Activity-Based Accounting

Chapter 3
Activity Cost
Behavior
Group 2 :
Nova Permata Sari 1510531008
Atika Rahmi Pratiwi 1510531013
Millaty Hifni 1510531016
Indah Salma Fitra 1510531047
Hanom Dwi Kurnia 1510532019
 Learning Objectives
1. Define cost behavior for fixed, variable,
and mixed costs.
2. Explain the role of the resource usage
model in understanding cost behavior.
3. Separate mixed costs into their fixed and
variable components using the high-low
method, the scatterplot method, and the
method of least squares.
4. Evaluate the reliability of a cost equation.
5. Discuss the role of multiple regression in
assessing cost behavior.
The Basics of Cost Behavior

Cost behavior is the general term

for describing whether costs
change as output changes.

Costs react to output changes in mandifferent

ways. We will begin by looking at the simplest
possibilitiesfixed costs, variable costs, and
mixed costs.
 Fixed Costs
Fixed costs is a cost that stays the same as output
changes.

More formally, a fixed cost is a

cost that, in total, remains
constant within a relevant range
as the level of activity output
changes.
 Variable Costs
A variable cost is a cost that, in total,
varies in direct proportion to changes
in output.

A variable cost goes up as output

goes up, and it goes down as output
goes down.
linear equation
Total variable cost = Variable cost per unit x Number of units
 Mixed Costs

A mixed cost is a
cost that has For example, sales
representatives are often
both a fixed and paid a salary plus a
a variable commission on sales.
component.

linear equation
Total cost = Fixed cost + Total variable cost
Classifying Costs According
to Behavior

1. Time Horizon
2. Resources and Output Measures
3. Non-Unit-Level Drivers
Time Horizon

Determining whether a cost is fixed or

variable depends on the time horizon.

According to economics, in the long run,

all costs are variable; in the short run, at
least one cost is fixed.
 Resources and Output
Measures

Every activity needs resources to accomplish the task

it has to do. Resources might include materials,
energy or fuel, labor, and capital. These inputs are
combined to produce an output.

One measure is the number of times the activity is performed.

Relationship between inputs,
activities,
output, and cost behavior.
 Activity drivers are
Another term
observable causal factors
for output
that measure the amount
measure is
of resources a cost object
driver
uses.
Activity drivers are divided into two
general categories:
production (or unit level) drivers
In a functional-based cost system, cost behavior is
assumed to be described by unit-level drivers only.
In an activity-based system, both unit-level and non-
unit-level drivers are used.

Thus, the ABC system produces a much

richer view of cost behavior than a
functional-based system.
Activities, Resource Usage, and
Cost Behavior
Flexible Resources
Committed Resources
Committed resources are resources that are supplied in advance of
 The annual expense associated
with the multiperiod category is
independent of actual usage of
the resource; thus, these expenses
can be defined as committed
fixed costs, and they provide
long-term activity capacity.

We may call these shorter-term

committed resources
discretionary fixed costs. They
are costs incurred for the
acquisition of short-term activity
capacity.
Step-Cost Behavior
The
A
Step
step
cost
costs
cost
ofwith
displays
a single
widechange
asteps
constant
are
order
assigned
level
is aofcombination
cost
to the
for fixed-cost
a range
of itsoffixed
category
output
costand
(thethen
committed
at some
point jumps to a higher
resourceengineers) and
level
its of
variable
cost, where
cost (the
it remains
flexiblefor
resourcesupplies).
a similar range of output.
To calculate
The
the variable
fixed activity
the
activity
fixed
raterate
cost
is simply
isper
theunit,
total
the total
we
costneed
committed
of flexible
to calculate
resources
cost divided
the fixed
divided
byactivity
theby the
rate.
 Relationship between total resources available and
resources used is expressed by the following
equation:

Resources available = Resources used + Unused capacity

Control and
Decision Making
Methods for Separating Mixed
Costs into Fixed and Variable
Components
Linearity Assumption

Total cost = Fixed cost + (Variable rate x Output)

The High-Low Method
 Notice that both the high and the low point are
determined by the high amount and the low amount
for the independent variable.

Variable rate
The
The Method of Least Squares
Using the Regression Programs
Reliability of Cost Formulas
Coefficient of Correlation

Coefficient of
correlation is the
square root of the
coefficient of
determination.
 Multiple Regression
In the case of two or more explanatory variables, the
linear equation is expanded to include the additional
variables:
 Managerial Judgment

Managerial judgment can be used alone or

in conjunction with the high-low,
scatterplot, or least-squares methods.

Managers use their experience and knowledge

of cost and activity-level relationships to identify
outliers, understand structural shifts, and adjust
parameters due to anticipated changing
conditions.
THE END