Introduction to Management Accounting

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Introduction to Management
Accounting
Chapter 3

Measurement of Cost

Behavior

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Linear-cost Behavior
Costs are assumed to be fixed or
variable within the relevant
range of activity

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Mixed-Cost Behavior Patterns

Mixed costs contain elements of both
fixed- and variable-cost behavior.
The fixed-cost element is unchanged
over a range of cost-driver activity.
The variable-cost element varies
proportionately with cost-driver activity.

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Mixed-Cost Behavior Patterns

Parkview Medical Center
Predicted costs = fixed + variable
costs (patient-days)
Predicted
costs = $10,000 + $5(4,000)
Predicted costs =
$30,000

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Learning
Objective 2

Managements Influence on Cost

Behavior

Choice of process and product design

Quality levels
Product features
Distribution channels

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Cost-Control Incentives
Managers use their
knowledge of cost
behavior to set
cost expectations.

Employees may
Receive rewards that
are tied to meeting
these expectations.

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Learning
Objective 3

Cost Functions

Planning and controlling the activities

of an organization require accurate
and useful estimates of future
fixed and variable costs.

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Cost Functions
Understanding relationships between costs
and their cost drivers allows managers to...
Make better operating, marketing,
And production decisions
Plan and evaluate actions
Determine appropriate costs for
short-run and long-run decisions.

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Cost Functions
The first step in estimating or predicting
costs is measuring cost behavior as a
function of appropriate cost drivers.

The second step is to use these cost

measures to estimate future costs at
expected levels of cost-driver activity.

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Cost Function Equation

Let:
Y = Total cost
F = Fixed cost
V = Variable cost per unit
X = Cost-driver activity in number of units

The mixed-cost function is called a linear-cost function.

Mixed-cost function:
Y = F + VX
Y = $10,000 + $5.00X

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Developing Cost Functions

Plausibility:
The cost function must be believable.

Reliability:
A cost functions estimates of costs
at actual levels of activity must reliably
conform with actually observed costs.

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Learning
Objective 5

Methods of Measuring Cost

Functions

1.
2.
3.
4.
5.

Engineering analysis
Account analysis
High-low analysis
Visual-fit analysis
Least-squares regression analysis

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Engineering Analysis
Engineering analysis measures cost behavior
according to what costs should be,
not by what costs have been.

Engineering analysis entails a systematic

review of materials, supplies, labor,
support services, and facilities
needed for products and services.

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Account Analysis

The simplest method of account analysis selects a plausible

st driver and classifies each account as a variable or fixed co

st

Parkview Medical Center

Amount

Fixed

Variable

ervisors salary and benefits

$ 3,800
$3,800
rly workers wages and benefits
14,674
$14,
pment depreciation and rentals
5,873
5,873
pment repairs
5,604
5,604
ning supplies
7,472
7,472
l maintenance costs
$37,423
$9,673
$27,750

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Account Analysis Example

3,700 patient-days
Fixed cost per month = $9,673
Variable cost per patient-day
= $27,750 3,700
= $7.50 per patient-day
Y = $9,673 + ($7.50 patient-days)

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High-Low Method
Plot historical data points on a graph.
Focus on the highest- and lowest-activity points.
High month: April
Maintenance cost: $47,000
Number of patient-days: 4,900
Low month: September
Maintenance cost: $17,000
Number of patient-days: 1,200

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High-Low Method Example

The point at which the line intersects the Y axis is the

intercept, F, or estimate of Fixed Costs, and the slope of the
line measures the variable cost.

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High-Low Method Example

What is the variable cost (V)?
Using algebra to solve for variable and fixed costs.

Variable costs = Change in costs

change in activity
V = ($47,000 $17,000) (4,900 1,200)
= $30,000 3,700 = $8.1081

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High-Low Method Example

What is the fixed cost (F)?
F = Total mixed cost total variable cost
At X (high) F = $47,000 - ($8.1081 4,900 patient days)
= $47,000 $39,730
= $7,270 a month
At X (low) F = $17,000 = ($8.1081 1,200 patient days)
= $17,000 $9,730
= $7,270 a month
Cost function measured by high-low
method:
Y = $7,270
per month + ($8.1081 patient-days)

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Visual-Fit Method
In the visual-fit method, the cost analyst
visually fits a straight line through a plot
of all of the available data, not just
between the high point and the
low point, making it more reliable
than the high-low method.

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Least-Squares Regression Method

Regression analysis measures
a cost function more objectively
by using statistics to fit a cost
function to all the data.
Regression analysis measures
cost behavior more reliably than
other cost measurement methods.

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The End

End of Chapter 3

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