlCo recorded the !olloing prod"ction activity andmaintenance costs !or to months9
Using these to levels o! activity, comp"te9
the variable cost per "nit#the total !i+ed cost#
)he :igh3Lo 4ethod)he :igh3Lo 4ethod
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+nits Cost.igh activity level (,000 (,;006
ow activity level
7/23/2019 Ab.az Chapter06S
22/23Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin
LearningObjective
cont#, 6 and ;can be !o"nd in
the )e+t Book
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End o! Chapter 6End o! Chapter 6