Activity Based Analysis and Various Costing

Abc analysis

1. Activity Analysis, Cost Behavior, and Cost Estimation 6- 1

2. Cost prediction Using knowledge of cost behavior to forecast a cost at a particular level of activity. The focus is on the future. Introduction Cost behavior The relationship between cost and activity. Process of determining cost behavior. Often focuses on historical data. Cost estimation 6- 2

3. Total Variable Cost Example Your total Pay Per View bill is based on how many Pay Per View shows that you watch. Number of Pay Per View shows watched Total Pay Per View Bill 6- 3

4. Variable Cost Per Unit Example The cost per Pay Per View show is constant. For example, $4.95 per show. Number of Pay Per View shows watched Cost per Pay Per View show 6- 4

5. Step-Variable Costs 1/2 Activity Cost Total cost remains constant within a narrow range of activity. 6- 5 Some costs are nearly variable, but they increase in small steps instead of continuously. Such costs, called step-variable costs,

6. Step-Variable Costs 2/2 Activity Cost Total cost increases to a new higher cost for the next higher range of activity. 6- 6

7. Total Fixed Cost Example Your monthly charges for video (and music) streaming services probably does not change regardless of how much content you consume. Number of videos watched Monthly Charges 6- 7

8. Fixed Cost Per Unit Example The average cost per hour decreases as more hours are spent watching videos. Number of hours watched Monthly Charges per hour watched 6- 8

9. Step-Fixed Costs 6- 9 How does this type of fixed cost differ from a step-variable cost? Step-variable costs can be adjusted more quickly and . . . The width of the activity steps is much wider for the step-fixed cost.

10. Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 30 60 90 Office space is available at a rental rate of $30,000 per year in increments of 1,000 square feet. Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity . Step-Fixed Costs - Example 6- 10

11. Fixed Monthly Rental Charge Variable Lease Charge Per Hour Rental Charge Per Hour Total Lease Cost Total semivariable cost Semivariable Cost The slope is the variable cost per unit of activity. 6- 11 A semivariable cost is partly fixed and partly variable.

12. Engineered, Committed, and Discretionary Costs Discretionary May be altered in the short term by current managerial decisions. Committed Long-term, cannot be reduced in the short term. Engineered Physical relationship with activity measure. Depreciation on Buildings and Equipment Advertising and Research and Development Direct Materials 6- 12

13. Cost Behavior in Other Industries 1/2 Merchandisers Cost of goods sold Manufacturers Direct material, Direct labor, and variable manufacturing overhead Merchandisers and Manufacturers Sales commissions and shipping costs Service Organizations Supplies and travel Examples of variable costs 6- 13

14. Examples of fixed costs Merchandisers, manufacturers, and service organizations Real estate taxes Insurance Sales salaries Depreciation Cost Behavior in Other Industries 2/2 6- 14