McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5
 
to se the! to predict costs"
 
5-3
#ecall the s!!ary of or cost#ecall the s!!ary of or cost
behavior discssion fro! Chapter 1"behavior discssion fro! Chapter 1"
$ypes of Cost Behavior %atterns
 
Minutes Talked
   T   o    t  a    l    L   o   n   g        i  s    t  a   n   c   e
   T   e    l  e   !    h   o   n   e    "    i   l   l
$re 'ariable Cost (xa!ple
 A variable cost is a cost whose total dollar a!ont varies in direct proportion to
changes in the activity level"
)or total long distance telephone bill is based on how !any
!intes yo tal*"
$ypes of Cost Behavior %atterns
#ecall the s!!ary of or cost#ecall the s!!ary of or cost
 
   %   e   r    M    i  n   u    t  e
   T   e    l  e   !    h   o   n   e    &    h   a   r   g   e
'ariable Cost %er Unit (xa!ple
  A variable cost re!ains constant if expressed on a per nit basis"
$he per !inte cost of long distance calls
is constant+ for exa!ple+ 1,- per
!inte"
2.2. Manufacturing companiesManufacturing companies  . direct !aterials+ . direct !aterials+
direct labor+ and variable overhead"direct labor+ and variable overhead"
3.3. Merchandising and manufacturing companiesMerchandising and manufacturing companies  . .
co!!issions+ shipping costs+ and clerical costsco!!issions+ shipping costs+ and clerical costs
sch as invoicing"sch as invoicing"
4.4. Service companiesService companies . spplies+ travel+ and . spplies+ travel+ and
clerical"clerical"
2.2. Manufacturing companiesManufacturing companies  . direct !aterials+ . direct !aterials+
direct labor+ and variable overhead"direct labor+ and variable overhead"
3.3. Merchandising and manufacturing companiesMerchandising and manufacturing companies  . .
co!!issions+ shipping costs+ and clerical costsco!!issions+ shipping costs+ and clerical costs
sch as invoicing"sch as invoicing"
 
$re 'ariable Cost
/irect !aterials is a tre or proportionately variable cost becase the a!ont sed dring
 
/irect !aterials is a tre or proportionately variable cost becase the a!ont sed dring
 
0tep'ariable Costs
 A resorce that is obtainable only in large A resorce that is obtainable only in large chn*s 2sch as !aintenance wor*ers3 andchn*s 2sch as !aintenance wor*ers3 and
whose costs increase or decrease only inwhose costs increase or decrease only in
 
 A resorce that is obtainable only in large A resorce that is obtainable only in large
chn*s 2sch as !aintenance wor*ers3 andchn*s 2sch as !aintenance wor*ers3 and
whose costs increase or decrease only inwhose costs increase or decrease only in
response to fairly wide changes in activity"response to fairly wide changes in activity"
)olume
not likel to have an effect on the number
of maintenance workers em!loed.
 
not likel to have an effect on the number
of maintenance workers em!loed.
)olume
level will cause a change in the number 
of maintenance workers em!loed.
 
level will cause a change in the number 
of maintenance workers em!loed.
)olume
(cono!ist4s(cono!ist4s Crvilinear CostCrvilinear Cost
nctionnction
 Accontant4s 0traightLine Accontant4s 0traightLine  Approxi!ation 2constant Approxi!ation 2constant
nit variable cost3nit variable cost3
 
5-*4
Let4s trn or attention to fixed cost behavior"Let4s trn or attention to fixed cost behavior"
$ypes of Cost Behavior %atterns
 
   M   o   n    t   h    l  -    "   a   s    i  c
   T   e    l  e   !    h   o   n   e    "    i   l   l
$otal ixed Cost (xa!ple
)or !onthly basic telephone bill is
probably fixed and does not change when yo !a*e !ore local calls"
 
$ypes of Cost Behavior %atterns
#ecall the s!!ary of or cost#ecall the s!!ary of or cost
 
5-*$
0umber of Local &alls    M   o   n    t   h    l  -    "   a   s    i  c    T   e    l  e   !    h   o   n   e
   "    i   l   l   !   e   r    L   o   c   a    l    &   a    l   l
ixed Cost %er Unit (xa!ple
 Average fixed costs per nit decrease as the activity level increases"
$he fixed cost per local call decreases as !ore local calls
are !ade"
 
1/am!les
 
$ypes of ixed Costs
 
Ma be altered in the short-term b current managerial decisions
&ommitted
in the short-term.
in the short-term.
   2   e   n    t    &   o   s    t    i  n
   T    h   o   u   s   a   n    d   s   o    f       o    l   l  a   r   s
+ *+++ 2+++ 3+++
(+
higher cost for the
ne/t higher range of
higher cost for the
ne/t higher range of
The relevant range of activit for a fi/ed
cost is the range of activit over which
the gra!h of the cost is flat.
1/am!le: Office space is
67,+,,, per year in
feet" As the bsiness grows+
!ore space is rented+
increasing the total cost"
of fi/ed cost differof fi/ed cost differ
from a ste!-variablefrom a ste!-variable
cost<cost<
more uickl and . . .more uickl and . . .
The width of theThe width of the activit ste!s isactivit ste!s is
much wider for themuch wider for the fi/ed cost.fi/ed cost.
ixed Costs and #elevant #ange
 
Activit >ilowatt ;ours7
@
 
co!ponents" Consider yor tility costs"
 
co!ponents" Consider yor tility costs"
&ixed Costs
  m   i / e
 
Activit >ilowatt ;ours7
@
 
  m   i / e
 
&ixed Costs (xa!ple
9f yor fixed !onthly tility charge is 6,+ yor9f yor fixed !onthly tility charge is 6,+ yor
variable cost is 6,",7 per *ilowatt hor+ and yorvariable cost is 6,",7 per *ilowatt hor+ and yor
!onthly activity level is ;+,,, *ilowatt hors+ the!onthly activity level is ;+,,, *ilowatt hors+ the
 
9f yor fixed !onthly tility charge is 6,+ yor9f yor fixed !onthly tility charge is 6,+ yor
variable cost is 6,",7 per *ilowatt hor+ and yorvariable cost is 6,",7 per *ilowatt hor+ and yor
!onthly activity level is ;+,,, *ilowatt hors+ the!onthly activity level is ;+,,, *ilowatt hors+ the a!ont of yor tility bill is:a!ont of yor tility bill is:
) < a = b>
 
Least08ares #egression &ethod
 A !ethod sed to analy@e !ixed costs if a scattergraph plot reveals an approxi!ately linear
relationship between the > and ) variables"
 
 A !ethod sed to analy@e !ixed costs if a scattergraph plot reveals an approxi!ately linear
relationship between the > and ) variables"
$his !ethod ses$his !ethod ses all all  of theof the
data points to esti!atedata points to esti!ate
the fixed and variablethe fixed and variable
cost co!ponents of acost co!ponents of a
!ixed cost"!ixed cost"
$his !ethod ses$his !ethod ses all all  of theof the
data points to esti!atedata points to esti!ate
the fixed and variablethe fixed and variable
cost co!ponents of acost co!ponents of a
!ixed cost"!ixed cost"
$he goal of this !ethod is$he goal of this !ethod is
to fit a straight line to theto fit a straight line to the
data thatdata that minimizes theminimizes the
sum of the squared errorssum of the squared errors""
 
$he goal of this !ethod is$he goal of this !ethod is
to fit a straight line to theto fit a straight line to the data thatdata that minimizes theminimizes the
sum of the squared errorssum of the squared errors""
 
Least08ares #egression &ethod
0oftware can be sed to0oftware can be sed to fit a regression linefit a regression line throgh the data points"throgh the data points"
$he cost analysis$he cost analysis objective is the sa!e:objective is the sa!e: ) < a = b>) < a = b>
The out!ut from the regression analsis can be
used to create an euation that enables ou to
estimate total costs at an activit level.
 
used to create an euation that enables ou to
estimate total costs at an activit level.