Akre University for Applied Sciences

Akre Technical College

Department of Business Administration

Managerial Accounting
Prepared by:
A.L. Nadhim [Link] Taha
Mrs. Khonav M. Hamid
Ahmad
2024-2025
Chapter 1two
ChapterTwo

Cost Behavior
Analysis
 Cost Management Systems

Objectives

Measure the cost of resources consumed.

Identify and eliminate non–value-added costs.

Determine efficiency and effectiveness of major activities.

Identify and evaluate new activities that can improve performance.

© McGraw Hill 3
 Direct and Indirect Costs

Direct costs Indirect costs

•Costs that can be easily •Costs that must be
and conveniently traced to a allocated in order to be
product or department. assigned to a product or
department.
•Example: cost of paint in
the paint department of an •Example: cost of national
automobile assembly plant. advertising for an airline is
indirect to a particular flight.

© McGraw Hill 4
 Marginal Costs and Average Costs

The extra cost The total cost to

produce a quantity
incurred to produce
divided by the
one additional unit.
quantity produced.

Marginal and average costs are largely a function of

cost behavior – variable and fixed costs.

© McGraw Hill 5
 Costs and Benefits of Information

More information does not mean more

benefits if information overload results.

© McGraw Hill 6
 Cost Classifications for Predicting Cost
Behavior
Cost behavior refers to the way different types of
production costs change when there is a change in
level of production.

There are three main types of costs according to their

behavior:
[Link] variable costs change when activity changes.
[Link] fixed costs remain unchanged when activity
changes.
[Link] costs or semi-variable costs have properties of
both fixed and variable costs.
 Cost Classifications for Predicting Cost
Behavior
Cost behavior refers to the way different types of
production costs change when there is a change in
level of production.

There are three main types of costs according to their

behavior:
[Link] variable costs change when activity changes.
[Link] fixed costs remain unchanged when activity
changes.
[Link] costs or semi-variable costs have properties of
both fixed and variable costs.
 Total Variable Cost
Variable costs change in direct proportion to the level of
production. This means that total variable cost increase when
more units are produced and decreases when less units are
produced. Although variable in total, these costs are constant per
unit. For example
Total Variable Cost $10,000 $20,000 $30,000

÷ Units Produced 5,000 10,000 15,000

Total variable cost

Variable Cost per Unit Variable cost per

$2.00 $2.00 $2.00
unit

Number of unit produced Number of unit produced

 Total Fixed Cost
Fixed costs are those which do not change with the level of
activity within the relevant range. These costs will incur even if no
units are produced. For example rent expense, straight-line
depreciation expense, etc.
Fixed cost per unit decreases with increase in production.
Following example explains this fact:

Total Fixed Cost $30,000 $30,000 $30,000

÷ Units Produced 5,000 10,000 15,000

Fixed Cost per Unit $6.00 $3.00 $2.00

Fixed cost per unit

Total fixed cost

Number of unit produced Number of unit produced

 Cost Classifications - Summary

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Variable cost per unit remains

Total variable cost changes as activity
Variable the same over wide ranges of
level changes.
activity.

Total fixed cost remains the same Fixed cost per unit goes down
Fixed
even when the activity level changes. as activity level goes up.

© McGraw Hill 11
 Mixed cost (semi-variable cost)

Mixed costs or semi-variable costs have properties of both fixed

and variable costs due to presence of both variable and fixed
components in them. An example of mixed cost is telephone
expense because it usually consists of a fixed component such as
line rent and fixed subscription charges as well as variable cost
charged per minute cost.

Since mixed cost figures are not useful in their raw form, therefore
they are split into their fixed and variable components by using
cost behavior analysis techniques such as High-Low Method,
Scatter Diagram Method and Regression Analysis.
 Mixed Costs

Y
b X
a +
Y =
Total Cost

o st
d c
i xe Variable
l m bX
t a Utility Charge
To

Fixed Monthly
a
X Utility Charge
Activity (number of units)
 Cost volume formula
Cost volume formula is a cost accounting relation used
to estimate production cost of a given number of units of
a product. A linear cost volume formula is of the
following form:

y = a + bx
In the above equation,
y stands for total production cost;
a for total fixed cost;
b for variable cost per unit; and
x for number of units
• Total Fixed Cost is the sum of pure fixed cost, such as rent on
factory building and property taxes; and the fixed component
of mixed costs, such as total fixed cost on delivery trucks i.e.
straight line depreciation expense.
• Variable Cost per Unit is the sum of pure variable cost per
unit, such as material cost per unit; and the variable
component of mixed cost, such as variable cost per unit on
delivery trucks i.e. fuel expense.

• For this purpose, mixed costs are split into their fixed and
variable components by using any of the following
techniques:
1. High-Low Method
2. Scatter Graph Method
3. Regression Method
 Example 1

Find total fixed cost, variable cost per unit, total cost of
producing 30,000 units from the following cost volume
formula:

y = $43,000 + 6x

Solution
Total Fixed Cost = $43,000
Variable Cost per Unit = $6
Total Cost of Producing 30,000 Units = $43,000 + 6 ×
30,000 = $223,000
 Example 2
If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours,
what is the amount of your utility bill?

Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100
 1. High-Low method
High-Low method is one of the several techniques used to split a
mixed cost into its fixed and variable components. Although easy
to understand, high low method is relatively unreliable. This is
because it only takes two extreme activity levels (i.e. labor hours,
machine hours, etc.) from a set of actual data of various activity
levels and their corresponding total cost figures. These figures are
then used to calculate the approximate variable cost per unit (b)
and total fixed cost (a) to obtain a cost volume formula.

y2 − y1
Variable Cost per Unit(b)
= x2 − x1
Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units at highest level of activity; and
x1 are the number of units at lowest level of activity
 Example 1
Company α wants to determine the cost-volume relation between its
factory overhead cost and number of units produced. Use the high-low
method to find:
1. Variable cost per units (b).
2. Total fixed cost at 3,000 units.
3. Find total variable cost at 3,000 units.
4. Mixed cost at 4,000 units
5. Find number of unit if total mixed cost is reaching $80,000.
Month Units FOH
1 1,520 $39,000
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
Solution:
We have,
at highest activity: x2 = 3,000; y2 = $59,000
at lowest activity: x1 = 1,250; y1 = $38,000

[Link] Cost per Unit = ($59,000 − $38,000) /(3,000 − 1,250) = $12 per unit

2.Y= a+bx
59,000 = a + ($12 × 3,000)
a = $59,000 − ($12 × 3,000)
a = $23,000 total fixed cost.

3. Total variable cost = variable cost per unit X number of units

= 12 X 3,000
= $36,000
4. Mixed cost = $23,000 + (12 X 4,000)
= $71,000
5. Y = a+bx
80,000 = 23,000 + 12x
12 x = 80,000 -23,000 x = 57,000/12 = 4,750 units
 Example 2
A company needs to know the expected amount of factory
overheads cost it will incur in the following month. Factory
overheads cost in the previous three months was as follows:

Date Cost Units

Jan $30,000 6,000

Feb $20,000 5,000

Mar $25,000 4,000

Company expects to produce 7000 units in April.

Calculate the expected factory overhead cost in April using the High-Low
method.
 Solution:
We found that:
Highest activity level is 6000 units in Jan.
Lowest activity level is 4000 units in March.

30,0000 - 25,000
Variable Cost
= = $2.5 Per Unit
Per Unit (b)
6000 - 4000
Fixed cost (a) = 30,000 - (2.5 x 6000) = $15,000
Total variable cost = $2.5 x 7000 = $17,500 (for new activity)
Total cost = $15,000 + $17,500 = $32,500
 2. The Scattergraph Method
Scatter graph method is a graphical technique of
separating fixed and variable components of
mixed cost by plotting activity level along x-axis
and corresponding total cost (mixed cost) along
y-axis. A regression line is then drawn on the
graph by visual inspection.
 2. The Scattergraph Method
Plot
Plot the
the data
data points
points on
on aa graph
graph
(total
(total cost
cost vs.
vs. activity).
activity).
Y
20
Maintenance Cost

* ** *
1,000’s of Dollars

* *
**
10 * *

0 X
0 1 2 3 4
Patient-days in 1,000’s
 The Scattergraph Method
Draw
Draw aa line
line through
through the
the data
data points
points with
with about
about anan
equal
equal numbers
numbers of of points
points above
above and
and below
below the
the line.
line.
Y
20
Maintenance Cost

* ** *
1,000’s of Dollars

* *
**
10 * *

0 X
0 1 2 3 4
Patient-days in 1,000’s
 The Scattergraph Method
Use
Use one
one data
data point
point to
to estimate
estimate thethe total
total level
level of
of activity
activity
and
and thethe total
total cost.
cost.
Y Total maintenance cost = $11,000
20
Maintenance Cost

* ** *
1,000’s of Dollars

* *
**
10 * *
Intercept = Fixed cost: $10,000

0 X
0 1 2 3 4
Patient-days in 1,000’s
Patient days = 800
 The Scattergraph Method
Make
Make aa quick
quick estimate
estimate of
of variable
variable cost
cost per
per unit
unit and
and
determine
determine the
the cost
cost equation.
equation.

Total maintenance at 800 patients $ 11,000

Less: Fixed cost 10,000
Estimated total variable cost for 800 patients $ 1,000

$1,000
Variable cost per unit = = $1.25/patient-day
800

Y = $10,000 + $1.25X

Total maintenance cost Number of patient days

 3. Least-Squares Regression Method
The term least-squares regression implies that the ideal fitting of the
regression line is achieved by minimizing the sum of squares of the
distances between the straight line and all the points on the graph.

By using mathematical techniques beyond the scope of this article,

the following formulas to calculate a and b may be derived:
 Count…

Where,
n is number of pairs of units—total-cost used in the calculation;
Σy is the sum of total costs of all data pairs;
Σx is the sum of units of all data pairs;
Σxy is the sum of the products of cost and units of all data pairs;
and
Σx2 is the sum of squares of units of all data pairs.
 Example
Based on the following data of number of units produced and the
corresponding total cost, estimate the total cost of producing 4,000
units. Use the least-squares linear regression method.

Month Units Cost

1 1,520 $39,000

2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
 Solution
x y x2 xy
1,520 $36,375 2,310,400 55,290,000

1,250 38,000 1,562,500 47,500,000

1,750 41,750 3,062,500 73,062,500

1,600 42,360 2,560,000 67,776,000

2,350 55,080 5,522,500 129,438,000

2,100 48,100 4,410,000 101,010,000

3,000 59,000 9,000,000 177,000,000

2,750 56,800 7,562,500 156,200,000

 Count…
Calculating the average variable cost per unit:
Thank You