LECTURE AID

Cost Estimation
COST BEHAVIOR (in relation to Volume)a -Cost Control
Decision Making

Units
DLH

Hours MH

COST- VOLUME -Pesos

M Selling Percentage
Prod'n.
Prod nL Operatinge
Admin.
Sales
Others

Simple
Regression Analysis the study of the relationship between two or more variables.
in regression analysis, there must be one dependent and one or more
independent variables) Multiple

Simple Regression Analysis: Cost-Volume Analysis

Example:
Multiple Regression Analysis: Cost-Volume- "Profit Analysis

dependent variablee

COST CLASSIFICATIONS (as to behavior in relation to volume)

NORMAL BEHAVIOR Total cost Per unit cost

Variable cost varies proportionately Constant
Discretionary
Within the relevant range< -Fixed cost Constant varies inversely
Committed
Semi-Variable Cost varies less than varies inversely
(mixed cost) proportionately

Step variable cost -

increases abruptly 2 costs per unit
Outside the relevant range
Step fixed cost -
2 total fixed costs 2 costs per unit

varies more than proportionately

ABNORMAL BEHAVIOR
varies inversely

Example Volume Variable cost Fixedcost

Within the relevant range 0/1- 800 units P 5/unit P 10,000
Outside the relevant range 801 -1,000 units 6/unit 12,000

How cost is defined - based on the behavior of total cost

How cost is expressed -

on a basis which is constant

3 Methods of Splitting Semi Variable Cost

1. High & Low Point Method - the least accurate

2.
3.
Method of Least Squares
Scatter graph
the most accurate

ILLUSTRATIVE PROBLEM

The maintenance costs for the lst quarter of 200C are shown below.

Hours Costs
January 10 P 80
FebruarY 20 110
March 15 95

1. High & Low Point

Volume (
V
F
Costs P

Difference in costs-difference in volume = variable rate x volume = Total variable cost

Total cost total variable cost= Total fixed cost

2. Method of Least Squares

Equation 1 Y= Na+Xb Where Y = total cost (dependent variable)

Volume (independent t variable)

2 n = No. o f periods or observations

2 ZXY = > Xa+ EX b a = Fixed cost per period (Y intercept)

b Variable rate (slope oft3. Scatter

3. Scatter Graph

L
 OUR LADY OF FATIMA UNTVERSITY
CPA Refresher Program

COST BEHAVIOR (How to split a semi-variable cost) Dr. Nelson S. Abeleda

Questions 1 -4 are based on the following information pertaining to the actual indirect materials costs for the
first quarter of the current year.

Units Indirect materials cost

January 2,5 00 P 25
February 1,800 7,550
March 3,000 10,250
The company uses the "High & Low Point" method for splitting a semi-variable cost.

1. What is the variable rate per unit of indirect materials?

2. What is the fixed cost of indirect materials per month
3. If 4,000 units will be produced in April, what would be the estimated cost of indirectmaterials?
4. If the normal capacity per month is 2,000 units, what is the indirect materials cost per unit?

Questions 5-8 are based on the following information pertaining tothemaintenance cost per hourfor the
last quarter of the current year.

Direct labor hours Maintenance coast/hour

October 500 P 9.00
November 800 6.75
December 750 7.00

5. What is the variable rate per hour of maintenance cost?

6. What is the fixed maintenance cost per month?
7. What is the annual fixed maintenance cost?
8. What s the maintenance cost per hour at a normal capacity of 600 direct labor hours?

Questions 9-11 are based on the following information:

An author is paid a fixed royalty plus a fixed percentage of the gross book sales. During the first
quarter of the current year, gross book sales as well as the royalties paid were as follows:

Gross Sales Royalties paid

January P 80,000 P 14,000
February 76,000 13,400
March 91,000 15,650
9. What is the variable rate of royalty as a percentage of sales?
10. What is the fixed royalty per annum?
11. What would be the estimated royalty expense to be paid for April if gross book sales will amount to P 62,000?

Questions 12 & 13 are based on the following information:

At normal capacity (100%), the budgeted factory overhead is P 55,000 and at 90% capacity, the
amount budgeted is P 52,500.

12. What is the budgeted fixed factory overhead?

13. What is the budgeted factory overhead at 80% capacity?

Questions 14-16 are based on the following information:

The flexible budget of factory overbead at 90% capacity is P 47,000 and at 80% capacity
the amount is P 42,500.

14. What is the budgeted factory overhead at normal capacity?

15. What is the budgeted variable factory overhead at 60%%?
16. What is the budgeted fixed factory overhead at 70% capacity?
 Question number 17 is based on the following information:

Highest Lowest
Month December March
Maintenance cost P 37,500 P 30,000
Machine hours 30,000 20,000
17. Whats the annual fixed maintenance cost?

Questions 18 & 19 are based on the following information:

The flexible budgets for three levels (last quarter) of plant operations are as follows:

Machine hours Maintenance cost

October 500 P4,500
November 640 5,200
December 690 5,450

18. Using the "Least Squares" method, compute the variable rate of maintenance per machine hour.
19. Using the "Least Squares" method, compute the fixed maintenance cost per month.

Question number 20 is based on the following information pertaining to maintenance cost:

Sum of hours 350

Sum of costs P 1,000
Sum of hours x cost = P 39,200
Sum of hours squared 14,250
No. of months observed 10

20. How much is the fixed cost per month?

MULTIPLE CHOICES
21. Which of the following is an example of classifying costs by their behavior?
a. Direct and indirect cost C. Relevant and irrelevant cost
b. Variable and fixed cost d. Avoidable and unavoidable cost

22. Which of the following is not a method of splitting a semi-variable cost?

a. High and Low Point c. Scatter graph
b. Least squares d. Linear programming

23. It is a type of chart which shows the relationship between two variables.
a. _Scatter chart c. Break even chart
b. Pie chart d. Profit chart

24. Which of the following cost classifications is constant on a per unit basis?
a. Variable cost C. Semi-variable cost
b. Fixed cost d. Step variable cost

25. Which of the following cost behavior is considered abnormal?

a. The total cost fluctuates proportionately with volume or activity.
b. The total cost varies less than proportionately with volume or activity.
c. The total cost varies more than proportionately with volume or activity.
d. The total cost is constant regardless of volume or activity.
26. Which of the
following best describes a fixcd cost?
a. The total cost
will not change irrespective of volume.
b. The cost
per unit will remain constant
C. The total amount regardless of volume.
may change related to a change in volume.
if
d. The total amount
may change if unrelated
to a changen volume.

27. Which of the

following is most likely to be a variable cost?
a. Advertising expense c. Commission expense
b. Salaries expense d. Interest expense

28. Which of the following may be classified as a fixed cost?

a. Direct material c. Direct labor
b. Indirect material d. Indirect labor

29. It is a type of chart which shows the relationship between two variables.
a. Pie chart c. Profit chart
b. Scatter chart d. Break even chart

30. Which of the following is the most accurate method for splitting a mixed cost?
a. High& low point c. Linear programming
b. Method of least squares d. Scatter graph

TRUEOR FALSE
31 .There are only two classifications of cost as to behavior, either it is fixed or variable.
32. In regression analysis there must be one independent variable and one or more
dependent variables.
33. A mixed cost consists of a normal and an abnormal cost behavior.
34. A semi-variable cost varies less than proportionately with volume.
35. The total fixed cost will not change irrespective of volumne.
36. The variable cost per unit will not change irrespective of volume change,
37. The constancy assumption pertaining to the total fixed cost and the variable cost per
unit is valid only within the relevant range.
38. A cost which varies more than proportionately with the change in volume is
considered as abnomal.
39. A cost which fluctuates inversely with the volume change is considered as normal.
40. The fixed cost computed using the "High & Low point" method and the "Least
squares" method will be the same.

IDENTIFICATION
41. a cost which fluctuates proportionately with volume.
42. a cost which remains the same regardiess of volume.
43. a cost which is constant on a per unit basis.
44. a cost which varies less than proportionately with volume.
45. a cost which decreases on a per unit basis with the increase in volume.