Escolar Documentos
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Cultura Documentos
Behavior
EMBA 5403
Fall 2010
Mugan
Types of The opportunity cost is the monetary amount
Costs associated with the next best use of the
resource.
differential costs- (benefits) – costs or
benefits that change between/among
alternatives
Irrelevant costs -Costs that don’t change
are irrelevant to the decision
Choose the alternatives where differential
benefits exceed differential costs
Opportunity costs
Sunk costs
Controllable /avoidable costs/discretionary
costs
Costs
Coststhat thathave
havealready
alreadybeen
beenincurred
incurredand
andcannot
cannotbe
be
changed
changedno
Fall 2010
nomatter
matterwhat
whataction
action is
istaken
Mugan
takenin
inthe
thefuture.
future. 2/82
Problems in Identifying and
Measuring Benefits
How
How dodo II measure
measure
the
thebenefit
benefit ofof
employee
employeetraining?
training?
How
How do
do II What
What is
isthe
the
measure
measure thethe monetary
monetarybenefit
benefit of
of
benefit
benefit of
of aahappy
happy customer?
customer?
improved
improved
quality?
quality? What
Whatis is the
the
monetary
monetary
benefit
benefit of
ofanan
improved
improved
working
working
Fall 2010
environment?
environment?
Mugan 3/82
Problems in Identifying and
Measuring Costs
How
How dodo II measure
measure What
Whatisisthe
thecost
cost of
of
the
thecost
costof ofpoor
poor aadissatisfied
dissatisfied
quality?
quality? customer?
customer?
What How
How do do II
What is isthe
thecost
cost
of measure
measurethe
of postponing
postponing the
this cost
cost of
of setting
thisyear’s
year’s setting
training my
my price
pricetoo
too
training
program? high?
high?
program?
Fall 2010 Mugan 4/82
Classifications of Costs
Behavior – how costs react to changes in
underlying cost driver
Variable or Fixed
Function – related to production or sales
Product or Period
Product costs –
Direct Material
Direct Labor
Factory Overhead
Traceability (cost of tracing cost to a cost
driver directly should be lower than the
benefits.
Marketing or Administrative
Selling Costs Costs
Sale
Income Income
Balance
Statement Statement
Sheet
Work
Raw Materials In Process
Work
Raw Materials In Process
Curvilinear Total
Total Cost Curve
Dollars
Output
Start-up Normal Exceeding
Range Operations Capacity
Fall 2010 Mugan 14/82
The
Therelevant
relevantrange
Relevant Range
range
isisthe
theportion
portionof
ofthe
the
curvilinear
curvilineartotal
totalcost
cost
Total curve
curvethat
thatappears
appears
Dollars Relevant
Relevant in
inthe
thenormal
normal
Range
Range Total operations
operationsarea.
area.
}
Cost
Output
Start- Normal Exceeding
up Operation Capacity
Range s
A
A straight
straight line
line
Economist’s
closely
closely
Curvilinear Cost approximates
approximates aa
Function curvilinear
curvilinear
variable
variable cost
cost
line
line within
within the
the
Relevant
Total Cost
relevant
relevant range.
range.
Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
A merchandising company
A service company usually will have a high
will normally have a high proportion of variable costs
proportion of variable costs. like cost of sales.
Committed
Committed Discretionary
Discretionary
Long-term,
Long-term, cannot
cannot bebe May
May be
be altered
altered in
in the
the short-
short-
significantly term
term by
by current
current managerial
managerial
significantly reduced
reduced decisions
decisions
in
in the
the short
short term.
term.
Examples Examples
Examples
Depreciation on Advertising
Advertising and
and
Equipment and Research
Research and
and
Real Estate Taxes Development
Development
Y
Total Mobile Phone Cost
t
cos
ed
i x
l m
t a
To Fixed Monthly
Phone Charge
X Fixed Monthly
Activity (minutes) Phone Charge
Y
Total Mobile Phone Cost
s t
co
d
i xe
l m
t a
To Variable
Cost per minute
X Fixed Monthly
Activity (minutes) Phone Charge
* * * ** *
**
Cost
10 * *
0 X
0 1 2 3 4
Activity - output
Fall 2010 Mugan 25/82
The Scattergraph Method
Draw
Draw aa line
line through
through the
the data
data points
points with
with about
about anan
Y equal
equal numbers
numbers of of points
points above
above and
and below
below the
the line.
line.
20
* * * ** *
**
Cost
10 * *
0 X
0 1 2 3 4
Activity - output
Fall 2010 Mugan 26/82
The Scattergraph Method
Use
Useone
onedata
datapoint
point to
to estimate
estimate the
thetotal
total level
level of
of activity
activity and
andthe
thetotal
total
cost.
cost.
Y Total cost = TL11
20
* * * ** *
**
Cost
10 * *
Intercept = Fixed cost: TL 10
0 X
0 1 2 3 4
Activity - output
TL1
Variable cost per unit = = TL1.25/ unit of output
0.8
Y = TL10 + TL1.25X
High
level of
activity
Low
level of
activity
Financial reporting
Predicting cost behavior
Assigning costs to cost objects-
products- determining unit costs
Decision making
Power
Failures
Continue
Fall 2010 Mugan 42/82
Numerical Example
Management at THD believes that indirect costs
are actually caused by the following five activities:
Estimated
Activity Costs
Machine setups 255,000 TL
Quality inspections 160,000 TL
Production orders 81,000 TL
Machine-hours worked 314,000 TL
Material receipts 90,000 TL
Total 900,000 TL
Total Overhead
Direct Labor Ho
Product A - 2.5
Fall 2010 Mugan 45/82
Unit Costs – Traditional
UNIT COST
Direct Mater
Fall 2010 Mugan 46/82
Numerical Example-MOVH by ABC
The following activity data was supplied by
the management of THD
T o ta l R a te p e r
A c ti v i ty C o sts T r a n sa c ti o n sT r a n sa c ti o n
M a c h i n e se tu p s 2 5 5 , 0 0 0 T÷ L 5,0 00 = 51 TL
Q u a l i ty i n sp e c ti o n s 1 6 0 , 0 0 0÷ 8,0 00 = 20 .00
P r o d u c ti o n o r d e r s 8 1 , 0 0 0÷ 600 = 1 3 5 .0 0
M a c h i n e -h o u r s w o r 3k 1e 4d, 0 0 0÷ 4 0 , 0 0 0= 7.8 5
M a te r i a l r e c e i p ts 9 0 , 0 0 0÷ 750 = 1 2 0 .0 0
Reconciliation Amount
Indirect costs assigned to Product A $ 392,200
Indirect costs assigned to Product B 507,800
Total indirect costs assigned $ 900,000
With multiple
products and
services.
That have products
and services that use
indirect activities
in different ways.
That have a high
percentage of indirect
product costs.
Fall 2010 Mugan 56/82
Problems With ABC
Proper identification
of cost drivers is
difficult.
ABC ignores the
difference between
the fixed and variable
costs of an activity.
ABC is more costly
because additional
measurements and
observations must
be made.
Fall 2010 Mugan 57/82
Quality of Conformance
Support activities
Prevention whose purpose is to
Costs reduce the number of
defects
Incurred to identify
defective products
Appraisal Costs before the products are
shipped
Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped
Incurred as a result of
External Failure defective products
Costs being delivered to
customers
Appraisal costs:
Inspection
Reliability testing
600,000
580,000
1.20%
1.16%
560,000
420,000
1.12%
0.84%
Quality cost
Supervision of testing and inspection
Depreciation of test equipment
120,000
200,000
0.24%
0.40%
80,000
140,000
0.16%
0.28%
reports provide
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
an estimate of
Internal failure costs:
Net cost of scrap 900,000 1.80% 750,000 1.50% the financial
Rework labor and overhead 1,430,000 2.86% 810,000 1.62%
Downtime due to defects in quality 170,000 0.34% 100,000 0.20% consequences
Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00% of the
External failure costs:
Warranty repairs 400,000 0.80% 900,000 1.80%
company’s
Warranty replacements
Allowances
870,000
130,000
1.74% 2,300,000
0.26% 630,000
4.60%
1.26%
current defect
Cost of field servicing
Total external failure cost
600,000
2,000,000
1.20% 1,320,000
4.00% 5,150,000
2.64%
10.30%
rate.
Total quality cost $ 7,500,000 15.00% $ 9,000,000 18.00%
9
Quality 18
reports
can also
Quality Cost (in millions)
7 14
External External External External
6 Failure Failure
be 12 Failure Failure
5
prepared 10
4 Internal 8 Internal
3 Internal
Failure in 6 Internal
Failure
2
Failure
Appraisal
graphic 4
Failure
Appraisal
1
Appraisal
form. 2
Appraisal
Least-Squares
Regression Using
Microsoft Excel.
To
To get
get these
these three
three pieces
pieces
information
information wewe will
will need
need to
to
use
use three
three different
different Excel
Excel
functions.
functions.
LINEST,
LINEST, INTERCEPT,
INTERCEPT, && RSQ
RSQ
Fall 2010 Mugan 74/82
Simple Regression Using Excel
Place
Place your
your cursor
cursor in in
cell
cell F4
F4 and
and press
press the the
== key.
key. Click
Click on
on the the
pull
pull down
down menu
menu and and
scroll
scroll down
down toto “More
“More
Functions
Functions .. .. .”.”
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.
Here is the
estimate of the
slope of the line.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.
Here is the
estimate of the
fixed costs.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.
Fall 2010 Mugan 80/82
Simple Regression Using Excel
Finally,
Finally, we we will
will
determine
determine the the
““goodness
goodness of of
fit
fit”, or R ,, by
”, or R22
by
using
using the the RSQ
RSQ
function.
function.
Here is the
estimate of R2.
1.
1. In
In the
the Known_y’s
Known_y’s box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_x’s
Known_x’s box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.
Fall 2010 Mugan 82/82