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PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Define cost behavior for fixed, variable, &
mixed costs.
2. Explain the role of the resource usage model
in understanding cost behavior.
3. Separate mixed costs into their fixed &
variable components using the high-low
method, scatterplot method, and method of
least squares.
Continued
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Evaluate the reliability of a cost equation.
5. Discuss the role of multiple regression in
assessing cost behavior.
6. Describe the use of managerial judgment in
determining cost behavior.
LO 1
LO 1
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
5
LO 1
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.
6
LO 1
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.
LO 1
LO 2
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.
9
LO 2
10
LO 2
FLEXIBLE RESOURCES
as needed
needed
Are resources that can be acquired as
No long term commitment
Quantity supplied = quantity demanded
>>>>>NO EXCESS CAPACITY
11
LO 2
COMMITTED RESOURCES
Are resources acquired in
in advance
advance of usage
Often have long term commitment
Quantity supplied (often) quantity demanded
>>>>> MAY MEAN EXCESS CAPACITY
12
LO 2
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.
13
LO 2
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.
14
LO 2
15
LO 3
LINEARITY ASSUMPTION
Variable
Variablecost
cost
assumes
assumesaalinear
linear
relationship
relationship
between
betweencost
costand
and
activity
activitydriver.
driver.
EXHIBIT 3-7
16
LO 3
HIGH-LOW EQUATIONS
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}
17
LO 3
SCATTERPLOT METHOD
Scatterplot
Scatterplotisisaa
method
methodof
of
determining
determiningthe
the
equation
equationof
ofaaline
lineby
by
plotting
plottingthe
thedata
dataon
on
aagraph.
graph.
EXHIBIT 3-11
18
LO 3
Scatterplot
Allows you to see the data BUT
It lacks any objective criterion
for choosing the best-fitting line
19
LO 3
SCATTERPLOT ADVANTAGE
EXHIBIT 3-12
20
LO 3
LEAST SQUARES
EXHIBIT 3-13
21
LO 4
22
LO 4
COEFFICIENT OF
DETERMINATION (R2)
Percentage
Percentageof
ofvariability
variabilityin
independent
dependent
variable
variableexplained
explainedby
byindependent
independent
variable
variable
Range:
Range:0011
Higher
Higherisisbetter
better
23
LO 4
COEFFICIENT OF CORRELATION
Square
Squareroot
rootof
ofcoefficient
coefficientof
of
determination
determination
Measures
Measureswhether
whethervariables
variablesmove
movein
in
same
same(+)
(+)or
oropposite
opposite(-)
(-)directions
directions
Range:
Range:-1
-1--+1
+1
24
LO 5
MULTIPLE
MULTIPLE REGRESSION:
REGRESSION: Definition
Definition
25
LO 6
MANAGERIAL JUDGMENT
Is a method of cost assignment used to
Determine fixed, variable cost
Uses managerial experience
Uses past observation of cost relationships
Advantage: simplicity
Disadvantage: judgment errors
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CHAPTER 3
THE
THE END
END
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