Cost - Behavior-Analysis and Use
Cost - Behavior-Analysis and Use
Cost - Behavior-Analysis and Use
Use
Chapter 5
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INTRODUCTION :
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The relationship between cost and activity called
cost behavior, is relevant to management
functions of planning, control, and decision
making. This behavior of costs may have
impacts on the managerial decisions relating to
volume of activity, selection of markets, selection
of products, selection of machineries etc. Without
the knowledge of cost behaviors, budgets and
other forecasting tools can be inaccurate and
unreliable.
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Mixed Costs:
As already mentioned, 'mixed costs' are cost
items which have both fixed and variable
elements. For helping management, these two
components should be segregated. The process of
segregation is termed as analysis.
Mixed cost is an item of cost containing both fixed
and variable elements.
Also known as semi-variable costs, a mixed cost is
an item of cost containing both fixed and variable
elements.
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Methods of Analyzing Mixed Costs
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(a).Scatter Diagrams:
Scatter diagrams are merely graphs showing, in
two-dimensional space, the pairs of values (xi, yi).
This is a statistical technique of identifying the form of
functional relationship between xi, the independent
variable and yi, the dependent variable. This technique
can be used to segregate mixed costs into fixed and
variable components.
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(b).High-Low Method:
If a scatter diagram confirms that the
relationship is approximately linear, attempts
must be made to segregate fixed and variable
costs. This can be done by using the
"high-low method".
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(c)The Least Square Regression Method
The High-Low method of separating fixed and variable costs
in mixed cost is limited for its consideration of two points
instead of all data. The least square regression is a method of
separating a mixed cost into its fixed and variable
components that uses all of the data.
A regression line of the form y = a +bx is fitted to the data,
where y represents total mixed cost, ‘a’ represents the total
fixed cost and ‘b’ represents the variable cost per unit of the
activity, ‘x’ represents the level of activity.
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Example: Production level Maintenance Costs
2,000 units Tk.13,000
5,000 " 28,000
6,000 " 35,000
4,000 " 25,000
8,000 " 40,000
10,000 " 45,000
In the above example,
Lowest point : 2,000 units Cost : Tk.13,000.00
Highest point : 10,000 Units Cost : 45,000.00
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The Least Square Regression Method(Cont)
The High-Low method of separating fixed and variable
costs in mixed cost is limited for its consideration of two
points instead of all data. The least square regression is a
method of separating a mixed cost into its fixed and
variable components that uses all of the data.
A regression line of the form y = a +bx is fitted to the data,
where y represents total mixed cost, ‘a’ represents the
total fixed cost and ‘b’ represents the variable cost per
unit of the activity, ‘x’ represents the level of activity.
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Example: Calculation of variation and co-variation
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Calculation of 'a' and 'b'
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(d).Miscellaneous Methods:
In practice, the following methods are very
much popular:
(i) Account analysis
(ii) Engineering analysis
(i)Account Analysis: Each account under
consideration is classified as either fixed or
variable based on the analyst's prior
knowledge of how the figures of the account
behave with the changes in the volume of
activity.
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(d).Miscellaneous Methods (Cont)
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(i)Traditional Approach/ Format of Income Statement
Sales Tk xxxxxx
Less Cost of Goods sold . xxxx
Gross Profit / Margin xxxx
Less Operating Expenses:
Administrative Costs Tk xxxx
Selling Costs . xxxx xxxx
Net Operating Income Tk xxxx
.
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(ii) Contribution Format of Income Statement: [Variable
Costing Income Statement]
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Income Statement
For the Period ......
[Contribution Format/Behavioral Format ]
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COMPARISON
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