CHAPTER Cost Drivers and Cost Behavior PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL ☼ This chapter discusses classifying costs and methods for estimating cost behavior Fixed costs Variable costs All managerial decisions deal with choices among different activity levels Managers must estimate which costs will vary with the activity and by how much LO VARIABLE VARIABLE COSTS: COSTS: Definition Definition Are costs that change in total as the level of activity changes FIXED FIXED COSTS: COSTS: Definition Definition Are costs that not change in total with changes in activity levels LO RELEVANT RELEVANT RANGE: RANGE: Definition Definition Is the range of activity over which the firm expects a set of cost behaviors to be consistent LO Estimates Estimates of ofvariable variable and andfixed fixed costs costsapply apply only onlyififlevel level of ofactivity activity lies lieswithin within relevant relevant range range EXHIBIT 5.1 LO FIXED COSTS Fixed (capacity) costs are divided between Committed costs Capacity costs that will continue to exist even if operations are temporarily reduced Discretionary (programmed or managed) costs Need not be incurred in the short run to operate the business LO VARIABLE VARIABLE and and FIXED FIXED COSTS: COSTS: A A Reminder Reminder Variable costs change with the volume of activity Fixed costs remain constant over the relevant range of activity LO CURVILINEAR CURVILINEAR VARIABLE VARIABLE COSTS: COSTS: Definition Definition Are costs that vary with the volume of activity but not in constant proportion LO What is an example of a curvilinear cost? Costs become curvilinear when volume discounts are offered LO Volume Volume discounts discounts EXHIBIT 5.5 10 LO Semifixed Semivariable Semifixed Semifixed costs costschange change because becauseof of changes changesinin long-term long-term assets; assets; semivariable semivariable costs costsdo donot not EXHIBIT 5.7 14 LO SIMPLIFYING COST ANALYSES Some Some costs costs do not not vary vary in in the the short short run run over over the the relevant relevant range range (fixed (fixed costs) costs) Some Some vary vary with with volume volume (variable (variable costs) costs) Others Others are are neither neither completely completely fixed fixed or or variable variable Decision Decision makers makers can can simplify simplify these these variations variations by by treating treating costs costs as as either either fixed fixed or or variable variable 15 LO EXERCISE EXERCISE 33 Name three methods of cost estimation Statistical regression, Account analysis, and Engineering estimation Press “Enter” or click left mouse button for answer 16 LO ANALYZING HISTORICAL COSTS Two steps to analyze historical cost data Make an estimate of the past relation Update for current, future periods Adjust costs for inflation and other changes 17 LO TOTAL COST EQUATION Total costs = Fixed costs + (Variable costs × Activity) Independent Variables 18 LO ANALYZING COSTS Steps in analyzing costs are: Review alternative cost drivers (independent variables) Plot the data Examine the data and method of accumulation 19 LO R MULTIPLE MULTIPLE REGRESSION: REGRESSION: Definition Definition Has more than one independent variable 20 LO DATA PROBLEMS Regardless of method used, results will only be as good as the quality of the data used Problems include Missing data Outliers Allocated and discretionary costs Inflation Mismatched time periods Trade-offs in choosing time period 21 LO Every Every method methodof of cost cost estimation estimation has hasstrengths strengths and and weaknesses weaknesses EXHIBIT 5.12 22 LO COMMON SIMPLIFICATIONS In general, more sophisticated methods provide more accurate cost estimates than simpler ones Methods of simplification are Using only one cost driver Assuming cost behavior patterns are linear within the relevant range Assume cost decreases are not “sticky” 23 LO DERIVING LEARNING CURVES Mathematically, the learning curve effect can be expressed by the equation: Y=aX b, where Y = average number of labor hours required per unit for X units a = number of labor hours required for the first unit X = cumulative number of units produced b = index of learning, equal to the log of the learning rate divided by the log of 24 LO STANDARD ERRORS OF THE COEFFICIENTS The standard errors of the coefficients give an idea of the confidence we can have in the fixed and variable cost coefficients The smaller the standard error relative to its coefficient, the more precise the estimate Such computational precision does not necessarily indicate that the estimating procedure is theoretically correct, however 25 LO T-STATISTIC The ratio between an estimated regression coefficient and its standard error is known as the t-value or tstatistic If the absolute value of the t-statistic is approximately or larger, we can be relatively confident that the actual coefficient differs from zero 26 LO R-SQUARED The R2 attempts to measure how well the line fits the data (that is, how closely the data points cluster about the fitted line) If all the data points were on the same straight line, the R2 would be 1.00—a perfect fit If the data points formed a circle or disk, the R2 would be zero, indicating that no line passing through the center of the circle or disk fits the data better than any other 27 End of CHAPTER 28 ... volume volume increases increasesdue duetoto learning learningfrom from experience experience EXHIBIT 5.6 A 11 LO Total Totallabor labor time timeand andcost cost will willdecrease decrease with...☼ CHAPTER GOAL ☼ This chapter discusses classifying costs and methods for estimating cost behavior Fixed costs Variable costs All managerial decisions deal with... regression, Account analysis, and Engineering estimation Press “Enter” or click left mouse button for answer 16 LO ANALYZING HISTORICAL COSTS Two steps to analyze historical cost data Make an estimate