HFT 3431 Chapter 6 Basic Cost Concepts Cost Related Questions n What Are the Hotel’s Fixed Costs? n Which Costs Are Relevant to Purchasing a New Microcomputer?

HFT 3431HFT 3431

Chapter 6Chapter 6

Basic Cost ConceptsBasic Cost Concepts

Cost Related QuestionsCost Related Questions

What Are the Hotel’s Fixed Costs?What Are the Hotel’s Fixed Costs? Which Costs Are Relevant to Which Costs Are Relevant to

Purchasing a New Microcomputer?Purchasing a New Microcomputer? What Are the Variable Costs of What Are the Variable Costs of

Serving a Steak Dinner?Serving a Steak Dinner? What Is the Opportunity Cost of What Is the Opportunity Cost of

Adding 25 Rooms to the Motel?Adding 25 Rooms to the Motel?


What Is the Standard Cost of What Is the Standard Cost of Catering a Banquet for 500 People?Catering a Banquet for 500 People?

What Are the Hotel’s Controllable What Are the Hotel’s Controllable Costs?Costs?

How Are Fixed Cost Portions of How Are Fixed Cost Portions of Mixed Costs Determined?Mixed Costs Determined?


How Are Costs Allocated to the How Are Costs Allocated to the Operating Departments?Operating Departments?

Which Costs Are Sunk Costs in Which Costs Are Sunk Costs in Considering a Future Purchase?Considering a Future Purchase?

Which Costs Are Relevant to Pricing Which Costs Are Relevant to Pricing a Lobster Dinner?a Lobster Dinner?

Cost TerminologyCost Terminology

Fixed Costs - Costs That Are Fixed Costs - Costs That Are Normally Not Affected by Changes in Normally Not Affected by Changes in Sales Volume Over a Relevant RangeSales Volume Over a Relevant Range– Rent, Insurance, TaxesRent, Insurance, Taxes

Relevant Range - Range of Activity Relevant Range - Range of Activity Under Which Cost Data Are ValidUnder Which Cost Data Are Valid– 100 to 300 rooms sold100 to 300 rooms sold– 301 to 500 rooms sold301 to 500 rooms sold


Variable Costs - Costs That Are Variable Costs - Costs That Are Constant on a Per Unit BasisConstant on a Per Unit Basis– Salad bar; GasolineSalad bar; Gasoline

Mixed Costs - Also Called Semi Fixed Mixed Costs - Also Called Semi Fixed or Semi Variable Costs and Have a or Semi Variable Costs and Have a Fixed and a Variable ComponentFixed and a Variable Component– Telephone Bill; Utility BillTelephone Bill; Utility Bill


Controllable Costs - Costs That Can Be Controllable Costs - Costs That Can Be Changed in the Short Run and Are Changed in the Short Run and Are Under the Control of an Operating Under the Control of an Operating ManagerManager– Hourly Wages; SuppliesHourly Wages; Supplies

Noncontrollable Costs - Costs That Noncontrollable Costs - Costs That Normally Cannot Be Changed in the Normally Cannot Be Changed in the Short RunShort Run– Taxes; InsuranceTaxes; Insurance


Prime Costs - Material Plus LaborPrime Costs - Material Plus Labor Unit Cost - Cost Per Salable UnitUnit Cost - Cost Per Salable Unit


Avoidable Costs - Fixed Costs That Avoidable Costs - Fixed Costs That Are Eliminated During a ShutdownAre Eliminated During a Shutdown– Insurance & LaborInsurance & Labor

Capacity Fixed Costs - Costs Capacity Fixed Costs - Costs Incurred When Providing Goods or Incurred When Providing Goods or ServicesServices– Depreciation; TaxesDepreciation; Taxes


Discretionary Fixed Costs - Costs Discretionary Fixed Costs - Costs That Management Can AvoidThat Management Can Avoid– Educational & Training CostsEducational & Training Costs

Step Costs - Costs That Change Due Step Costs - Costs That Change Due to Changes in a Range of Activityto Changes in a Range of Activity– Housekeeping wages 100-300 roomsHousekeeping wages 100-300 rooms– Housekeeping wages 301-400 roomsHousekeeping wages 301-400 rooms


Overhead Costs - All Costs Other Overhead Costs - All Costs Other Than Direct Costs Incurred by Profit Than Direct Costs Incurred by Profit Centers (Indirect Costs)Centers (Indirect Costs)

Differential Costs - Costs That Differ Differential Costs - Costs That Differ Between Two AlternativesBetween Two Alternatives

Sunk Cost - A Past Cost Relating to a Sunk Cost - A Past Cost Relating to a Past DecisionPast Decision


Average Cost - Cost to Produce an Average Cost - Cost to Produce an Item (Include All Costs)Item (Include All Costs)

Incremental Costs - How Much It Incremental Costs - How Much It Costs to Produce Another Unit Costs to Produce Another Unit (Variable Costs Only)(Variable Costs Only)

Cost TerminologyCost Terminology Standard Costs - What Costs Should Standard Costs - What Costs Should

Be Under Ideal SituationsBe Under Ideal Situations Indifference Point - The Level of Indifference Point - The Level of

Activity Where Costs Are the Same Activity Where Costs Are the Same Under Variable and Fixed Under Variable and Fixed ArrangementsArrangements

Determination of Mixed Cost Determination of Mixed Cost ElementsElements

TMC = FC + (VC/Unit * Unit Sales)TMC = FC + (VC/Unit * Unit Sales) High - Low (Two Point Method)High - Low (Two Point Method) ScattergramScattergram Regression Analysis (Method of Regression Analysis (Method of

Least Squares)Least Squares)

High - Low High - Low (Two Point Method)(Two Point Method)

Select a Sample High and Low Month Select a Sample High and Low Month for Sales (or Costs)for Sales (or Costs)

Calculate Difference in Two Calculate Difference in Two Measures (Sales or Costs and Measures (Sales or Costs and Activity)Activity)

High - Low High - Low (Two Point Method)(Two Point Method)

Divide Activity Difference Into Sales Divide Activity Difference Into Sales or Cost Differenceor Cost Difference

Result Is Variable Cost Per UnitResult Is Variable Cost Per Unit Solve for Fixed CostsSolve for Fixed Costs

ScattergramScattergram

Graph Sales (Cost) Data With ActivityGraph Sales (Cost) Data With Activity Draw Best Straight Line Through Draw Best Straight Line Through

DataData Where Intersects Y Axis Is Fixed Where Intersects Y Axis Is Fixed

CostsCosts Solve for Variable Cost Per UnitSolve for Variable Cost Per Unit

Regression AnalysisRegression AnalysisMethod of Least SquaresMethod of Least Squares

Computation of Computation of BestBest Straight LineStraight Line Y = a + bxY = a + bx b = Slope of Line or Variable Cost b = Slope of Line or Variable Cost

Per UnitPer Unit A = Y Intercept or Fixed CostA = Y Intercept or Fixed Cost

Indifference Point Formula

VC% * Revenue = FC Assume Fixed Lease of $48,000 or 5% or

Revenue0.05 * (revenue) = $48,000

Revenue = $48,000 / 0.05

Revenue = 960,000If sales will be < $960,000 use VC leaseIf sales will be > $960,000 use FC lease

Cost AllocationCost Allocation

Distribution of Overhead Costs to the Distribution of Overhead Costs to the Profit CentersProfit Centers

Single Allocation Base Approach - Single Allocation Base Approach - Uses a Single Factor Such As Square Uses a Single Factor Such As Square Footage, Number of People, RevenueFootage, Number of People, Revenue

Multiple Allocation Approach - Use Multiple Allocation Approach - Use the Most Closely Related Factorthe Most Closely Related Factor

Analysis After AllocationAnalysis After Allocation

What Is Income (Loss)?What Is Income (Loss)? Which Allocated Overhead Costs Are Which Allocated Overhead Costs Are

Fixed?Fixed? What Other Departments Are What Other Departments Are

Affected?Affected? Any Operating Alternatives?Any Operating Alternatives?

Use of Cost DataUse of Cost Data

Which Piece of Equipment Should Be Which Piece of Equipment Should Be Purchased?Purchased?

How Much Should We Charge?How Much Should We Charge? Can We Sell Below Cost?Can We Sell Below Cost?

Use of Cost DataUse of Cost Data

What Time Periods Should We Be What Time Periods Should We Be Open?Open?

Should We Close For the Season?Should We Close For the Season? Which Segment Should Get the Most Which Segment Should Get the Most

Support?Support?

HomeworkHomework

Textbook: Problems 4,6,11,14Textbook: Problems 4,6,11,14– To be turned inTo be turned in

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HFT 3431 Chapter 6 Basic Cost Concepts Cost Related Questions n What Are the Hotel’s Fixed Costs? n Which Costs Are Relevant to Purchasing a New Microcomputer?