Cost Behaviour: Part 2 of 2 Sections 1 and 2 Feb 1, 2013 Professor: Khim Kelly Office: HH386B Office Hours: Mon/Wed 11:30am – 12:30pm and Appointment Email: [email protected]TA: Kun Huo Email: [email protected]Ch. 6 Assignment due Feb 4(Mon), 11.59pm
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Cost Behaviour: Part 2 of 2 Sections 1 and 2 Feb 1, 2013 Professor: Khim Kelly Office: HH386B Office Hours: Mon/Wed 11:30am – 12:30pm and Appointment Email:
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Cost Behaviour: Part 2 of 2Sections 1 and 2
Feb 1, 2013
Professor: Khim KellyOffice: HH386B
Office Hours: Mon/Wed 11:30am – 12:30pm and AppointmentEmail: [email protected]
mixed costs– How to use costs behaviour to predict costs– Analyze mixed costs (High-Low Method)
• Major topics for today…– Analyse mixed costs (Regression)– Another example of High-Low method– The contribution margin approach
Regression
• High-Low method uses only two data points– Improve accuracy of results by considering more data points
• Regression analysis– Uses all the available data points– “Fits” a line to the data points while attempting to minimize errors.– Develops a similar looking equation to High-Low method
• Both assume linearity– Need to be aware of potential differences in cost behaviour outside of
the relevant range– When predicting costs, you might want to limit analysis to a range
around expected activity
The next slides plot data (from last lecture Clicker Question #3) with activity on the X axis and the mixed cost on the Y axis.
LSR method: y = 4.10x + $12,346 (with outlier)LSR method: y = 3.51x + $13,890 (without outlier)
Outlier?Nonlinear?
Example: High-Low Method and Predicting Cost (P6-15)
Prince Company’s total OH costs at various levels of activity are presented below:
Month DL Hours Total OH Cost
September 100,000 $388,000
October 80,000 $340,400
November 135,000 $485,600
December 140,000 $483,200
Example: High-Low and Predicting Cost (P6-15)
Assume OH costs consists of utilities, supervisory salary, depreciation, and maintenance. The breakdown for October at 80,000 DL hour level of activity is:
The company wants the breakdown of costs into variable and fixed cost elements. Answer the following required:
OH Type OH Cost
Utilities Variable $104,000
Salaries & Depreciation Fixed $120,000
Maintenance Mixed $116,400
Total OH Cost $340,400
Example: High-Low and Predicting Cost (P6-15)
1. Estimate how much of the $483,200 of OH cost in December was maintenance cost
Example: High-Low and Predicting Cost (P6-15)
The company wants the breakdown of costs into variable and fixed cost elements. Answer the following required:
OH Type OH Cost
December OH Mixed $483,200
December:
Salaries & Depreciation Fixed ($120,000)
Utilities Variable ($182,000)
Maintenance (Mixed Cost) $181,200
Variable Cost = $104,000/80,000 * 140,000
It is Clicker Time!!
Feel Free to Work Together on Clicker Questions
Q: Use the high-low method to develop the cost formula for maintenance cost (select option that is closest to your answer).
Clicker Question #1 (P6-15)
A. Y = $15,000 + $23.80XB. Eggs + Plants = Eggplant C. Y = $30,000 + $3.12XD. Y = $30,000 + $1.08XE. Y = $15,000 + $2.38X
LOW (October): 80,000 DL hours @ $116,400
HIGH (December): 140,000 DL hours @ $181,200
Clicker Question #1
LOW (October): 80,000 DL hours @ $116,400
HIGH (December): 140,000 DL hours @ $181,200
$181,200 - $116,400
140,000 – 80,000=
$64,800
60,000=
$1.08 per DL hour=
$116,400 a + ($1.08 * 80,000)=a $30,000=
Answer: D. Y = $30,000+$1.08X
Then:
Example: High-Low and Predicting Cost (P6-15)
3. Express the company’s total OH cost in the formula Y = a+ bX:Variable Costs: