cost behavior: analysis and use uaa – acct 202 principles of managerial accounting dr. fred barbee
TRANSCRIPT
![Page 1: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/1.jpg)
Cost Behavior: Analysis and Use
UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee
![Page 2: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/2.jpg)
$
Volume (Activity Base)
As the volume of activity goes up
How does the cost react?
![Page 3: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/3.jpg)
Why do I need to know this
information?
Good question. Here are some examples of
when you would want to
know this.
![Page 4: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/4.jpg)
$
Volume (Activity Base)
For decision making purposes, it’s important for a manager to know the cost behavior pattern and the relative proportion of each cost.
![Page 5: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/5.jpg)
Knowledge of Cost Behavior
Setting Sales Prices
Entering new markets
Introducing new products
Buying/Replacing Equipment
Make-or-Buy decisions
![Page 6: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/6.jpg)
Total Variable CostsTotal Variable Costs
$
Volume (Activity Base)
![Page 7: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/7.jpg)
Per Unit Variable CostsPer Unit Variable Costs
$
Volume (Activity Base)
![Page 8: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/8.jpg)
Variable Costs - ExampleVariable Costs - Example
A company manufacturers microwave ovens. Each oven requires a timing device that costs $30. The per unit and total cost of the timing device at various levels of activity would be:
# of Units Cost/Unit Total Cost1 $30 $30
10 30 300100 30 3,000200 30 6,000
Linearity is assumed
![Page 9: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/9.jpg)
Variable CostsVariable Costs
The equation for total VC:
TVC = VC x Activity BaseTVC = VC x Activity Base
Thus, a 50% increase in volume results in a 50% increase in total VC.
![Page 10: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/10.jpg)
Step-Variable CostsStep-Variable Costs
But differentbetween rangesof activity
$
Volume (Activity Base)
Step Costs are constant withina range of activity.
![Page 11: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/11.jpg)
Total Fixed CostsTotal Fixed Costs
$
Volume (Activity Base)
![Page 12: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/12.jpg)
$
Volume (Activity Base)
Per-Unit Fixed CostsPer-Unit Fixed Costs
![Page 13: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/13.jpg)
Fixed Costs - ExampleFixed Costs - Example
A company manufacturers microwave ovens. The company pays $9,000 per month for rental of its factory building. The total and per unit cost of the rent at various levels of activity would be:
# of Units Monthly Cost Average Cost1 $9,000 $9,000
10 9,000 900100 9,000 90200 9,000 45
![Page 14: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/14.jpg)
RelevantRange
Curvilinear Costs & the Relevant RangeCurvilinear Costs & the Relevant Range
$
Volume (Activity Base)
Accountant’s Straight-Line Approximation
Economist’s CurvilinearCost Function
![Page 15: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/15.jpg)
Mixed CostsMixed Costs
$
Volume (Activity Base)
Variable costs
Fixed costs
![Page 16: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/16.jpg)
![Page 17: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/17.jpg)
Intercept Slope
This is probably how you learned this equation in
algebra.
![Page 18: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/18.jpg)
Total Costs
VC Per Unit
(Slope)
Fixed Cost
(Intercept)
Level of Activity
![Page 19: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/19.jpg)
Total Costs
VC Per Unit
(Slope)
Fixed Cost
(Intercept)
Level of Activity
Dependent Variable
Independent Variable
![Page 20: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/20.jpg)
20
• Account Analysis
• Engineering Approach
• High-Low Method
• Scattergraph Plot
• Regression Analysis
Methods of Analysis
![Page 21: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/21.jpg)
Account Analysis
Each account is classified as either – variable or – fixed
based on the analyst’s prior knowledge of how the cost in the account behaves.
![Page 22: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/22.jpg)
Engineering Approach
Detailed analysis of cost behavior based on an industrial engineer’s evaluation of required inputs for various activities and the cost of those inputs.
![Page 23: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/23.jpg)
Plot the data points on a graph (total cost vs. activity).
Plot the data points on a graph (total cost vs. activity).
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
The Scattergraph Method
![Page 24: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/24.jpg)
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
Quick-and-Dirty Method
Intercept is the estimated fixed cost = $10,000
Intercept is the estimated fixed cost = $10,000
Draw a line through the data points with about anequal numbers of points above and below the line.
Draw a line through the data points with about anequal numbers of points above and below the line.
![Page 25: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/25.jpg)
0 1 2 3 4
*
To
tal
Co
st i
n1,
000’
s o
f D
oll
ars
10
20
0
***
**
**
*
*
Activity, 1,000’s of Units Produced
X
Y
Quick-and-Dirty Method
The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
The slope is the estimated variable cost per unit.
Slope = Change in cost ÷ Change in units
Vertical distance is the change in cost.
Vertical distance is the change in cost.
Horizontal distance is
the change in activity.
Horizontal distance is
the change in activity.
![Page 26: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/26.jpg)
Advantages
• One of the principal advantages of this method is that it lets us “see” the data.
• What are the advantages of “seeing” the data?
![Page 27: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/27.jpg)
Nonlinear Relationship
ActivityCost
0 Activity Output
**
* **
![Page 28: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/28.jpg)
Upward Shift in Cost Relationship
ActivityCost
0 Activity Output
* **
**
*
![Page 29: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/29.jpg)
Presence of Outliers
ActivityCost
0 Activity Output
* **
*
**
![Page 30: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/30.jpg)
MonthActivity Level: Patient Days
Maintenance Cost Incurred
January 5,600 $7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
Brentline Hospital Patient Data
Textbook Example
![Page 31: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/31.jpg)
Brentline Hospital Patient Data
0
2000
4000
6000
8000
10000
12000
0 2000 4000 6000 8000 10000
Patient-Days
Mai
nte
nan
ce C
ost
![Page 32: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/32.jpg)
Brentline Hospital Patient Data
y = 0.7589x + 3430.90
2000
4000
6000
8000
10000
12000
0 2000 4000 6000 8000 10000
Patient-Days
Mai
nte
nan
ce C
ost
![Page 33: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/33.jpg)
Brentline Hospital Patient Data
y = 0.7589x + 3430.90
2000
4000
6000
8000
10000
12000
0 2000 4000 6000 8000 10000
Patient-Days
Mai
nte
nan
ce C
ost
![Page 34: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/34.jpg)
Brentline Hospital Patient Data
y = 0.7589x + 3430.9R2 = 0.8964
0
2000
4000
6000
8000
10000
12000
0 2000 4000 6000 8000 10000
Patient-Days
Mai
nte
nan
ce C
ost
![Page 35: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/35.jpg)
From Algebra . . .
• If we know any two points on a line, we can determine the slope of that line.
![Page 36: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/36.jpg)
High-Low Method
• A non-statistical method whereby we examine two points out of a set of data . . .
–The high point; and
–The low point
![Page 37: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/37.jpg)
High-Low Method
• Using these two points, we determine the equation for that line . . .
–The intercept; and
–The Slope parameters
![Page 38: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/38.jpg)
High-Low Method
• To get the variable costs . . .
–We compare the difference in costs between the two periods to
–The difference in activity between the two periods.
![Page 39: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/39.jpg)
MonthActivity Level: Patient Days
Maintenance Cost Incurred
January 5,600 $7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
Brentline Hospital Patient Data
Textbook Example
![Page 40: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/40.jpg)
High/ Low
MonthPatient Days
Maint. Cost
High June 8,000 $9,800
Low March 5,000 7,400
Difference 3,000 $2,400
![Page 41: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/41.jpg)
Change in Cost V = ------------------ Change in Activity
(Y2 - Y1) V = ------------ (X2 - X1)
![Page 42: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/42.jpg)
High/ Low
MonthPatient Days
Maint. Cost
High June 8,000 $9,800
Low March 5,000 7,400
Difference 3,000 $2,400
The Change in Cost
Divided by the change in activity
![Page 43: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/43.jpg)
Change in Cost V = ------------------ Change in Activity
$2,400 V = ------------ 3,000
= $0.80 Per Unit
![Page 44: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/44.jpg)
Total Cost (TC) = FC + VC- FC = - TC + VC
FC = TC - VC
![Page 45: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/45.jpg)
FC = $9,800 - (8,000 x $0.80) = $3,400
![Page 46: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/46.jpg)
FC = $7,400 - (5,000 x $0.80) = $3,400
![Page 47: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/47.jpg)
TC = $3,400 + $0.80X
![Page 48: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/48.jpg)
MonthActivity Level: Patient Days
Maintenance Cost Incurred
January 5,600 $7,900
February 7,100 8,500
March 5,000 7,400
April 6,500 8,200
May 7,300 9,100
June 8,000 9,800
July 6,200 7,800
We have taken “Total Costs” which is a mixed cost and
we have separated it into its VC and FC
components.
![Page 49: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/49.jpg)
So what? You say! Thank you for asking! Now I can use this formula for planning purposes. For example, what if I believe my activity level will be 6,325 patient days in February. What would I expect my total maintenance cost to be?
![Page 50: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/50.jpg)
What is the estimated total cost if the activity level for February is expected to be 6,325 patient days?
Y = a + bxTC = $3,400 + 6,325 x $0.80
TC = $8,460
![Page 51: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/51.jpg)
Some Important Considerations
• We have used historical cost to arrive at the cost equation.
• Therefore, we have to be careful in how we use the formula.
• Never forget the relevant range.
![Page 52: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/52.jpg)
Relevant Range
$
Volume (Activity Base)
![Page 53: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/53.jpg)
Strengths of High-Low Method
• Simple to use
• Easy to understand
![Page 54: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/54.jpg)
Weaknesses of High-Low
• Only two data points are used in the analysis.
• Can be problematic if either (or both) high or low are extreme (i.e., Outliers).
![Page 55: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/55.jpg)
.
. ... .. .. ...
..
Extreme values - not necessarily representative
Representative High/Low Values
.
![Page 56: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/56.jpg)
Weaknesses of High-Low
• Other months may not yield the same formula.
![Page 57: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/57.jpg)
FC = $8,500 - (7,100 x $0.80) = $2,820
![Page 58: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/58.jpg)
FC = $7,800 - (6,200 x $0.80) = $2,840
![Page 59: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/59.jpg)
Regression Analysis
• A statistical technique used to separate mixed costs into fixed and variable components.
• All observations are used to fit a regression line which represents the average of all data points.
![Page 60: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/60.jpg)
Regression Analysis
• Requires the simultaneous solution of two linear equations
• So that the squared deviations from the regression line of each of the plotted points cancel out (are equal to zero).
![Page 61: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/61.jpg)
Production
Cost
Actual Y
Estimated yError
2)( yY
The objective is to find values of a and b in the equation y = a + bX that minimize
![Page 62: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/62.jpg)
y = a + bX
The equation for a linear function (straight line) with one independent variable is . . .
Where:
y = The Dependent Variable a = The Constant term (Intercept)
b = The Slope of the line X = The Independent variable
![Page 63: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/63.jpg)
y = a + bX
The equation for a linear function (straight line) with one independent variable is . . .
Where:
y = The Dependent Variable a = The Constant term (Intercept)
b = The Slope of the line X = The Independent variable
The Dependent Variable
The Independent
Variable
![Page 64: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/64.jpg)
Regression Analysis
• With this equation and given a set of data.
• Two simultaneous linear equations can be developed that will fit a regression line to the data.
![Page 65: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/65.jpg)
Where: a = Fixed cost b = Variable cost n = Number of observations X = Activity measure (Hours, etc.) Y = Total cost
2xbxaxy
xbnay
![Page 66: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/66.jpg)
))(()(
))(())((2
2
YXXn
XYXXYa
))(()(
))(()(2 XXXn
YXXYnb
![Page 67: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/67.jpg)
![Page 68: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/68.jpg)
![Page 69: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/69.jpg)
![Page 70: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/70.jpg)
![Page 71: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/71.jpg)
![Page 72: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/72.jpg)
Fixed Costs
Variable Costs
![Page 73: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/73.jpg)
R2, the Coefficient of Determination is the percentage of variability in the
dependent variable being explained by the independent variable.
This is referred to as a “goodness of fit” measure.
![Page 74: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/74.jpg)
R, the Coefficient of Correlation is square root of R2. Can range from -1 to +1. Positive correlation means the
variables move together. Negative correlation means they move in
opposite directions.
![Page 75: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/75.jpg)
MethodFixed Cost
Variable Cost
High-Low
Scattergraph
Regression
$3,400
$3,300
$3,431
$0.80
$0.79
$0.76
![Page 76: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/76.jpg)
Coefficient of Determination
• R2 is the percentage of variability in the dependent variable that is explained by the independent variable.
![Page 77: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/77.jpg)
Coefficient of Determination
• This is a measure of goodness-of-fit.
• The higher the R2, the better the fit.
![Page 78: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/78.jpg)
Coefficient of Determination
• The higher the R2, the more variation (in the dependent variable) being explained by the independent variable.
![Page 79: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/79.jpg)
Coefficient of Determination
• R2 ranges from 0 to 1.0• Good Vs. Bad R2s is relative.• There is no magic cutoff
![Page 80: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/80.jpg)
Coefficient of Correlation
• The relationship between two variables can be described by a correlation coefficient.
• The coefficient of correlation is the square root of the coefficient of determination.
![Page 81: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/81.jpg)
Coefficient of Correlation
• Provides a measure of strength of association between two variables.
• The correlation provides an index of how closely two variables “go together.”
![Page 82: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/82.jpg)
Machine Hours
Utility Costs
Machine Hours
Utility Costs
![Page 83: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/83.jpg)
![Page 84: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/84.jpg)
![Page 85: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/85.jpg)
Hours of Safety
Training
Industrial Accidents
Industrial Accidents
Hours of Safety
Training
![Page 86: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/86.jpg)
![Page 87: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/87.jpg)
![Page 88: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/88.jpg)
Hair Length
202 Grade
Hair Length
202 Grade
![Page 89: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/89.jpg)
![Page 90: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/90.jpg)
![Page 91: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/91.jpg)
![Page 92: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/92.jpg)
![Page 93: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/93.jpg)
![Page 94: Cost Behavior: Analysis and Use UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee](https://reader037.vdocuments.mx/reader037/viewer/2022110321/56649cf95503460f949ca411/html5/thumbnails/94.jpg)