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Topic 2: Activity Cost

Behaviour
HM Chapter 3

26 March 2014

Topics Covered
No. Topic
1

Introduction

No Topic
.
7
Transfer Price

Cost Behaviour

Budgeting

Standard Costs

10

Segment
11
reporting &
Desentralization
Quality Cost
12

Cost-Volume-Profit
Analysis
Relevant Cost for
Decision Making
Lean System, target
costing & BSC
Corporate Social
Responsibility
Environmental Cost

After previous class, you


understand:
the

need for management accounting information.


Differentiate management accounting & financial
accounting.
Provide a brief historical description of
management accounting.
Identify the current focus of management
accounting.
Describe role of management accountants in an
organization.
Explain importance of ethical behavior for
managers, management accountants.
List 3 forms of certification available to
management accountants.

Learning Objectives
The

basics of Cost Behavior


Activity, Resource Usage, and Cost
Behavior
Methods for separating mixed costs
into fixed and variable components
Reliability of costs formulas
Multiple regression
Managerial judgment

Basic of Cost behaviour


behavior istilah umum untuk
menggambarkan apakah biaya input
tetap (fixed) atau variable dan
pengaruhnya terhadap perubahan
output

Cost

Fixed
cost
Variab
le
cost
Mixed
Cost

biaya yg tetap
ketika
penggunaan
aktvitas
naik/turun
biaya berubah
langsung
secara
proporsional
terhadap
output
Terdiri atas
komponen
fixed &
variable

FIXED
FIXED COST:
COST: Definition
Definition
Fixed costs do not vary over the
relevant range.
Reddy Heaters: 1 cutting
machine costs $60,000 per year
& can produce up to 240,000, 3inch segments

VARIABLE
VARIABLE COST:
COST: Definition
Definition
Variable costs vary in direct
proportion to changes in output.
Reddy Heaters: 1 segment uses
0.1 kilowatts at cost of $2.00 per
kilowatt. Each segment costs
$.20.

MIXED
MIXED COST:
COST: Definition
Definition
Mixed costs have a variable and
a fixed component.
Reddy Heaters: sales people
earn a $10,000 salary + $0.50
commission on each heater sold.

COST BEHAVIOR
ACTIVITIES
Every

activity has a

Time horizon for measurement


Resources to accomplish the task
Materials
Labor
Capital

Output measures (activity drivers)

10

CAPACITY:
CAPACITY: Definition
Definition
Capacity for an activity is the
amount
an activity
a
amount
of anofactivity
a company
company
perform.
can can
perform.
Practical capacity is the level at
which company can perform
efficiently.

11

How much capacity does a


company need? What happens
if there is excess capacity?

Need for capacity depends on


level of performance required.
Excess capacity affects cost
behavior.

12

FLEXIBLE RESOURCES
Are

resources that can be acquired as


needed
No long term commitment
Quantity supplied = quantity demanded
>>>>>NO EXCESS CAPACITY
Example:

direct materials

13

COMMITTED RESOURCES
Are

resources acquired in advance of usage


Often have long term commitment
Quantity supplied (often) quantity
demanded
>>>>> MAY MEAN EXCESS CAPACITY
Example:

factory building

14

COMMITTED
COMMITTED RESOURCES:
RESOURCES:
Can
Can Be
Be

Committed fixed costs, such as


a building or equipment bought,
leased; or
Committed discretionary
costs, such as implicit contracts
with employees.

15

STEP
STEP COST:
COST: Definition
Definition
Step-costs exhibit a discontinuous
behavior pattern.
Step-costs are constant for a certain
range of output, then jump to another
level, remaining constant again over a
certain range of output.

16

Step cost

Relevant range

Example
Engineering

cost $50.000/year to
produce 2500 unit & 3 engineer hired
Capacity prod. Available = 3x2500 =
7500
If production only 6000 unit/year
total supply cost = $90.000
Fixed activity rate?
Variable activity rate?
Total cost?

EQUATIONS
Total Cost = Fixed Cost + Variable Cost
= Engineering Cost + Supply Cost
Fixed activity rate =
Variable activity rate =

Total committed cost


Total capacity available
Total cost of flexible resources
Capacity used

19

Total

Cost = Engineering Cost + Supply Cost


= (3x50.000) + 90.000
= $240.000

Fixed

activity rate = (3x50.000)/7500


= $20
Variable activity rate = 90.000/6000
= $15

MIXED COST
Methods for separating mixed
costs into fixed and variable
components
high-low

method,
scatterplot method, and
method of least squares.

LINEARITY ASSUMPTION
Variable
Variablecost
cost
assumes
assumesaalinear
linear
relationship
relationship
between
betweencost
costand
and
activity
activitydriver.
driver.

Total Cost = Fixed Cost + (Variable Cost x Output)


22

HIGH-LOW METHOD
Variable rate = Change in cost / Change in output
(High cost Low cost) / (High output Low output)
Fixed cost = Total cost for high (Low) point
{Variable rate x High (Low) output}

23

Month

Cost ($)

Time (hour)

January

1000

100

February

1250

200

March

2250

300

April

2500

400

May

3750

500

Variable cost per unit = (3750-1000)/(500-100)


= $6,875
Fixed Cost = 3.750 (6,875x500)
= $312,50

High-low Method
Keunggulan

Objektif
Mudah
Cepat
Kelemahan

tidak reliable apabila data


tertinggi/terendah merupakan
Outliers

SCATTERPLOT METHOD
Scatterplot
Scatterplotisisaa
method
methodof
of
determining
determiningthe
the
equation
equationof
ofaaline
lineby
by
plotting
plottingthe
thedata
dataon
on
aagraph.
graph.

26

Dengan

asumsi pilihan garis


terbaik adalah titik 1 & 3
Variable Cost per unit = (2250-1000)/(300100)

= $6,25
Fixed Cost = $2250 (6,25x 300)

= $375
TC = 375 + (6,25 X)

What are the advantages,


disadvantages of scatterplot?

Scatterplot
Allows you to see the data BUT
It lacks any objective criterion
for choosing the best-fitting line

28

SCATTERPLOT ADVANTAGE

Can you see why


the high-low
method doesnt
always provide the
best cost equation?

29

LEAST SQUARES

30

formulae
V = [XY XY / n]
[X2 (X)2 / n]
F = Y V X
n
n
R2 = V[XY - X Y / n]
[EY2 (Y)2 / n]

Month

Cost ($)

Time (hour)

January

1000

100

February

1250

200

March

2250

300

April

2500

400

May

3750

500

Regresi

dilakukan dengan menu


Data Analysis pada Microsoft
Excel

SUMMARY
OUTPUT

Regression Statistics
0.9717512
Multiple R
64
0.9443005
R Square
18
Adjusted R
0.9257340
Square
24
299.30474
Standard Error
99
Observations

ANOVA

Regression

Residual

Significance
SS
MS
F
F
50.860465 0.00567523
4556250 4556250
12
1
89583.333
268750
33

Total

4825000

df

Coefficient
s

Intercept

125

Standard
Error

Upper
Lower
Upper
Lower 95%
95%
95.0%
95.0%
0.3981989 0.7171290 874.012762 1124.0127 874.01276 1124.0
313.91347
05
11
8
63
28
13
t Stat

P-value

How reliable is the cost


equation developed by the
least squares method?

R2, the coefficient of


determination, and the
coefficient of correlation will tell
you the goodness of fit of your
cost equation.

34

COEFFICIENT OF
DETERMINATION (R2)
Percentage

of variability in
dependent variable explained
by independent variable
Range: 0 1
Higher is better

35

COEFFICIENT OF CORRELATION
Square

root of coefficient of
determination
Measures whether variables
move in same (+) or opposite (-)
directions
Range: -1 - +1

36

MULTIPLE
MULTIPLE REGRESSION:
REGRESSION:
Definition
Definition

Multiple regression uses 2 or more


independent variables (variable
costs) in addition to the yintercept (fixed cost) to explain
the dependent variable.

37

Month
Jan
feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

Machine
hour
1340
1298
1376
1405
1500
1432
1322
1416
1370
1580
1460
1455

Summe
r
0
0
0
0
1
1
1
1
1
0
0
0

Cost
1740
1636
1788
1770
2390
2304
2250
2284
2260
1991
1840
1867

SUMMARY OUTPUT

Regression Statistics
0.99568
Multiple R
9
0.99139
R Square
6
Adjusted R
0.98948
Square
4
27.5753
Standard Error
1
Observations

12

ANOVA

Regression
Residual
Total

df

Significa
nce F

SS
MS
F
788538. 394269.
2
4
2 518.504 5.08E-10
6843.57 760.397
9
8
6
11 795382

Total BiayaCoefficie
= $291,58
+
Standard+ (1,068 x MachineHour)
Lower
Upper
Lower

nts
Error
t Stat
P-value
95%
95%
95.0%
(501,88
x Summer)
291.579 148.277 1.96643 0.08080

627.006

Upper
95.0%
627.006

MANAGERIAL JUDGMENT
Is

a method of cost assignment


used to
Determine fixed, variable cost
Uses managerial experience
Uses past observation of cost
relationships

To refine statistical estimation results


Advantage:

simplicity
Disadvantage: judgment errors
40

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