 Determine relation of costs to volume;

 Illustrate relationship of costs to volume

through profitgraph; and
 Application of cost behavior to the assigned
case – Bill French
What is cost behavior?

 It is how costs work as the level of

activity changes.
Variable costs
 are items of cost that vary, in total, directly
and proportionately with volume.
Fixed costs
 are items of cost that, in total, do not vary
at all with volume.
Semi-variable costs
 are those costs that include a combination of
variable-cost and fixed-cost items.
 TOTAL COST COST PER UNIT
Variable Cost Increases as volume Constant
increases;

Decreases as volume
decreases
Fixed cost Constant Increases as volume
decreases;

Decreases as volume
increases.
Graphical illustration:
Mathematical equation:

TC = TFC + (UVC * X)

 where:
 TC = Total cost
 TFC = Total fixed cost (per time period)
 UVC = Unit variable cost (per unit of volume)
 X = Volume
Inherent conditions

 Range of volume;
 Length of time period;
 “Stickiness” of costs; and
 Environment.
 Relevant Range

$16,000 –

$12,000 –
Relevant Range
$8,000 –
st s o C de xi F

$4,000
–

–
0 500 1,000 1,500 2,000 2,500
Volume in Units
Relevant Time Period

 Theamount of variable cost depends on the

time period over which cost behavior is being
estimated.
“Sticky” Costs

 Coststhat are generally considered to be

100% variable, are in actuality, not 100%
variable on the downside.
Environment
 Costs in a period that may change as a result
of many influences in the economic
environment such as:

 Changes in wage rates, fringe benefits, and

material prices;
 Changes arising from technological changes
in production processes.
 JUDGMENT
 HIGH-LOW METHOD
 SCATTER DIAGRAM
 LINEAR REGRESSION
JUDGMENT

 usedin deciding how each item, or category,

of cost will vary with volume and what the
amount of fixed costs will be; and

 also known as account-by-account method.

HIGH-LOW METHOD

 usedin estimating total costs at each of two

volume levels, which establishes two points
on the line; and

 most accurate when the high and low levels

of activity are representation of the majority
of the other points.
HIGH-LOW METHOD

 UVC= Upper limit-lower limit of cost

Upper limit-lower limit of volume

 TotalFixed Cost =
Upper or lower limit of cost - (UVC x Upper
or lower limit of volume)
SCATTER DIAGRAM

A chart of points in which actual costs

recorded in past periods are plotted against
the volume levels in those periods.
SCATTER DIAGRAM ILLUSTRATION
LINEAR REGRESSION

 Fita line to the observations by the

statistical technique;
 Give the total fixed cost and unit variable
cost values directly
General Rule:

 useas much as relevant information as is

available, subject to limitation of time and
cost in performing analysis
 Input versus Output Measures

 Monetary versus Nonmonetary Measures

 Choice of a Measure
 Cost-Volume-Profit (CVP) Analysis
 Shows the expected relationship between total
costs and revenue at various volumes.
 Revenue is assumed to be constant
 All units produced are sold

TC= TFC+ (UVC x Volume)

 Sales= FC+VC
 Zero profit
 Point at which no profit nor loss is incurred.
 Sale below BEP will mean loss
 Sale above BEP will mean profit
Break even point in peso- the total amount of
sales to recover costs
Or simply BEP in units x the SP
Total Cost Profit Region
16000
14000
12000
10000
Break-even Point
8000
6000 Loss Region
4000
2000
0
0 0.2 0.4 0.6 0.8 1 1.2
Volume
As volume increases, average per unit cost
decreases because the average fixed cost of
each unit decreases. This phenomenon is
referred to as spreading the fixed costs over
higher volume.
 Contribution Margin= SP-VC
 CM ratio = Contribution margin/ SP
 Contribution margin is the excess of Selling
price over variable cost.
 Contribution margin is equal to total Fixed Costs
at BEP.
 The Amount by which the current volume
exceeds the break-even volume.
 The ratio or percentage decrease in sales before
a loss is incurred.
 Increase Selling price per unit
 Decrease Variable cost per unit
 Decrease Fixed Costs
 Increase volume
 Changes in input prices- materials, wages,
inflation
 The rate of change in volume- rapid change in
volume will likely to increase cost
 The direction in change in volume
 The duration of change in volume
 Prior knowledge of the change
 Productivity
 Management Discretion
Product mix- uses weighted average
contribution margin
CVP- single product
Learning Curves- reduction in unit
production cost associated with
increased productivity
THANK YOU!

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