ALSARHANI YAHYA 1 Cost Behavior CH 3. ALSARHANI YAHYA 2 The cost behavior meaning : what is the way for changing the cost element. When the level of

ALSARHANI YAHYAALSARHANI YAHYA 11

Cost BehaviorCost Behavior

CH 3CH 3


The cost behavior meaning : what is the The cost behavior meaning : what is the way for changing the cost element. way for changing the cost element. When the level of product change the When the level of product change the other cost elements still fixed , however other cost elements still fixed , however the other elements change as whole or the other elements change as whole or parts.parts.

The study for cost behavior important The study for cost behavior important when the company prepare the cost data when the company prepare the cost data for determine the cost of the product or for determine the cost of the product or to prepare the different reports to the to prepare the different reports to the managers for decision making.managers for decision making.


Cost elements organized in relation to Cost elements organized in relation to the change in the volume of production the change in the volume of production to:to:

1.1. Fixed cost.Fixed cost.2.2. Variable cost.Variable cost.3.3. Mixed cost.Mixed cost. Fixed cost: it is that all cost are fixed and Fixed cost: it is that all cost are fixed and

those costs remain fixed regardless of those costs remain fixed regardless of the change in the volume of production. the change in the volume of production. such as ( rents the depreciation for such as ( rents the depreciation for machines and equipment…)machines and equipment…)


Cost behavior

0

1000

2000

3000

4000

5000

6000

1 2 3 4 5 6 7 8 9 10 11

level of activity

co

st

Seen from the graph that fixed costs are fixed line with Seen from the graph that fixed costs are fixed line with lowering the sight about the change of the level of activity.lowering the sight about the change of the level of activity.

We assume that the company product 20 unit so the cost We assume that the company product 20 unit so the cost for unit =5000/20for unit =5000/20

=250 R.O /UNIT=250 R.O /UNIT Assume the company will product 50 unit so what is the Assume the company will product 50 unit so what is the

cost?cost?


Variable Cost:Variable Cost:The costs which changing usually with The costs which changing usually with

the change of unit product and the change of unit product and these like :the cost of direct these like :the cost of direct materials or direct salaries.materials or direct salaries.

When the cost of unit 100 R.O from When the cost of unit 100 R.O from the raw materials so any increase in the raw materials so any increase in the product will increase the cost.the product will increase the cost.

The total of variable cost =number of The total of variable cost =number of units x the cost of unitunits x the cost of unit


Variable cost

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6 7 8 9 10 11

level of activity

co

st

Seen from the graph the relationship between the Seen from the graph the relationship between the variable cost and the level of activity a direct variable cost and the level of activity a direct relation.relation.

The Variable cost it’s the product costs so it The Variable cost it’s the product costs so it founded when the product was and disappear founded when the product was and disappear when the product disappear.when the product disappear.


Mixed cost:Mixed cost:The costs which have both variable and fixed costs like The costs which have both variable and fixed costs like

electric costs ,indirect labor, Maintenance …electric costs ,indirect labor, Maintenance … This cost called the semi - variable costs or semi-fixed This cost called the semi - variable costs or semi-fixed

costs.costs. Example:Example:If the variable cost=100 R.O per unit.If the variable cost=100 R.O per unit.The fixed cost =5000 R.O and the total for all unit The fixed cost =5000 R.O and the total for all unit

product 20 units.product 20 units.So what is the total of cost?So what is the total of cost?And what is the fixed cost for one unit?And what is the fixed cost for one unit? If the company product 50 unit so what is the total of If the company product 50 unit so what is the total of

cost and what is the fixed cost for one unit?cost and what is the fixed cost for one unit? If the company product 10 unit so what is the total of If the company product 10 unit so what is the total of

cost and what is the fixed cost for one unit?cost and what is the fixed cost for one unit? Give your notes?Give your notes?

Highest and Lowest levelHighest and Lowest level

There are many methods used to There are many methods used to analyze these costs and distributed analyze these costs and distributed to variable and fixed costs the to variable and fixed costs the highest and lowest level.highest and lowest level.

This method relies on the tendency This method relies on the tendency calculated based on the highest and calculated based on the highest and lowest values of the costs to be lowest values of the costs to be uploadeduploaded


Highest and Lowest levelHighest and Lowest level

This method is calculation tendency This method is calculation tendency rate on the basis of the highest level rate on the basis of the highest level of production and the lowest level for of production and the lowest level for this production and the this production and the corresponding costs for each of them corresponding costs for each of them and then give the difference between and then give the difference between the cost of the highest level and low the cost of the highest level and low to the difference between the to the difference between the highest and lowest level of activityhighest and lowest level of activity


Factory maintenance costs Hours of operation

81000 3150

84000 3450

93000 3600

87000 2850

66000 2250

75000 2550


For example :If company showing this table about the cost for maintenance and the hours of operation

How you can get the fixed cost?


Cost Behavior AnalysisCost Behavior Analysis The formula of costs:The formula of costs:T=F+VST=F+VST=the total of cost.T=the total of cost.F=Fixed cost.F=Fixed cost.V=variable cost for unitV=variable cost for unitS=the size of product.S=the size of product. Example :Example :When the company product (S) unit with variable When the company product (S) unit with variable

cost for unit=100 R.O for one unit, and the total cost for unit=100 R.O for one unit, and the total of fixed cost=5000 R.O so what is the formula of of fixed cost=5000 R.O so what is the formula of costs?costs?

If the company decide to product 60 unit so what is If the company decide to product 60 unit so what is the total of cost? the total of cost?


The Methods of measuring costThe Methods of measuring cost1.1. The overall method.The overall method.2.2. The variable method.The variable method.3.3. The untapped method.The untapped method.4.4. The direct method.The direct method.

Overall method :This method is based on the assumption Overall method :This method is based on the assumption that all elements of the costs are due to production, so the all that all elements of the costs are due to production, so the all cost element will appear in the cost product statement like cost element will appear in the cost product statement like that:that:

Direct material xxxDirect material xxxDirect labor xxxDirect labor xxxManufacturing cost indirect (F&V) xxxManufacturing cost indirect (F&V) xxx

Product costs ____ xxxProduct costs ____ xxx


The variable method: This method is based on The variable method: This method is based on the product costs are all the variable costs the product costs are all the variable costs elements. On the other hand, the fixed costs elements. On the other hand, the fixed costs are the time costs element such as rents or the are the time costs element such as rents or the depreciation.depreciation.

The company will established bears remain The company will established bears remain fixed cost but the variable cost will stopped fixed cost but the variable cost will stopped when the product stop, when the product stop,

The cost product statement will be like that:The cost product statement will be like that:Direct material xxxDirect material xxxDirect labor xxxDirect labor xxxManufacturing cost indirect (V) xxxManufacturing cost indirect (V) xxxProduct costs ____ xxxProduct costs ____ xxx


The untapped method: This method is based The untapped method: This method is based on untapped any cost to have a product.on untapped any cost to have a product.

To calculated the untapped method it should To calculated the untapped method it should add only all the untapped costs in the cost add only all the untapped costs in the cost statement. However, the non –untapped costs statement. However, the non –untapped costs appear in the profit and loss statement, so the appear in the profit and loss statement, so the untapped costs =variable costs and percent untapped costs =variable costs and percent from untapped fixed cost.from untapped fixed cost.

The cost product statement will be like that:The cost product statement will be like that:Direct material xxxDirect material xxxDirect labor xxxDirect labor xxxManufacturing cost indirect (V) xxxManufacturing cost indirect (V) xxxManufacturing cost indirect (F) xxxManufacturing cost indirect (F) xxxProduct costs ____ xxxProduct costs ____ xxx


The cost of indirectly manufacturing fixed cost The cost of indirectly manufacturing fixed cost identified as follows:identified as follows:

The percent untapped=the Actual energy/available The percent untapped=the Actual energy/available energy.energy.

Actual energy: it Maximum capacity can be done Actual energy: it Maximum capacity can be done with not include any faults arising from the with not include any faults arising from the revenues generated or not revenues.revenues generated or not revenues.

Available energy: it Maximum capacity can be Available energy: it Maximum capacity can be done with not include any faults arising from the done with not include any faults arising from the revenues generated .revenues generated .

The untapped fixed cost =percent untapped fixed The untapped fixed cost =percent untapped fixed cost x fixed costs.cost x fixed costs.

Example:Example:The A company was product 12000 unit and the The A company was product 12000 unit and the

available energy 16000 unit and the total of fixed available energy 16000 unit and the total of fixed cost=9000 R.O so what is the untapped fixed cost=9000 R.O so what is the untapped fixed cost?cost?


The direct method: in this method to calculate The direct method: in this method to calculate the product cost by insert all the direct cost the product cost by insert all the direct cost only and the other cost (indirect cost) post to only and the other cost (indirect cost) post to profit & loss statement.profit & loss statement.

The statement of product cost will be like this:The statement of product cost will be like this:

Material direct xxxMaterial direct xxx

Labor direct xxxLabor direct xxx

Manufacturing variable direct cost xxxManufacturing variable direct cost xxx

Manufacturing fixed direct cost xxxManufacturing fixed direct cost xxx

Product cost ____ xxxProduct cost ____ xxx


ExampleExample This data from one of company:This data from one of company: Available power 15000Available power 15000 The number of product unit 12000The number of product unit 12000 The price for one unit 18 R/unitThe price for one unit 18 R/unit The material direct cost 4.5 R/unitThe material direct cost 4.5 R/unit The labor direct cost 2.5 R/unitThe labor direct cost 2.5 R/unit Manufacturing variable indirect cost 2.5 R/unit.Manufacturing variable indirect cost 2.5 R/unit. Manufacturing fixed indirect cost 30,000 RManufacturing fixed indirect cost 30,000 R Sales variable expenses 1.5 R/unitSales variable expenses 1.5 R/unit Sales and administration expenses 20,000 R/unitSales and administration expenses 20,000 R/unit Required :Required :The product cost by 4 methods?The product cost by 4 methods?


ExampleExample This data from one of company:This data from one of company: Available power 18000Available power 18000 The number of product unit 16000The number of product unit 16000 The material direct cost 6.5 R/unitThe material direct cost 6.5 R/unit The labor direct cost 4.5 R/unitThe labor direct cost 4.5 R/unit Manufacturing variable indirect cost 2.5 R/unit.Manufacturing variable indirect cost 2.5 R/unit. Manufacturing fixed indirect cost 40,000 RManufacturing fixed indirect cost 40,000 R Manufacturing variable direct cost 3.5 R/unitManufacturing variable direct cost 3.5 R/unit Manufacturing fixed direct cost 20,000 RManufacturing fixed direct cost 20,000 R Sales 20 R/unitSales 20 R/unit Sales and administration expenses 18,000 R/unitSales and administration expenses 18,000 R/unit Required :Required :The product cost by 4 methods?The product cost by 4 methods?

Documents

ALSARHANI YAHYA 1 Cost Behavior CH 3. ALSARHANI YAHYA 2 The cost behavior meaning : what is the way for changing the cost element. When the level of