MS-O1 COST BEHAVIOR ANALYSIS

Cost - Amount of resources given up/expended/ used/ sacrificed

- Expired cost- treated as expense/ period cost
- Unexpired Cost- are assets
Cost Behavior
- relationship between cost and activity
Cost Object
- anything for which cost is computed
Cost Driver
- variable
- affects cost
Cost Pools
- grouping of individual cost items
Activity
1. Value Adding Activities
- necessary
- non eliminable
2. Non-value Adding Activities
- do not make product more valuable to customers
Cost Accounting
- combination of FA and MA
Different Types of Cost

As to type
1. Product cost
- inventoriable cost
- unsold units ---- assets (invty)
- sold units ---- expense (COGS)
2. Period Cost
- expensed in the period of incurrence

As to function
1. Manufacturing Cost

Direct MC materials and labor

Indirect MC FOH
2. Non- manufacturing cost

Research and Development

Marketing cost

Distribution cost

Selling cost

After sales cost

General and Administrative Expense

As to traceability
1. Direct Cost
- related and can be traced to a particular cost object
2. Indirect Cost
- related but cant be traced to cost object

Cost Assignment
-allocating indirect cost to cost object

For decision Making

1. Relevant Cost
-future cost that will differ under alternative courses of
action
-may be incurred at any level, whether within or outside
the relevant range.
2. Differential Cost
-difference in cost between 2 alternatives

Incremental cost
-increase in cost

Decremental cost
-decrease in cost
3. Opportunity Cost
-income or benefit given up when 1 alternative is selected
over another

2. Fixed Cost

Total amount
-constant

Per unit
-varies inversely

2 types
a) Commited Fixed Cost
-long term in nature
b) Discretionary or Managed Fixed Cost
3. Mixed Cost
- has both variable and fixed

Total amount
-increase less proportionately as production
increases

Per unit
-decrease less proportionately as production
increases
4. Step Cost
-when activity changes, step cost shifts upward or
downward by a certain interval or step

Step variable cost

-have small steps

Step fixed cost

-have large steps
Cost behavior assumption
1. Relevant Range
-range of activity that reflects the companys normal
operating leverage

2. Linearity Assumption
-within relevant range, there is a strict linear relationship
between cost and cost driver
3. Time Assumption

Cost Function: Y = a + bx
Where:
Y - total cost
- dependent variable
A - fixed cost
- constant
- Y-intercept
- vertical-axis intercept
B - variable cost per cost driver
- constant
- slope of the line
o
Slope- steepness of the line
X - activity level or cost driver
- independent variable
Cost estimation: Separation of V and F of mixed cost
1. High-Low Method
B= change in Y / change in X
2. Scattergraph Method
-includes correlation analysis
-objective: display of population for analysis
3. Least Square Regression Method
-determines the line of best fit
-sophisticated methos

Simple regression
- 1 independent variable

Multiple regression
- multiple independent variable

4. Other cost estimation methods

Industrial Engineering Method

-relationship between input and output
-indicates what and how much cost should be

Account Analysis Method

-each cost is classified as either F or V based on
experience and judgement

Conference Method
-cost are classified based on opinions

4. Sunk or Past or Historical Cost

-already incurred & cant be change

As to behavior (Reactions to change in cost driver)

1. Variable Cost

Total amount

-varies directly to change in activity level or cost

driver
Per unit
-constant
2 types
a) True variable
b) Step variable

Correlation

- measure of a co-variation between the dependent and

independent variables
Coefficient of correlation (r)
- measure of the extent of the linear relationship between 2
variables
- from -1 to 1
- when r=0, no correlation
- when r is +, direct relationship between dependent and
independent variable
- when r is -, inverse relationship
- an r that is nearest to +1 or -1 would indicate the strongest
linear association
Coefficient of determination (r2)
- measure of goodness of fit
- squaring the value of r
-represents the % of the total variation in the dependent
variable y that is explained or accounted for by the regression
equation
- high r2 means the values in the regression equation
explained virtually the entire amount of total costs. The variables are
highly correlated

Process costing
-homogeneous product

Hybrid process costing system

Operation costing
- materials cost are accumulated using JO while
conversion cost are accumulated using PC

Backflush costing
- eliminates the detailed tracking of WIP
- most appropriate when inventories are low or when
change in invty is minimal
- most likely used by JIT

Activity- based costing

- two-stage procedure that uses multiple drivers to predict
and allocate cost
- tends to increase the # of cost pools and cost driver used
- ABCs philosophy is to accumulate homogeneous cost
pools
- products are not cross-subsidized

Standard of Error Estimate

-standard deviation about the regression line

Prediction error or Errors of estimate

- Actual cost less Estimated cost computed using the
regression equation
- serves as confidence interval or acceptable range of
tolerance
- if r2=1, the std error is 0

Cost accounting process

Cost accumulation

Cost allocation or Cost assignment

Cost accounting systems

Job order costing

- heterogeneous product

Type of activity level

Unit level

Batch level

Product level

Facility level

Process Value Analysis

- comprehensive understanding of how an org generates its
output
- involves determination of which activities are value adding or
non
- key component of ABC mgmt. that links product costing and
continuous improvement