MANAGERIAL ACCOUNTING
:Submitted to
:Submitted By
COMSATS INSTITUTE OF
INFORMATION
TECHNOLOGY
.LAHORE
In The name of ALLAH The Most Beneficent & Most
.Merciful
:Cost Behavior
Cost behavior refers to how a cost will change as the level of
activity changes. Attempting to make a decision without a throughout understanding
.of cost behavior can leads to failure
:Variable Cost
Variable Cost is a cost whose total amount varies in direct proportion to change in the
activity level. If activity levels double, the total variable cost also doubles. If activity level changes by
10% then variable cost also increases by 10%
Variable cost remains constant if expressed on a per unit basis. For example
Number of Guests ($)Cost of meal per Guest ($) Total cost of Meal
250 30 7,500
500 30 15,000
750 30 22,500
1000 30 30,000
:Step-Variable Cost
The cost of a resource that is obtainable only in large chunks and
that increases or decreases only in response to fairly wide changes in activity is
known as a step variable cost. For example the wages of skilled repair technicians
.are often consider as being a step variable cost
There is linear relationship between cost and volume. Many costs that are classified
as variable actually behave in curvilinear fashion. Many costs are not linear, a
curvilinear cost may be approximated with a straight; line within a narrow band of
.activity is known as relevant range
:Fixed Costs
Total fixed remains constant within the relevant range of activity. For
example, the company a company rents a building for $500 per month to store its
equipments within the relevant range, the total amount of rent paid by company is the
same regardless of its guests. Fixed cost remains same in total. The average fixed
cost per unit become smaller as the level of activity increases
:Mixed Costs
A mixed cost consist both variable and fixed cost elements.
Mixed costs are also known as semi variable costs the following equation can
?be used to show relationship between mixed costs and level of activity
Y=a+bX
In this equation
Y= total mixed cost
a = the total fixed cost
b = the variable cost per unit of activity
X = the level of activity
Mixed costs are very common. For example, the cost of providing X-ray
service to patient at medical college is mixed cost. How does management go
about estimating about fixed and variable cost of mixed cost? There are two
methods
Account analysis -1
.Engineering approach -2
In account analysis, an account is classified either variable or fixed base on
analysts prior knowledge of how the cost in the account behaves. For
example, direct material may be classified as variable cost and building lease
.may be classified as fixed cost
The engineering approach involves a detailed analysis of what cost behavior
.should be, based on individual evaluation of industrial production methods
:Dependent variable
A variable that is plotted vertical axes is known as depend
dent variable. A variable that is plotted in X axes is known as independent
.variable
Variable Cost=Y2-Y1 = cost at the high level of activity-Cost at low level of activity
X2-X1 high activity level – low activity level
Therefore, when the high low method is used, the variable cost is estimated by
dividing the difference in cost between high and low level of activity by the change in
.activity between those two points
For example
Patient days Maintenance cost
(8000×0.80) – $9800 =
.3400 $=
Traditional Approach
(Cost Organized by Function)
Sales………………………………………………………$12000
Cost of goods sold……………………………………….. 6000
Gross Margin………………………………………………6000
Selling & Administrative expenses
Selling…………………………………3100
Administrative…………………………1900……………..5000
Net Operating Income…………………………………….1000
Contribution approach
(Cost Organized by Function)
Sales…………………………………………………………12000
Variable Expenses
Variable Production……………………2000
Variable selling…………………………..600
Variable administrative………………….400……………..3000
Contribution Margin…………………………………………9000
Fixed Expenses
Fixed production……………………………4000
Fixed selling…………………………………2500
Fixed administrative………………………...1500 8000
Net Operating Income……………………………………….1000