Professional Documents
Culture Documents
and
Cost Estimation
2
The Activity Base
Units Machine
p
produced hours
Miles Labor
driven hours
3
True VC Example
A VC is a cost whose total dollar amount varies in direct proportion
to changes in the activity level. Supposed you had a phone bill that
is based on the number of minutes talked.
e Bill $$
Total Phone $
Minutes Talked
4
True Variable Costs
Direct materials is a true or proportionately VC because the total
cost of direct material used during a period will vary in direct
proportion to the level of production activity.
ost $$
Total DM Co
Volume
Minutes Talked
6
Extent of Variable Costs
A merchandising company
A service company
usually will have a high
will normally have a high
proportion of VCs,
proportion of VCs.
like cost of sales.
8
Step-Variable Costs
Cost $$
Total C
T
Volume
Number of Calls
10
FC Per Unit Example
Average FCs per unit decrease as the activity level increases. The
FC per local call decreases as more local calls are made
made.
per Call $$
harge p
Phone Ch
11
Committed Discretionary
y
Long-term, cannot be May be altered in the
g y reduced
significantly y current
short-term by
in the short term. managerial decisions
Examples Examples
Depreciation on Advertising and
Equipment and Research and
R lE
Real Estate
t t TTaxes D
Development
l t
12
The Linearity Assumption
g
and the Relevant Range
st $$
Relevant
Tottal Cos
Range
R
Activity
13
14
Uses of the Contribution (CM) Format
Th CM iincome statement
The t t t fformatt iis used
d as an
internal planning and decision making tool. Uses
off this
thi approachh iinclude:
l d
1. CVP analysis
y
2. Budgeting
3. Segmented reporting of profit data
4 Special decisions ssuch
4. ch as pricing and make
make--or-
or-
buy analysis
15
Variable
Tota
C t per KW
Cost
X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge
17
If your fixed monthly utility charge is $40, your VC is $0.03 per kwh,
kwh,
and your monthly activity level is 2,000 kwh,
kwh, what is the amount of
your utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
18
Scattergraph Method
* * * ** *
s of Do
**
10 * *
1,000’s
Mainte
0 X
0 1 2 3 4
Patient-days
Patient days in 1,000
1,000’s
s
Patient days = 800
19
Scattergraph Method
$1,000
VC per unit = = $1.25/patient
$1 25/patient-
25/patient-day
800
Y = $10
$10,000
000 + $1
$1.25X
25X
20
High-Low Method
$2,400
$2 400
= $8.00/hour
300
21
High-Low Method
23
Regression Method
24
Regression Method
25
Regression Method
R2 is
i the
th percentage
t off the
th variation
i ti in i total
t t l costt
explained by the activity.
Y
20
* ** *
Total Cost
* * **
10 * *2
R varies from 0% to 100%, and
the higher the percentage the better
better.
0 X
0 1 2 3 4
Activity
26