Chapter 6 Part 1: Activity y
Analysis and Cost Behavior
ACG 6309
Dr. Chula King
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Student Learning Outcomes
• Explain the relationships among cost estimation, cost behavior and cost prediction
• Define and describe the behavior of variable, step
step‐variable,
variable, fixed, step
fixed, step‐fixed,
fixed, semivariable
semivariable and and
curvilinear costs
• Explain the importance of the relevant range in using a cost behavior pattern for cost prediction
• Define and give examples of engineered costs, committed costs and discretionary costs.
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Definitions
• 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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1
Variable Cost
• Remains constant on a per unit basis
• Fluctuates in total in direct response to cost‐
driver changes.
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Step‐Variable Cost
Cost
Total cost remains
constant within a
narrow range of
activity.
Activity
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Step‐Variable Cost
Cost
Total cost increases to a
new higher cost for the next higher range of activity. activity
Activity
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2
Fixed Cost
• Remains unchanged in total
• Fluctuates on a per unit basis in direct response to cost‐driver changes.
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Step‐Fixed Cost
Rent Cost in
Thousands of Dollarss • Remain fixed over a wide range of activity
• Jump to a different amount for activity levels outside that range
90
60
30
0 1,000 2,000 3,000 Rented Area (Square Feet)
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Semivariable Cost
• Partly fixed and partly variable
Total Bulldozer Cost
Slope is the variable cost per unit of activity
Variable Usage Charge
Fixed Monthly
Lease Charge
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3
Curvilinear Cost
Total Cost
Curvilinear
Cost Function
Relevant Range
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g
A straight‐line
(constant unit variable cost) closely approximates a curvilinear line within
the relevant range.
Activity
Engineered, Committed and Discretionary Costs
• Engineered: Physical relationship with activity measure, e.g., direct materials
• Committed: Long‐term, cannot be reduced in the short term, e.g., depreciation on buildings the short term e g depreciation on buildings
and equipment
• Discretionary: May be altered in the short‐
term by current managerial decisions, e.g., advertising and R&D.
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The Next Step
• Part 2 looks at methods that can be used to estimate costs.
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