Writing MCQs Susan Chamberlain Dept of OBS/GYN Queen’s University Queen’s University.
3-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Activity Cost Behaviour 3...
-
Upload
kelly-taylor -
Category
Documents
-
view
221 -
download
1
Transcript of 3-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Activity Cost Behaviour 3...
3-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Activity Cost Activity Cost BehaviourBehaviour
33
PowerPresentation® prepared by PowerPresentation® prepared by
David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University
3-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives
Define and describe cost behaviour for fixed, variable, and mixed costs.
Explain the role of the resource usage model in understanding cost behaviour.
Learning Objectives Learning Objectives
3-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Separate mixed costs into their fixed and
variable components using the high-low
method, the scatterplot method, and the
method of least squares.
Learning ObjectivesLearning Objectives(continued) (continued)
3-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives (continued)Learning Objectives (continued)
Evaluate the reliability of a cost equation.
Explain the role of multiple regression in assessing cost behaviour.
Describe the use of managerial judgment in determining cost behaviour.
3-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Cost BehaviourCost Behaviour
Fixed-Cost Behaviour Variable-Cost Behaviour
$ $Relevant Range
Units Produced Units Produced
3-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Mixed-Cost BehaviourMixed-Cost Behaviour
Total Costs
Cost
Number of Units Produced
Fixed Costs Variable Costs
Linearity Assumption
Total cost = Fixed cost + Total variable cost
3-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Activity Cost Behaviour ModelActivity Cost Behaviour Model
Inputs:
Materials
Energy
Labour
Capital
Cost Behaviour
Activities Activity Output
Changes in Input Cost Changes in Output
3-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Basic TermsBasic Terms
The linearity assumption assumes that variable costs increase in direct proportion to the number of units produced (or activity units used).
Practical capacity is the efficient level of activity performance.
3-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Types of ResourcesTypes of Resources
Flexible Resources
Committed Resources
Discretionary Fixed Costs
3-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Flexible ResourcesFlexible Resources
Flexible resources are supplied as used and needed.
They are acquired from outside sources, where the terms of acquisition do not require any long-term commitment for any given amount of the resource
3-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Committed ResourcesCommitted Resources
Committed resources are resources that are
supplied in advance of usage.
They are acquired by the use of either an
explicit or implicit contract to obtain a given
quantity of resource, regardless of whether
the amount of the resource available is fully
used or not. Committed resources may
have unused capacity.
3-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Discretionary Fixed CostsDiscretionary Fixed Costs
Discretionary fixed costs are shorter-term committed resources
3-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Step-Cost FunctionStep-Cost Function
Cost
Activity Output (units)
Narrow Width
3-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Step-Fixed CostsStep-Fixed Costs
Cost
Activity Usage
Normal Operating
Range
(Relevant Range)
3-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Resource RelationshipsResource Relationships
The relationship between resources supplied and resources used is expressed by the following equation:
Resources available = Resources used + Unused capacity
3-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Resource Relationships ExampleResource Relationships Example
Three engineers hired at $50,000 each
Each engineer is capable of processing 2,500 change orders
$90,000 was spent on supplies for the engineering activity
There were 6,000 orders processed
3-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Resource Relationships Example Resource Relationships Example (continued)(continued)
Available orders = Orders used + Orders unused
7,500 orders = 6,000 orders + 1,500 orders
Fixed engineering rate = $150,000/7,500
= $20 per change order
Variable engineering rate = $90,000/6,000
= $15 per change order
3-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Resource Relationships Example Resource Relationships Example (continued)(continued)
Cost of orders supplied = Cost of orders used + Cost of unused orders
= [($20 + $15) x 6,000] + ($20 x 1,500)
= $240,000
Of course, the $240,000 is precisely equal to the $150,000 spent on engineers and the $90,000 spent on supplies.
The $30,000 of excess engineering capacity means that a new product could be introduced without increasing current spending on engineering.
3-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Methods for Separating Mixed Costs into Methods for Separating Mixed Costs into Fixed and Variable ComponentsFixed and Variable Components
The High-Low Method
The Scatterplot Method
The Method of Least Squares
3-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Month Setup Costs Setup Hours
January $1,000 100
February 1,250 200
March 2,250 300
April 2,500 400
May 3,750 500
High-Low Method: An ExampleHigh-Low Method: An Example
3-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
The High-Low Method (continued)The High-Low Method (continued)
Variable Rate (V)= Change in cost/Change in output
V = (High cost - Low cost) / (High output - Low output)
V = ($3,750 - $1,000) / (500 - 100)
V = $2,750 / 400
V = $6.875 per setup hour
3-22Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
The High-Low Method (continued)The High-Low Method (continued)
3,750 = Fixed costs + $6.875 (500)
Fixed costs = $3,750.00 - $3,437.50
Fixed costs = $312.50
The cost formula using the high-low method is:
Total cost = $312.50 + ($6.875 x setup hours)
3-23Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Activity Hours
Activity
Cost
$4,000
3,000
2,000
1,000
0100 200 300 400 500
.
Scatterplot MethodScatterplot Method
.
. .
.
Analyst can fit line
based on his or her
experience
Important: Cost function is only
relevant within relevant range
3-24Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonlinear Relationship`Nonlinear Relationship`
ActivityCost
0 Activity Output
*
*
***
3-25Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Upward Shift in Cost RelationshipUpward Shift in Cost Relationship
ActivityCost
0 Activity Output
**
*
**
*
3-26Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Presence of OutliersPresence of Outliers
ActivityCost
0 Activity Output
**
*
*
**
3-27Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Least SquaresLeast Squares
Constant 125
Standard Error of Y Est 299.304749934466
R squared 0.944300518134715
No. of Observations 5
Degrees of Freedom 3
X Coefficient(s) 6.75
Standard Error of Coef. 0.9464847243
3-28Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Least Squares (continued)Least Squares (continued)
The results give rise to the following equation:
Setup Costs = $125 + ($6.75 x # of setup hours)
R2 = .944, or 94.4 percent of the variation in
setup costs is explained by the
number of setup hours variable.
3-29Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
TC = b0 + b1X1 + b2X2 + . . .
b0 = the fixed cost or intercept
bi = the variable rate for the ith independent variable
Xi = the ith independent variable
Multiple RegressionMultiple Regression
3-30Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Multiple Regression (continued)Multiple Regression (continued)Utility
Month MHrs Summer Cost
January 1,340 0 $1,688
February 1,298 0 1,636
March 1,376 0 1,734
April 1,405 0 1,770
May 1,500 1 2,390
June 1,432 1 2,304
July 1,322 1 2,166
August 1,416 1 2,284
September 1,370 1 1,730
October 1,580 0 1,991
November 1,460 0 1,840
December 1,455 0 1,833
3-31Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Multiple Regression (continued)Multiple Regression (continued)
Constant 243.11149907159
Std Error of Y Est 55.5082829356447
R squared 0.96717927255452
No. of Observations 12
Degrees of Freedom 9
X Coefficient(s) 1.09715750519456 510.49073361447
Std Err of Coef. 0.210226332115593 32.5489645352191
3-32Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Multiple Regression (continued)Multiple Regression (continued)
The results gives rise to the following equation:
Utilities cost = $243.11 + $1.097(MH) + $510.49(Summer)
R2 = .967, or 96.7 percent of the variation in utilities cost is explained by the machine hours and summer variables.
3-33Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Cost Behaviour and Managerial Cost Behaviour and Managerial JudgmentJudgment
Use past experience Try to confirm results with operating
personnel Use common sense to confirm
statistical studies
Some Tips