Cost Terms and Behaviors
Explain cost behavior?
The way costs react to changes in activity
What are the pros of using a scatter graph?
What are the 3 methods used to estimate cost?
Scattergraph
High-Low
Least Squares Regression
The slope of the cost line represents?
Variable cost per unit
The linear assumption indicates that costs can always be estimated by?
Straight line
Define a fixed cost
A cost that remains constant in total but decreases per unit as activity increases
What are the cons to using a scatter graph?
Subjective
What is the formula for estimating costs? (Linear equation) and what does each variable stand for?
y = a + b(x)
Total Costs = Fixed Costs + Variable Costs(units)
R square tells us the percentage of variability that can be explained by what?
Activity
Which of the following is a variable cost assuming the cost driver is units produced?
Insurance
Utilities (monthly base rate of $35 plus usage)
Direct Labor
Rent
Direct Labor
Define variable cost
A cost that remains constant per unit and increases in total as activity increases
What is the amount of fixed costs?
$40,000 = $17,000 x $23(1,000)
$17,000
Which method of cost estimation is the most reliable and why?
Least squares regression analysis because it uses all data points
What regression analysis output measures the "goodness of fit".
R-Square
Which would be considered a step cost:
Paying hourly wages
Hiring a new manager
Paying utilities
Rent
Hiring a new manager
Define a mixed cost
Contains both a variable and fixed component
Using the following, calculate total costs:
Fixed Costs = $14,000
Variable Cost per Unit = $12
Total Units = 500
$20,000
Meadow, which uses the high-low method, had total costs of $278,600 at its lowest level of activity when 8,700 units were sold. When, at its highest level of activity, sales equaled 15,200 units, total costs were $399,500. Meadow would estimate fixed costs as:
$116,780
The y-intercept on a scattergraph represents?
Fixed costs
The following represent 6 months of costs for ABC company. What type of cost does this represent:
Units: 0 10 20 30 40 50
Cost: 50 60 70 80 90 100
Mixed Cost
Explain the relevant range
Range of activity where we expect our cost behavior assumptions to be true
Calculate the slope:
Units Cost
Jan 5,000 $12,000
Feb 7,500 $14,600
March 4,800 $13,000
April 7,200 $14,800
0.59
Sage, Inc. used Excel to run a least-squares regression analysis, which resulted in the following output:
Intercept: 24,355
X Variable: 6.47
What would Sage's predicted total cost be with sales of 11,000 units?
$95,525
This type of cost is fixed for a narrow range.
Step Costs
Describe a cost driver
An activity that causes costs to rise when activity increases