ACCT 312 CH 3

Fixed costs

Costs that in total are constant within the relevant range as the level of the associated driver varies

Variable costs

• Costs that, in total, vary in direct proportion to changes in an activity driver

• Total cost of direct materials for each level of production varies, but the unit cost stays the same

Mixed costs

• Costs that have both a fixed and a variable component

• EX: There are 10 sales representatives, each earning
  $30,000 plus receive a commission of $5 per speaker
  sold that can be represented by the following equation

Resources

Economic elements that enable one to perform activities

Activity capacity

Obtained when a firm acquires the resources needed to perform an activity

Practical capacity

Activity level where the activity is performed efficiently

Unused capacity

Activity capacity that is not used completely

Flexible resources

• Supplied as needed and used

• Quantity of resource supplied equals the quantity demanded

• No unused capacity

Committed resources

• Supplied in advance of usage

• A given quantity is obtained, whether or not that full amount is used

• Unused capacity is possible

Step-cost function

Displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point

Step-variable costs

Follow a step-cost behavior with narrow steps

Step-fixed costs

Follow a step-cost behavior with wide steps

Activity rate

Average unit cost obtained by dividing the resource expenditure by the
activity’s practical capacity

Relationship between resources supplied and resources used formulas

• Activity availability = Activity output + Unused capacity

• Cost of activity supplied = Cost of activity used + Cost of unused activity

Activities

• Have characteristics of both flexible and committed resources

• Ex: A power department acquires long-term capacity for
  supplying power by investing in a building and equipment; Resources acquired in advance

• It acquires fuel to produce power as needed - Resources
  acquired as needed

Industrial Engineering method

• Forward-looking method of determining what activities, in what amounts, are needed to complete a process

• Through physical observation and analysis

• Engineering studies are very precise, BUT VERY EXPENSIVE

• Used for manufacturing processes

• Advantage - Can be applied to new processes and designs

Account Analysis Method

Used to estimate costs by classifying accounts in the general ledger as: Fixed, Variable, Mixed

Cost Equation (straight line)

Y = F + VX

• Y = Total cost (the dependent variable)

• F = Fixed cost component (the intercept parameter)

• V = Variable cost per unit (the slope parameter)

• X = Measure of output (the independent variable)

Dependent variable

Variable whose value depends on the value of another variable

Independent variable

Variable that measures output and explains changes in the cost

Intercept parameter

Corresponds to fixed cost

Slope parameter

Corresponds to the variable cost per unit of output

High-Low Method

Takes two points (the high and the low by volume of activity NOT TOTAL COST) and determines the slope and the intercept

• Slope is variable rate

• Intercept is fixed cost

Advantages: Objective in nature and simple to calculate

Disadvantages: High and low points may be outliers that represent atypical cost-activity relationships

Scatterplot method

• Uses a scattergraph to visually assess the relationship between cost and output

• Intercept is fixed cost

• Slope is a variable rate

• Assesses the validity of the assumed linear relationship

Advantages: Allows vision inspection of the data and identifies nonlinearity, outliers, and shifts in the cost relationship

Disadvantages: Lacks objective criterion for choosing the best-fitting line, subjective in nature

Method of Least Squares

• Difference between the predicted and actual costs

• Shown by the distance from the points marked in the scattergraph to the best-fitting line

• Measure of closeness is the sum of the squared deviations of the points from the line

• The farther away from the line, the bigger the deviation

Hypothesis test of cost parameters

Indicates whether the parameters are different from zero

Goodness of fit

Measures the degree of association between cost and activity output

Confidence intervals

Provides a range of values for the actual cost with a prespecified degree of confidence

Coefficient of determination

Percentage of variable in the dependent variable explained by an independent variable

Standard Errors

• Tell how tightly the data points cluster around the
  regression line

• Small standard error indicates that the regression line
  more closely approximates the data

• Larger standard error indicates the opposite

Multiple Regression

• Used whenever least squares is used to fit an equation involving two or more independent variables

• Linear equation is expanded to include the additional variable when there are two explanatory variables

Y = F + V1X1 + V2X2

X1= Number of moves

X2= Number of pounds moved

Learning curve

Shows how labor hours per unit decrease as units produced increases

Experience curve

Relates cost to increased efficiency, such that the more often a task is performed, the lower the cost is of doing it

Incremental unit=time learning curve model

Decreases by a constant percentage each time the cumulative quantity of units produced doubles

Cumulative average-time learning curve model

States that the cumulative average time per unit decreases by a constant percentage, or learning rate, each time the cumulative quantity of units produced doubles

Learning rate

Gives the percentage of time needed to make the next unit, based on the time it took to make the previous unit; expressed as a percent