MAS-02
Batch 3
COST BEHAVIOR ANALYSIS
Cost behavior analysis is the study of how specific costs respond to changes in the level
of activity within a company.
The starting point in cost behavior analysis is measuring the key activities in the
company’s business.
Activity levels may be expressed in terms of
– sales peso (retail company),
– miles driven (trucking company),
– room occupancy (hotel), or
– number of dance classes taught (dance studio).
For an activity level to be useful in cost behavior analysis, there should be correlation
between changes in the level or volume of activity and changes in the costs.
The activity level selected is referred to as the activity (or volume) index.
The activity index identifies the activity that causes changes in the behavior of costs.
VARIABLE COST:
Variable costs are costs that vary in total directly and proportionately with changes in the
activity level.
A variable cost may also be defined as a cost that remains the same per unit at every level
of activity.
FIXED COST
Fixed costs are costs that remain the same in total regardless of changes in the activity level.
Since fixed costs remain constant in total as activity changes, fixed costs per unit vary
inversely with activity. As volume increases, unit cost declines and vice versa.
SUMMARY:
SALES (Increase) Sales (Decrease)
Total Variable Cost Increase Decrease
Variable Cost Per Unit Same Same
Total Fixed Cost Same Same
Fixed Cost Per Unit Decrease Increase
MIXED COST
Mixed costs contain both a variable cost element and a fixed cost element.
Sometimes called semivariable costs, mixed costs change in total but not proportionately with
changes in the activity level.
In CVP analysis, it is assumed that mixed costs must be classified into their fixed
and variable elements.
Firms usually ascertain variable and fixed costs on an aggregate basis at the end of a
time period, using the company’s past experience with the behavior of the mixed cost at
various activity levels.
a. HIGH-LOW METHOD - is a mathematical method that uses the total costs incurred at
the high and low levels of activity.
The steps in calculating fixed and variable costs under this method are as follows:
1. Determine variable cost per unit from the following formula:
High minus Low Costs High minus Low Activity Level = Variable Cost per unit
2. Determine the fixed cost by subtracting the total variable cost at either the high or the
low activity level from the total cost at that activity level.
Please take note:
CORRECT
Cost at Cost at
Highest Low est
Activity Activity
-
-
Highest Low est
Activity Activity
WRONG
Highest Low est
Cost - Cost
-
Highest Low est
Activity Activity
b. REGRESSION ANALYSIS - refers to a technique for estimating the relationship
between variables. It helps people understand how the value of a dependent variable
changes when one independent variable is variable while another is held constant.
Regression analysis is used in forecasting future data.
The steps in calculating fixed and variable costs under this method are as follows
1. Determine variable cost per unit from the following formula:
Where:
E = Summation
x = Activity
y = Cost
xy = Activity multiply to Cost
n = term
_
x = Average activity
_
y = Average cost
2. Determine the Fixed Cost:
_ _
a = (y) – VC/unit (x)
COST BEHAVIOR ANALYSIS
PROBLEMS:
A. Francis Villamin Company has assembled the following data pertaining to certain costs that
cannot be easily identified as either fixed or variable. Ramos Company has heard about a
method of measuring cost functions called the high-low method and has decided to use it in this
situation.
Cost Hours
$24,900 5,250
25,000 5,500
36,400 7,500
44,160 9,750
45,000 9,500
Required:
a. Compute for Variable cost per unit.
b. Compute for Total Fixed Cost
c. What is the cost function?
B. Bee Jay De Leon Company has provided the following data for the first five months of the
year:
Machine Hours Lubrication Cost
January 120 P750
February 160 P800
March 200 P870
April 150 P790
May 170 P840
1. Using the high-low method of analysis, compute the estimated variable lubrication cost
per machine hour rounded to the nearest centavo
2. Using the high-low method of analysis, the compute estimated monthly fixed component of
the lubrication cost.
3. Using the least-squares regression method of analysis, the estimated variable lubrication cost
per machine hour is closest to?
4. Using the least-squares regression method of analysis, the estimated monthly fixed
component of lubrication cost is closest to:
5. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 130 is closest to:
6. Using the least-squares regression method of analysis, the estimated total lubrication
cost for June if the estimated machine hours is 130 is closest to:
7. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 0 is closest to:
8. Using the least-squares regression method of analysis, the estimated total lubrication
cost for June if the estimated machine hours is 0 is closest to:
C. Jimmy Balmediano Company has a 25% margin of safety. Its after tax return on sales is 6%,
and its tax rate is 40%.
Required:
1. Compute for the contribution margin ratio.
2. Compute for fixed cost assuming sales of P120,000.
D. Andrew Manacop Co. had a loss of P3 per unit when sales were 40,000 units and a loss of
P1.60 per unit at 50,000 units sales.
Required:
1. Compute contribution margin per unit.
2. Determine fixed costs.
3. Compute for the units breakeven point.
MULTIPLE CHOICE:
Costs Classification
1. The term relevant cost applies to all the following decision situations except the
A. Acceptance of a special order
B. Determination of a product price
C. Replacement of equipment
D. Addition or deletion of a product line
2. A decision making concept, described as “the contribution to income that is foregone by not
using a limited source for its best alternative use” is called
A. Marginal cost C. Potential cost
B. Incremental cost D. Opportunity cost
3. In a decision analysis situation, which one of the following costs is not likely to contain a
variable cost component?
A. Labor C. Depreciation
B. Overhead D. Selling
4. The term that refers to costs incurred in the past that are not relevant to a future decision is
A. Full absorption cost C. Sunk cost
B. Under-allocated indirect cost D. Incurred marginal cost
5. Management accountants are concerned with incremental unit costs. These costs are
similar to the following except
A. The economic marginal cost C. The cost to produce an additional
B. The variable cost unit
D. The manufacturing unit cost
6. Opportunity costs
A. Costs irrevocably incurred by past actions
B. The difference between actual and standard costs
C. Not recorded in the accounting records
D. Partly fixed costs and partly variable costs
7. Cost of goods sold is a component of the income statement. In a merchandising
establishment, this refers to purchases adjusted for changes in inventory. In a
manufacturing company, what replaced purchases to arrive at cost of goods sold?
A. Finished goods C. Work in process inventory
B. Fixed manufacturing overhead D. Cost of good manufactured
8. The salaries you could be earning by working rather than attending college is an example of
A. Outlay costs C. Sunk costs
B. Misplaced costs D. Opportunity costs
9. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is
A. Relevant because salaries are always present
B. Relevant because this will probably change if the regional service office is built
C. Irrelevant because it is future cost that will not differ between the alternatives under
consideration
D. Irrelevant since another imputed cost for the same will be considered
10. Sunk costs
A. Are substitutes for opportunity costs
B. Are relevant to long-term decisions but not to short-term decisions
C. Are relevant to decision-making
D. In themselves are not relevant to decision making
11. When all manufacturing costs used in production are attached to the products, whether
direct, or indirect, variable or fixed, this is called
A. Process costing C. Variable costing
B. Absorption costing D. Job order costing
High-low Method
12. Mine and Yours Company uses a regression equation to analyze the behavior of its
transportation costs (T) as a function of travel time (H). They developed the following
equation using two years’ observation with a related coefficient of determination of 85:
T = 100,000 + 50H
If 500 hours of travel time were logged in one period, the related point estimate of total
transportation costs would be
A. P110,000 C. P106,250
B. P121,250 D. P125,000
13. These are among the methods of segregating fixed cost and variable costs except
A. Breakeven method C. Scattergraph method
B. Simple regression analysis D. High-low method
14. Jackson, Inc., is preparing a flexible budget for next year and requires a breakdown of the
cost of steam used in its factory into the fixed and variable elements. The following data on
the cost of steam used and direct labor hours worked are available for the last 6 months of
this year.
Month Cost of Steam Direct Labor Hours
July P 15,850 3,000
August 13,400 2,050
September 16,370 2,900
October 19,800 3,650
November 17,600 2,670
December 18,500 2,650
TOTAL P 101,520 16,920
Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of
steam per direct labor hour is
A. P4.00 C. P5.82
B. P5.42 D. P6.00
15. In the Timbungan Country, Inc., a maintenance cost is partly fixed and partly variable in
nature. At the low level of activity (150 direct labor hours), maintenance costs total P2,100.
At high level of activity (270 direct labor hours), maintenance costs are P3,000. Using the
high-low method, what is the variable maintenance cost per unit and the total fixed
maintenance cost?
Variable Maintenance Cost Fixed Maintenance Cost
A. P 7.50 P 975
B. P 7.50 P2,100
C. P10.00 P 600
D. P10.00 P2,100
26. Regression analysis
A. Estimates the independent cost variable
B. Uses the probability assumption to determine the total project cost
C. Estimates the dependent cost variable
D. Ignores the coefficient of determination
27. The segregation of fixed cost and variable cost is the key to proper cost analysis.
Regression analysis is a technique used for this purpose. Identify the appropriate statement
below on regression analysis
1. It assumes that a change in value of a dependent variable is related to the change in
value of an independent variable.
2. A linear relationship between the direst cost and production volume can cause a
problem when using accounting data for regression analysis.
3. It attempts to find an equation for a linear relationship among the variables.
4. It establishes a cause and effect relationship
A. All four statements are appropriate
B. Statements 1, 3, and 4 only
C. Statements 1 and 3 only
D. Statements 2 and 4 only
E. Statements 2, 3, and 4 only
F. Statements 1 and 4 only
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