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McGraw-Hill/Irwin
Learning Objective 1
McGraw-Hill/Irwin
Introduction
Cost estimation
Process of determining cost behavior, often focusing on historical data.
Cost behavior
Relationship between cost and activity.
Cost prediction
Using knowledge of cost behavior to forecast level of cost at a particular activity. Focus is on the future.
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Learning Objective 2
McGraw-Hill/Irwin
Step-Variable Costs
Activity
Cost
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Step-Variable Costs
Total cost increases to a new higher cost for the next higher range of activity.
Activity
Cost
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Step-Fixed Costs
Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost.
Continue
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Step-Fixed Costs
Total cost doesnt change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. 90 Rent Cost in Thousands of Dollars
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Step-Fixed Costs
How does this type of fixed cost differ from a step-variable cost?
The width of the activity steps is much wider for the step-fixed cost.
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Semivariable Cost
A semivariable cost is partly fixed and partly variable.
Semivariable Cost
Slope is variable cost per unit of activity. Total Utility Cost
Variable
Utility Charge Fixed Monthly Utility Charge Activity (Kilowatt Hours)
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Curvilinear Cost
Curvilinear Cost Function
Total Cost
Relevant Range
A straight-line (constant unit variable cost) closely approximates a curvilinear line within the relevant range.
Activity
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Learning Objective 3
McGraw-Hill/Irwin
Curvilinear Cost
Curvilinear Cost Function
Total Cost
Relevant Range
A straight-Line (constant unit variable cost) closely approximates a curvilinear line within the relevant range.
Activity
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Learning Objective 4
McGraw-Hill/Irwin
Discretionary
May be altered in the short term by current managerial decisions.
Engineered
Physical relationship with activity measure. Depreciation on Buildings and equipment Advertising and Research and Development
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Direct Materials
Service Organizations
Supplies and travel
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Learning Objective 5
McGraw-Hill/Irwin
Cost Estimation
Account-Classification Method Visual-Fit Method High-Low Method
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Cost estimates are based on a review of each account making up the total cost being analyzed.
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Visual-Fit Method
A scatter diagram of past cost behavior may be helpful in analyzing mixed costs.
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Visual-Fit Method
Plot the data points on a graph (total cost vs. activity).
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Visual-Fit Method
Draw a line through the plotted data points so that about equal numbers of points fall above and below the line.
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Visual-Fit Method
Estimated fixed cost = $10,000
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Using these two levels of activity, compute: the variable cost per unit. the total fixed cost.
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Unit variable cost = $3,600 4,000 units = $0.90 per unit Fixed cost = Total cost Total variable cost
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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 = $1,600
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Total Cost
The objective of the regression method is the general cost equation: Y = a + bX Activity
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The X term coefficient (b) is the estimate of variable cost per unit of activity, the slope of the cost line.
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Learning Objective 6
McGraw-Hill/Irwin
Multiple Regression
Multiple regression includes two or more independent variables: Y = a + b1X1 + b2X2
Terms in the equation have the same meaning as in simple regression with only one independent variable.
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Cost estimates are based on measurement and pricing of the work involved.
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Analyze the kind of work performed. Estimate the time required for each labor skill for each unit. Use local wage rates to obtain labor cost per unit.
Material required for each unit is obtained from engineering drawings and specification sheets. Material prices are determined from vendor bids.
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Learning Curve
Learning effects are large initially. Average Labor Time per Unit
Learning Objective 7
McGraw-Hill/Irwin
6. Inflation.
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End of Chapter 6
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