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and
Cost Estimation
In Total
Per Unit
VC
Total VC is
proportional to the activity
level within the RR.
RR
FC
Machine
hours
A measure off what
h t
causes the
i
incurrence
off a VC
Miles
driven
Labor
hours
3
True VC Example
Total Phone
e Bill $$
$
Minutes Talked
Total DM Co
ost $$
Volume
P Min
Per
nute
Phon
ne Cha
arge $$
$
Minutes Talked
A manufacturing company
will often have many
VCs.
A service company
will normally have a high
proportion of VCs.
A merchandising company
usually will have a high
proportion of VCs,
like cost of sales.
7
Total C
T
Cost $$
Step-Variable Costs
Volume
9
Tota
al Phon
ne Bill $
$$
Number of Calls
10
Phone Ch
harge p
per Call $$
Average FCs per unit decrease as the activity level increases. The
FC per local call decreases as more local calls are made
made.
11
Committed
Discretionary
y
Long-term, cannot be
g
y reduced
significantly
in the short term.
Examples
Examples
Depreciation on
Equipment and
R lE
Real
Estate
t t T
Taxes
Advertising and
Research and
D
Development
l
t
12
Tottal Cos
st $$
Relevant
Range
R
Activity
13
Total
$ 100,000
60 000
60,000
$ 40,000
Less: FC
Net Income
30,000
$ 10,000
Unit
$ 50
30
$ 20
Used primarily by
management
management.
16
Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where:
Y
Tota
al Utilitty Cost
b = the VC p
per unit of activity
y
(the slope of the line)
X = the level of activity
Variable
C t per KW
Cost
X
Activity (Kilowatt Hours)
Fixed Monthly
Utility Charge
17
Y = a + bX
Y = $40 + ($0.03 2,000)
Y = $100
18
Scattergraph Method
Mainte
enance Cost
1,000s
s of Do
ollars
* *
* *
10
* ** *
**
Patient-days
Patient
days in 1,000
1,000s
s
Patient days = 800
19
Scattergraph Method
Make a quick estimate of VC per unit and determine the
cost equation.
Total maintenance at 800 patients
Less: Fixed cost
Estimated total variable cost for 800 patients
VC per unit =
$1,000
800
$ 11
11,000
000
10,000
$ 1,000
= $1.25/patient
$1 25/patient25/patient-day
Y = $10
$10,000
000 + $1
$1.25X
25X
Total maintenance cost
High-Low Method
The VC per hour of
maintenance is equal to
the change in cost divided
y the change
g in hours.
by
$2,400
$2
400
= $8.00/hour
300
21
High-Low Method
High-Low Method
Y = $3,400
$3 400 + $8
$8.00
$8.00X
00X
00X
23
Regression Method
A method used to analyze mixed costs if a scattergraph plot reveals
an approximately linear relationship between the X and Y variables.
Regression Method
Software can be used to fit
a regression line through
the data points.
The cost analysis objective
is the same: Y = a + bX
Regression also provides a statistic, called the R2,
which is a measure of the goodness of fit of the
regression line to the data points.
25
Regression Method
R2 is
i the
th percentage
t
off the
th variation
i ti in
i total
t t l costt
explained by the activity.
Y
Total Cost
20
* *
* *2
10
* ** *
**
0
0
2
3
Activity
X
26