Topic 2:

Topic 2: Activity Cost Behaviour HM Chapter 326 March 2014Topics CoveredNo.TopicNo.Topic1Introduction

7Transfer Price2Cost Behaviour

8Cost-Volume-Profit Analysis3Budgeting9Relevant Cost for Decision Making4Standard Costs10Lean System, target costing & BSC5Segment reporting & Desentralization11Corporate Social Responsibility6Quality Cost

12Environmental Cost2After 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 ObjectivesThe basics of Cost BehaviorActivity, Resource Usage, and CostBehaviorMethods for separating mixed costs into fixed and variable componentsReliability of costs formulasMultiple regressionManagerial judgmentDefine cost behavior for fixed, variable, & mixed costs.Explain the role of the resource usage model in understanding cost behavior.Separate mixed costs into their fixed & variable components (high-low method, scatterplot method, method of least squares)Evaluate the reliability of a cost equation.Discuss the role of multiple regression in assessing cost behavior.Describe the use of managerial judgment in determining cost behavior

4Basic of Cost behaviourCost behavior istilah umum untuk menggambarkan apakah biaya input tetap (fixed) atau variable dan pengaruhnya terhadap perubahan output7FIXED COST: DefinitionFixed costs do not vary over the relevant range.Reddy Heaters: 1 cutting machine costs $60,000 per year & can produce up to 240,000, 3-inch segments

8VARIABLE COST: DefinitionVariable 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.

9MIXED COST: DefinitionMixed 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 ACTIVITIESEvery activity has aTime horizon for measurementResources to accomplish the taskMaterialsLaborCapitalOutput measures (activity drivers)10CAPACITY: Definition11Capacity for an activity is the amount of an activity a company can perform.Practical capacity is the level at which company can perform efficiently.amount of an activity a company can perform.12How 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.FLEXIBLE RESOURCESAre resources that can be acquired as neededNo long term commitmentQuantity supplied = quantity demanded>>>>>NO EXCESS CAPACITYExample: direct materials13COMMITTED RESOURCESAre resources acquired in advance of usageOften have long term commitmentQuantity supplied (often) quantity demanded>>>>> MAY MEAN EXCESS CAPACITYExample: factory building

14COMMITTED RESOURCES:Can Be 15Committed fixed costs, such as a building or equipment bought, leased; orCommitted discretionary costs, such as implicit contracts with employees.STEP COST: Definition16Step-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.

Step costRelevant rangeExampleEngineering cost $50.000/year to produce 2500 unit & 3 engineer hiredCapacity prod. Available = 3x2500 = 7500If production only 6000 unit/yeartotal supply cost = $90.000Fixed activity rate?Variable activity rate?Total cost?

EQUATIONS19 Total Cost = Fixed Cost + Variable Cost = Engineering Cost + Supply CostFixed activity rate =Total committed costTotal capacity availableVariable activity rate =Total cost of flexible resourcesCapacity usedTotal Cost = Engineering Cost + Supply Cost = (3x50.000) + 90.000 = $240.000Fixed activity rate = (3x50.000)/7500 = $20Variable activity rate = 90.000/6000 = $15MIXED COSTMethods for separating mixed costs into fixed and variable components

high-low method, scatterplot method, and method of least squares.LINEARITY ASSUMPTION22Variable cost assumes a linear relationship between cost and activity driver.

Total Cost = Fixed Cost + (Variable Cost x Output)HIGH-LOW METHOD23Variable 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}MonthCost ($)Time (hour)January1000100February1250200March2250300April2500400May3750500Variable cost per unit = (3750-1000)/(500-100) = $6,875

Fixed Cost = 3.750 (6,875x500) = $312,50High-low MethodKeunggulanObjektifMudahCepatKelemahantidak reliable apabila data tertinggi/terendah merupakan OutliersSCATTERPLOT METHOD26

Scatterplot is a method of determining the equation of a line by plotting the data on a graph.Dengan asumsi pilihan garis terbaik adalah titik 1 & 3Variable Cost per unit = (2250-1000)/(300-100) = $6,25Fixed Cost = $2250 (6,25x 300) = $375

TC = 375 + (6,25 X)

28What are the advantages, disadvantages of scatterplot?ScatterplotAllows you to see the data BUTIt lacks any objective criterion for choosing the best-fitting lineSCATTERPLOT ADVANTAGE29Can you see why the high-low method doesnt always provide the best cost equation?

LEAST SQUARES30

formulaeV = [XY XY / n] [X2 (X)2 / n]

F = Y V X n n

R2 = V[XY - X Y / n] [EY2 (Y)2 / n]Regresi dilakukan dengan menu Data Analysis pada Microsoft Excel

MonthCost ($)Time (hour)January1000100February1250200March2250300April2500400May3750500SUMMARY OUTPUTRegression StatisticsMultiple R0.971751264R Square0.944300518Adjusted R Square0.925734024Standard Error299.3047499Observations5ANOVAdfSSMSFSignificance FRegression14556250455625050.860465120.005675231Residual326875089583.33333Total44825000CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept125313.913470.3981989050.717129011-874.01276281124.012763-874.01276281124.013X Variable 16.750.9464847247.1316523410.0056752313.7378631879.7621368133.7378631879.76213734How 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.COEFFICIENT OF DETERMINATION (R2)Percentage of variability in dependent variable explained by independent variableRange: 0 1Higher is better35COEFFICIENT OF CORRELATIONSquare root of coefficient of determinationMeasures whether variables move in same (+) or opposite (-) directionsRange: -1 - +136MULTIPLE REGRESSION: Definition37Multiple regression uses 2 or more independent variables (variable costs) in addition to the y-intercept (fixed cost) to explain the dependent variable.MonthMachine hourSummerCostJan134001740feb129801636Mar137601788Apr140501770May150012390Jun143212304Jul132212250Aug141612284Sep137012260Oct158001991Nov146001840Dec145501867SUMMARY OUTPUTRegression StatisticsMultiple R0.995689R Square0.991396Adjusted R Square0.989484Standard Error27.57531Observations12ANOVAdfSSMSFSignificance FRegression2788538.4394269.2518.5045.08E-10Residual96843.578760.3976Total11795382CoefficientsStandard Errort StatP-valueLower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept291.5792148.27781.9664390.080804-43.8484627.0069-43.8484627.0069Machine hour1.0682820.10443610.229072.96E-060.8320311.3045320.8320311.304532Summer501.8816.1696231.038461.83E-10465.3018538.4583465.3018538.4583Total Biaya = $291,58 + (1,068 x MachineHour) + (501,88 x Summer)MANAGERIAL JUDGMENTIs a method of cost assignment used toDetermine fixed, variable costUses managerial experienceUses past observation of cost relationshipsTo refine statistical estimation resultsAdvantage: simplicityDisadvantage: judgment errors40SELESAISampai Jumpa Minggu Depan