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2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Define cost behavior for fixed, variable, &
mixed costs.
2. Explain the role of the resource usage model
in understanding cost behavior.
3. Separate mixed costs into their fixed &
variable components using the high-low
method, scatterplot method, and method of
least squares.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
5
QUESTIONS TO THINK ABOUT:
Reddy Heaters
6
QUESTIONS TO THINK ABOUT:
Reddy Heaters
7
QUESTIONS TO THINK ABOUT:
Reddy Heaters
8
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
1
Define cost behavior for
fixed, variable, & mixed
costs.
9
LO 1
10
LO 1
REDDY HEATERS:
Cutting Activity
Cutting
Cutting activity
activity uses
uses 22 inputs
inputs
Cutting
Cutting machine
machine
11 machine
machine can
can produce
produce up
up to
to 240,000,
240,000, 3-inch
3-inch
segments
segments per
per year
year (fixed
(fixed cost)
cost)
Power
Power to
to operate
operate machine
machine (variable
(variable cost)
cost)
11
LO 1
FIXED
FIXED COST:
COST: Definition
Definition
12
LO 1
VARIABLE
VARIABLE COST:
COST: Definition
Definition
13
LO 1
VARIABLE COSTS:
$0.20 per Unit Produced
What
Whatisisthe
thetotal
total
variable
variablecost
costtoto
produce
produce120,000
120,0003- 3-
inch
inchsegments?
segments?
EXHIBIT 3-2
14
LO 1
MIXED
MIXED COST:
COST: Definition
Definition
15
LO 1
16
LO 1
ACTIVITY DRIVERS 1
Production drivers (unit level)
Explain changes in unit cost as units produced
changes
Are inputs with direct relationship with production
level
Examples:
Pounds direct materials
Direct labor
17
LO 1
ACTIVITY DRIVERS 2
Non-unit level activity drivers
Explain changes in cost in terms other than
changes in units of production
Have no direct relationship with production
Examples
Depreciation
Set-up costs incurred to change the items produced
18
LO 1
19
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
20
LO 2
CAPACITY:
CAPACITY: Definition
Definition
21
LO 2
22
LO 2
FLEXIBLE RESOURCES
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LO 2
COMMITTED RESOURCES
24
LO 2
COMMITTED
COMMITTED RESOURCES:
RESOURCES:
Can
Can Be
Be
25
LO 2
STEP
STEP COST:
COST: Definition
Definition
26
LO 2
27
LO 2
IMPLICATIONS
Improving managerial control & decision
making by
Encouraging managers to pay more attention to
controlling resource usage, spending
Providing information to control capacity
efficiently
Allowing managers to calculate change in resource
supply, demand
28
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
3
into fixed & variable
components using high-
low, scatterplot, & least
squares.
29
LO 3
LINEARITY ASSUMPTION
Variable
Variablecost
cost
assumes
assumesaalinear
linear
relationship
relationship
between
betweencost
costand
and
activity
activitydriver.
driver.
EXHIBIT 3-7
30
LO 3
EXHIBIT 3-10
31
LO 3
HIGH-LOW EQUATIONS
32
LO 3
SCATTERPLOT METHOD
Scatterplot
Scatterplotisisaa
method
methodof of
determining
determiningthethe
equation
equationofofaaline
linebyby
plotting
plottingthe
thedata
dataonon
aagraph.
graph.
EXHIBIT 3-11
33
LO 3
Scatterplot
Allows you to see the data BUT
It lacks any objective criterion
for choosing the best-fitting line
34
LO 3
35
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
36
LO 4
37
LO 4
COEFFICIENT OF
DETERMINATION (R2)
Percentage
Percentageofofvariability
variabilityin
independent
dependent
variable
variableexplained
explainedbybyindependent
independent
variable
variable
Range:
Range:00––11
Higher
Higherisisbetter
better
38
LO 4
COEFFICIENT OF CORRELATION
Square
Squareroot
rootof
ofcoefficient
coefficientof
of
determination
determination
Measures
Measureswhether
whethervariables
variablesmove
moveinin
same
same(+)
(+)or
oropposite
opposite(-)
(-)directions
directions
Range:
Range:-1
-1--+1
+1
39
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
5
Discuss the role of
multiple regression in
assessing cost behavior.
40
LO 5
MULTIPLE
MULTIPLE REGRESSION:
REGRESSION: Definition
Definition
41
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
6
Describe the use of
managerial judgment in
determining cost
behavior.
42
LO 6
MANAGERIAL JUDGMENT
Is a method of cost assignment used to
Determine fixed, variable cost
Uses managerial experience
Uses past observation of cost relationships
To refine statistical estimation results
Advantage: simplicity
Disadvantage: judgment errors
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CHAPTER 3
THE
THE END
END
44