Download Managerial Accounting Chapter 4

Chapter 4
Managerial Accounting
Identifying Cost
Behavior
Prepared by Diane Tanner
University of North Florida
Assumptions
To predict cost behavior, we must assume
 Production equals sales (in units)
 I.e., no change in beginning and ending
inventories
 Cost behavior is linear
 Activity level occurs within a defined
activity range
 Called relevant range
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Relevant Range
 A range of activity within which cost behavior
holds true
 I. e., Normal range of operations that can be
expected for a particular product or company
 Activity outside of this range, forecasts of cost
behavior may not be accurate
Relevant range
Cost
Units
Variable Cost Behavior
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Unit Variable Cost
Cost per Unit
Total Costs
Total Variable Cost
$20
$15
$10
$5
0
10 20
30
Units Produced (000)
0
10 20
30
Units Produced (000)
Total Variable Costs
Change as volume or
activity level changes
Unit Variable Costs
Same cost per unit at any
activity level
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Fixed Cost Behavior
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
0
10 20
30
Units Produced (000)
Total Fixed Costs
Same cost at any
activity level
Unit Fixed Cost
Cost per Unit
Total Costs
Total Fixed Cost
$20
$15
$10
$5
0
10 20
30
Units Produced (000)
Unit Fixed Costs
Change per unit as volume
or activity levels change
Discretionary vs. Committed
Fixed Costs
 Describes behavior of fixed costs in the short-run
 Discretionary
 Can easily change in the short run
 Examples:
 Advertising
 R&D
 Repair and maintenance
 Committed
 Not easily changed in the short run
 Examples:
 Rent
 Depreciation – buildings and equipment
 Insurance for buildings and equipment
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Step Costs
 Costs that remain constant within a short
relevant range of activity, then adjust to a new
level
Example: Cleaning services at UNF
0-40 classrooms
1 Janitor
41-80 classrooms 2 Janitors
81-120 classrooms 3 Janitors
$22,000
$44,000
$66,000
Cost
Volume
Mixed Costs
 Consist of both a variable
cost element and a fixed
cost element
 Often referred to as semivariable costs
 Characteristics
 Costs change in total but
not proportionately with
changes in the activity
level
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Example: Cell phone
1- Flat monthly charge
plus added costs for
excess data usage
Variable cost portion
Fixed cost portion
Number of megabytes over
Determining Cost Behavior
Two-step process
Step 1 - Test to determine if the cost is fixed:
Compare the total cost at all activity levels.
A fixed cost is the same in total at all activity levels.
 If the fixed cost test fails, move to step 2.
 If the fixed cost test passes, the cost is fixed.
Step 2 - Test to determine if the cost is variable:
Compare the unit cost at all activity levels.
 A unit variable cost is the same at all activity levels.
 If the variable cost test fails, the cost is a mixed
cost.
 If the variable cost test passes, the cost is variable.
The End