COST AND COST CONCEPTS

COST AND COST
CONCEPTS
COST BEHAVIOR WITH REGRESSION ANALYSIS
COST BEHAVIOR
• Cost behavior analysis deals with

understanding how costs change in
response to changes in an activity
like production or sales. Management
typically performs cost behavior
analysis through the cost function.
COST FUNCTION
The Cost
Function:
Y = a + bX
[Y] - total costs (dependent variable)
[X] - activity or cost driver (independent
variable) [a] - total fixed costs (Y-axis
intercept)
[b] - variable cost per unit (slope of the line)
[bX] – the total variable costs
As certain activity increases, some costs remain constant or the same while some costs will
vary or change. Consider the following cost behavior patterns (assume activity is based on
production):
PER-UNIT
TOTAL COST
COST
Constant Decreases as
FIXED (representing “a” in production increases
the cost function) (indicating INVERSE
relationship)
Increases as Constant
production increases (representing “b” in
VARIABLE (indicating DIRECT the cost function)
relationship)
Increases (less Decreases (less

proportionately vs. proportionately vs.
MIXED
total variable costs) unit fixed costs) as
(SEMI-VARIABLE)
as production production increases
increases
Variable Costs vs. Fixed Costs
RD Company manufactures and sells a single product. A partially
completed schedule of costs over a relevant range of 25 to 75 units
produced each week is given below:
Units Produced
(I) 25 UNITS (II) 50 UNITS (III) 75 UNITS
TOTAL COST
Variable Cost ? ? ?
Fixed Cost ? 600 ?
Total Cost ? ? ?
PER UNIT COST
Variable costs 2 ? ?
Fixed costs ? ? ?
REQUIRED:
1. Determine the correct amounts of those with (?) mark.

2. Which specific costs remain constant over the relevant
range?
3. Which specific costs are directly related with production?
4. Which specific cost is inversely related with production?
5. Express the cost formula based on the line equation form ‘Y
= a + bX.’
6. If RD plans to produce 60 units, then how much is the
expected total costs?
Variable Costs vs. Fixed Costs
Determine the correct amounts of those with (?) mark.
Units Produced
(I) 25 UNITS (II) 50 UNITS (III) 75 UNITS
TOTAL COST
Variable Cost 50 100 150

Fixed Cost 600 600 600
Total Cost 650 700 750
PER UNIT COST
Variable costs 2 2 2
Fixed costs 24 12 8
Which specific costs remain
constant over the relevant range?
FIXED COST
VARIABLE COST PER

UNIT
Which specific costs are directly
related with production?
VARIABLE COSTS
TOTAL COSTS
Which specific costs are directly
related with production?
FIXED COSTS PER UNIT

Express the cost formula based on
the line equation form ‘Y = a + bX.
Y = 600 + 2X
If RD plans to produce 60 units,
then how much is the expected
total costs?
Y = 600 + 2 (60
UNITS)
Y= 720
COST ESTIMATION:
SEGREGATING VARIABLE & FIXED COST
HIGH-LOW POINTS method
The fixed and variable

portions of the mixed
costs are computed
from the highest and
lowest points based on
activity or cost driver.
FORMULA
Change in Costs ( YH – YL )
Variable cost per unit (b) =
Change in Activity ( XH – XL )
HIGH-LOW METHOD
St. Donnalyn Hospital would like to come up with a cost formula that links
ER Department cost to the number of patients admitted during a month.
The ER Department’s costs and the number of patients admitted during
the past nine months follow:
ER Department’s
Month Number of Patients
Cost
April 18 P 15,600
May 19 P 15,200
June 17 P 13,700
July 15 P 14,600
August 15 P 14,300
September 11 P 13, 200
October 11 P 12,800
November 48 P 72, 500
REQUIRED:
Using the high-low method, determine the ER

department’s:
1. Variable cost per unit
2. Total annual fixed costs
3. Monthly cost function
4. Estimated cost of 12 patients to be admitted next month.

LIMITATIONS of COST BEHAVIOR
ANALYSIS
• RELEVANT RANGE assumption Relevant range refers to the

range of activity within which the cost behavior patterns are
valid and cost relationships are linear. Beyond the range, the
cost may show a different cost behavior pattern.
• TIME PERIOD assumption The cost behavior patterns

identified are valid only over a specific period of time.
Beyond the period, the cost may show a different cost
behavior pattern.
REQUIRED:
Using the high-low method, determine the ER

department’s:
1. Variable cost per unit: P 300/ UNIT
2. Total annual fixed costs: P 114,000
3. Monthly cost function: Y= 9500 + 300 X
4. Estimated cost of 12 patients to be admitted next month: P

13,100
ACTIVITY
HIGH-LOW METHOD

COST AND COST CONCEPTS

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COST AND COST

• Cost behavior analysis deals with

Increases (less Decreases (less

1. Determine the correct amounts of those with (?) mark.

Determine the correct amounts of those with (?) mark.

Variable Cost 50 100 150

VARIABLE COST PER

FIXED COSTS PER UNIT

The fixed and variable

Using the high-low method, determine the ER

1. Variable cost per unit

2. Total annual fixed costs

3. Monthly cost function

4. Estimated cost of 12 patients to be admitted next month.

• RELEVANT RANGE assumption Relevant range refers to the

• TIME PERIOD assumption The cost behavior patterns

Using the high-low method, determine the ER

1. Variable cost per unit: P 300/ UNIT

2. Total annual fixed costs: P 114,000

3. Monthly cost function: Y= 9500 + 300 X

4. Estimated cost of 12 patients to be admitted next month: P

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