Anda di halaman 1dari 31

# 3-1

Cost
Analysis
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University

3-2

Objectives
Objectives
Understand the importance of cost management.
After
this
After
this
Describe the two
aspects
of managing
costs.
chapter,
you
chapter,
you should
should
Distinguish between
and non-valuebe
able
becosts.
able to:
to:
Understanding the limitations of methods of cost
behavior and analysis.
Classify costs along several dimensions including
whether managers can change them at short notice.

3-3

Cost
Cost Drivers
Drivers and
and Pools
Pools
Activities
Activities that
that cause
cause costs
costs
are
are cost
cost drivers
drivers and
and include
include
sales,
sales, production,
production, and
and items
items
such
such as
as the
the number
number of
of
products
products the
the company
company
A
Agroup
group of
of costs
costs
makes
of
makes and
and the
the number
number
of by
driven
driven
by the
the
customers
customers itit serves.
serves.
same
same activity
activity isis aa
cost
cost pool.
pool.

3-4

Estimated
Estimated Cost
Cost Behavior
Behavior
Fixed Cost Behavior

## Variable Cost Behavior

\$

Activity
Unit Cost Varies with Volume

Activity
Unit Cost Rate is Constant

3-5

Estimated
Estimated Cost
Cost Behavior
Behavior
Mixed Cost
Total Costs

\$ Cost
Variable Costs
Fixed amount

## Number of Units Produced

Total Costs = Fixed Amount + (Variable Cost Per Unit x Number of Units)
Total Costs = Fixed Costs + Variable Costs

3-6

Estimating
Estimating Cost
Cost Behavior
Behavior
Account Analysis
Engineering Approach
Interviews
The (High-Low) Two-Point Method
Scatter-Diagram Method
Regression

3-7

Account
Account Analysis
Analysis
Manager decides how to classify a cost by
looking at its name and then checking this
judgment by scanning the account for that
cost for several periods.
Example: Rent, depreciation, salaries, and
advertising are generally fixed.
Weakness: It only shows what costs have
been, not what they should be.

3-8

Engineering
Engineering Approach
Approach
Engineers study the material and labor
requirements of products and related
operations, then make per-unit estimates of
the costs that should vary with production.
Advantage: It indicates what costs should
be rather than what they
have been.

3-9

Interviews
Interviews
This is a simple tool that has proven useful in
determining what drives many costs, and to
determine what is likely to happen to
particular costs, given specific actions.
Advantage: It does help to identify cost
drivers.
Weakness: Interviewing does not help
determine how much of a
particular cost is
fixed or
variable.

3-10

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
The high-low (two-point) method is a
relatively unsophisticated, yet widely used,
method of estimating the components of a
mixed cost.
Approach: This method uses two past levels
of activity and the amounts of the
cost incurred at those levels;
more specifically, the highest and
lowest levels of activity.

3-11

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
Variable cost
component of =
mixed cost
Variable cost
component of =
mixed cost
Variable cost
component of =
mixed cost

change in cost
change in activity
\$40,800 \$14,800
18,000 5,000
\$26,000
13,000

\$2 per
= machine hour

3-12

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
Fixed cost
variable
total
component of =
volume x
cost
cost
mixed cost
components
At the high point: 18,000
Fixed cost
component of = \$40,000 (18,000 x \$2)
mixed cost
Fixed cost
component of = \$4,800
mixed cost

3-13

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
Fixed cost
variable
total
component of =
volume x
cost
cost
mixed cost
components
At the low point: 5,000
Fixed cost
component of = \$14,800 (5,000 x \$2)
mixed cost
Fixed cost
component of = \$4,800
mixed cost

3-14

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
An Example
Month
January
February
March
April
May

Utility Costs
\$4,000
5,000
9,000
10,000
15,000

High!
High!

Units Produced
400
800
1,200
1,600
2,000

3-15

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
An Example
Month
January
February
March
April
May

Utility Costs
\$4,000
5,000
9,000
10,000
15,000

Low!
Low!

Units Produced
400
800
1,200
1,600
2,000

3-16

High-Low
High-Low (Two-Point)
(Two-Point) Method
Method
Variable Cost = (\$15,000 \$4,000) / (2,000 400)
= \$11,000 /1,600
= \$6.875 per unit
Fixed Costs

= \$1,250

## The cost formula using the high-low method is:

Y = \$1,250 + \$6.875 (X)

3-17

Scatter-Diagram
Scatter-Diagram Method
Method
The scatter-diagram (or graphical) method
requires cost and volume data from prior
periods, and drives an equation (cost
prediction formula) based on those data.
Weakness: The placement and slope of the
line are matters of judgment; the manager
eyeballs the data and fits the line
visually.

3-18

Scatter-Diagram
Scatter-Diagram Method
Method
Utility Cost
\$16,000
x

12,000
x
x

8,000

## Analyst can fit line

based on his or her
experience

4,000

400

800
1,200
Units Produced

1,600

2,000

3-19

Regression
Regression Method
Method
Regression analysis (or just regression) is a
more sophisticated method for estimating the
fixed and variable components of a mixed
cost.
Regression uses cost and volume data from
prior periods to yield an equation of the form
y = a + bx.
The appendix covers regression in more detail.

## Problems and Pitfalls in

Cost Behavior Analysis
Historical Data
High-low, scatter-diagram, and regression
methods all use historical information.
Formulas based on historical data can give
useful predictions only if past conditions prevail
in the future.
Outliers should be ignore

3-20

## Problems and Pitfalls in

Cost Behavior Analysis
Correlation and Association

For
For an
an equation
equation to
to be
be
The
useful
the
The visual
visual
aspect of
of the
the scatterscatteruseful for
for planning,
planning,
theaspect
diagram
relationship
the
diagram
method allows
allows the
the
relationship between
between
themethod
manager
cost
must
manager
to see
see whether
whether the
the
cost and
and the
the activity
activity
mustto
activity
be
activity chosen
chosen as
as the
the
be fairly
fairly close.
close.
independent
independent variable
variable isis aa good
good
predictor
predictor of
of cost.
cost.

3-21

3-22

Step
Step Variable
Variable Costs
Costs
Linearity Assumption

Narrow Width

\$ Cost

## Number of Units Produced

3-23

Definitions
Definitions
Discretionary costs are fixed costs that can be
quickly altered by managerial action.
Example: Advertising, employee training,
and research and development

## Committed costs are fixed costs that cannot

be changed so quickly.
Example: Depreciation

3-24

Definitions
Definitions
Avoidable costs are costs that can be avoided
by adding, dropping, or curtailing some
activities.
Example: Advertising, sales salaries

A
Acompany
company that
that drops
drops aa product
product line
line might
might not
not
be
be able
able to
to reduce
reduce its
its sales
sales force
force or
or its
its rent.
rent.
Such
Such costs
costs are
are unavoidable.
unavoidable.

3-25

Definitions
Definitions
A direct cost is incurred specifically because
of a particular activity of a firm, like a product
line, or geographical area.
Direct costs are sometimes called separable or
traceable costs.

## An indirect cost does not relate to one specific

activity, but rather to several.
An indirect cost is sometimes called a common
or joint cost.

3-26

Manufacturing
Manufacturing Costs
Costs
Direct materials
Direct labor

3-27

Regression
Regression Output
Output (Appendix)
(Appendix)
Regression Output:
\$7,731.78

Constant
Standard Error of Y Estimate

\$1,763.16
0954921

R Squared
No. of Observations

12 Degrees of Freedom
Coefficient(s)

10X
\$1.76678Standard

Error of Coefficient

\$0.12139

## Model: Y = \$7,731.78 + \$1.76678X

3-28

Goodness
Goodness of
of Fit
Fit (Appendix)
(Appendix)
Goodness of fit tells us how well the
regression line fits the data, and therefore
suggests to managers how good their
predictions are likely to be. Two potential
measures are:
1. the coefficient of determination (Rsquared).
2. the standard error of the estimate
(Standard Error of Y Estimate).

3-29

Multiple
Multiple Regression
Regression Equation
Equation
(Appendix)
(Appendix)
TC = FC + b1X1 + b2X2 + + bnXn

3-30

Chapter 3
The
The End
End

3-31