IntroductionProcess of determining cost behavior, often focusing on historical data.Cost estimation

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective2

Total Variable Cost Example Your total Pay Per View bill is based on how many Pay Per View shows that you watch.Number of Pay Per View shows watchedTotal Pay Per View Bill

Variable Cost Per Unit ExampleThe cost per Pay Per View show is constant. For example, $4.95 per show.Number of Pay Per View shows watchedCost per Pay Per View show

Step-Variable CostsActivityCostTotal cost remains constant within a narrow range of activity.

Total Fixed Cost ExampleYour monthly basic cable TV bill probably does not change no matter how many hours you watch. Number of hours watchedMonthly Basic Cable Bill

Fixed Cost Per Unit ExampleThe average cost per hour decreases as more hours are spent watching cable television.Number of hours watched Monthly Basic cable Bill per hour watched

Step-Fixed CostsRent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet)306090Total cost doesnt change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.

Semivariable Cost Fixed Monthly Utility ChargeVariable Utility ChargeActivity (Kilowatt Hours) Total Utility CostTotal semivariable cost

Curvilinear CostCurvilinear Cost FunctionActivity

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective3

Curvilinear CostCurvilinear Cost FunctionRelevant RangeActivity

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective4

Engineered, Committed and Discretionary CostsDiscretionaryMay be altered in the short term by current managerial decisions.CommittedLong-term, cannot be reduced in the short term.EngineeredPhysical relationship with activity measure.

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective5

Account Classification MethodCost estimates are based on a review of each account making up the total cost being analyzed.

Visual-Fit MethodA scatter diagram of past cost behavior may be helpful in analyzing mixed costs.

The High-Low MethodOwlCo recorded the following production activity and maintenance costs for two months:

Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.

Unit variable cost = $3,600 4,000 units = $.90 per unit Fixed cost = Total cost Total variable cost Fixed cost = $9,700 ($.90 per unit 9,000 units) Fixed cost = $9,700 $8,100 = $1,600The High-Low Method

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective5 cont., 6 and 7 can be found in the Text Book

End of Chapter 6