emba 802 - session 4
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EMBA 802 - Session 4. William F. Bentz October 4, 1999. Fisher College of Business. Today’s Quote. The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. Marcel Proust. Cost Behavior. - PowerPoint PPT PresentationTRANSCRIPT
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EMBA 802 1
EMBA 802 - Session 4
William F. BentzOctober 4, 1999
Fisher College of Business
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EMBA 802 2
The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.
Marcel Proust
Today’s Quote
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EMBA 802 3
Cost Behavior
• When talking about cost behavior, it is important to distinguish the behavior of total cost from the behavior of average unit costs (weighted mean). To do this, let us consider an illustration using arbitrary equation parameters that serve our purpose.
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EMBA 802 4
Quantities (Q)
Variable Cost Per
Unit
Total Variable
Cost
Total Fixed Cost
Fixed Cost Per
Unit
Total Semi-Variable
Cost
Per Unit Semi-
Variable Cost
Total Semi-Fixed
Cost
Per Unit Semi-Fixed
Cost 100 25$ 2,500$ 12,500$ 125$ 12,600$ 150$ 6,000$ 60.00$ 200 25 5,000 12,500 63 12,700 88 6,000 30.00 300 25 7,500 12,500 42 12,800 67 12,000 40.00 400 25 10,000 12,500 31 12,900 56 12,000 30.00 500 25 12,500 12,500 25 13,000 50 12,000 24.00 600 25 15,000 12,500 21 13,100 46 18,000 30.00 700 25 17,500 12,500 18 13,200 43 18,000 25.71 800 25 20,000 12,500 16 13,300 41 18,000 22.50 900 25 22,500 12,500 14 13,400 39 24,000 26.67
1,000 25 25,000 12,500 13 13,500 38 24,000 24.00
Q Y = v Y = vQ Y = F Y = F/QY =
F + vQY =
(F + vQ)/QY = S*(1 + INT(Q/B))
Y = S*(1 + INT(Q/B))/Q
Cost Behavior Illustration: Total and Unit Costs
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EMBA 802 5
Total Activity Cost Curves
$-$5,000
$10,000$15,000$20,000$25,000$30,000$35,000$40,000
1 3 5 7 9Activity Volume (100's)
Total VariableCost
Total FixedCost
Total Semi-Variable Cost
Total Semi-Fixed Cost
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EMBA 802 6
Costs Per Activity Unit
$-
$50
$100
$150
$200
1 2 3 4 5 6 7 8 9 10
Activity Volume (100's)
Do
llars
of
Co
st Variable Cost
Per Unit
Fixed CostPer Unit
Semi-VariableCost Per Unit
Semi-FixedCost Per Unit
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EMBA 802 7
OSU Bumper Stickers
I am not lost, I am exploring
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EMBA 802 8
Further Observations
• The level of analysis will influence how a cost is modeled.
• For strategic analyses, most costs will be considered variable. For tactical analyses, the same costs might be modeled as part fixed and part variable.
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EMBA 802 9
Another, Different View
A somewhat different view is more meaningful, but cannot easily be modeled as a general case. In this view, scarcity over the decision time frame affects the behavior of costs. Thus scarcity is the issue, not short- or long-run distinctions. (Staubus)
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EMBA 802 10
Plentiful Resources (SR)
• Starting from a plentiful supply of constant-flow resources,– a small increment in activity will cause no
increment in the total cost of these resources
– a small decrement in activity will cause no decrement in the total cost of these resources
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EMBA 802 11
Plentiful Resources (LR)
• In the “long run”, increments in volume will ultimately require cost increments.– small increments in activity will cause
existing resources to be replaced and new resources acquired
– small decrements in activity will cause fewer existing resources to be replaced and thus fewer resources acquired
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EMBA 802 12
Scarce Resources (SR)
• Starting with a shortage of supply of constant-flow resources– even small increments in activity will cause
substantial (above average cost) increases in cost
– small decrements in activity may reduce the scarcity of resources and actually reduce total and average cost
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EMBA 802 13
Scarce Resources (LR)
• Starting with a shortage of supply of constant-flow resources– increments in activity will cause increases
in cost as resources adjust to the demand for production
– decrements in activity will cause decrements in total cost as resources are adjusted downward due to sale or reduced replacements
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EMBA 802 14
Questions?
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EMBA 802 15
Cost Incurred
Cost incurred during a period:
• asset is increased, or
• cost is deducted from revenue of the period as an expense,
• cost is deducted as a loss of the period
Assets = Liabilities + Owners Equity
Owners’ Equity = Contributed + Earned Capital
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EMBA 802 16
Functional Classification
Manufacturing function costs:
• asset (Raw Material, Work in Process, or Finished Goods inventories),
• expense (Cost of Goods Sold, cost of idle capacity, etc.)
• loss (unusual spoilage, loss of materials, abnormal waste)
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EMBA 802 17
Functional Classification
Non-manufacturing costs:
• Distribution costs - expense (no asset*)
• Selling costs - expense (no asset*)
• Marketing costs - expense (no asset*)
• R&D costs - expense of period until one moves into the late development stage
• G&A costs - expense of period (no asset*)
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EMBA 802 18
Product Costs
• Fin. Acct. - inventoriable mfg. Cost
• Mgt. Acct. - all costs, past and future, associated with a product or service from design through warranty and service costs.
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EMBA 802 19
Traceability of Costs
• Directly traceable to a cost object
• Not directly traceable to a cost object
(Really a continuum of traceability)
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EMBA 802 20
Types of Production Activities
• Unit driven costs
• Batch driven costs
• Product sustaining costs
• Facility sustaining
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EMBA 802 21
Importance of Purpose
• Cost management - identify many individual activities for review and possible elimination or change.
• Cost measurement - group the costs driven by the same factors to simplify the system and reduce the number of drivers.
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EMBA 802 22
Traditional Classifications
• Direct materials
• Direct labor
• Indirect manufacturing costs– Overhead or burden– Support costs
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EMBA 802 23
Project Suggestions
• Paragraph framing the issues• Relate to what has been covered in text• Think in terms of pro or cons, not just what
you see at work• Answer the question asked regardless of
your inventory of answers• Consider the important issues to avoid going
on a tear about minor or narrow issues
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EMBA 802 24
ABKY Problem 3-45 (Part a)Annual Patient No. of FixedCost Days Patients (Constant)
Nursing Services 3,000,000$ 3,000,000$ Nursing Administration 1,300,000 1,300,000 Laboratory 300,000 300,000 Medical Supplies 500,000 500,000 Linen & laundry 400,000 400,000 Dietary 800,000 800,000 Employee cafeteria 200,000 200,000 Housekeeping 700,000 700,000 Medical records 250,000 250,000 Social services 200,000 200,000 Patient scheduling 60,000 60,000 Billing & collection 110,000 110,000 Plant operations 300,000 300,000 Plant maintenance 400,000 400,000 Equipment operation 500,000 500,000 500,000 Property insurance 40,000 40,000 Depreciation 1,000,000 1,000,000 Totals 10,060,000$ 7,200,000$ 420,000$ 2,940,000$
Driver activity level 50,000 8,000
Cost per driver unit 144.00$ 52.50$
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EMBA 802 25
ABKY Prob. 3-45 (Parts b & c)
Requirement (b):Y = $2,940,000 + 144X1+ 52.5X2
Requirement (c):Projected 1997 cost 11,332,500$
Projected 1997 patient days 55,000 Projected 1997 patients 9,000
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EMBA 802 26
• Break for it!
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EMBA 802 27
Problem 3-30
Planned Activity ActivityEstimated Activity Cost Cost
Activity Cost Level Rate Driver
Purchase ordering 20,000$ 400 $50.00 No. of orders - X1
Maintnance 44,000 2,000 22.00 Machine hours - X2
Power 36,000 30,000 1.20 Kilowatt hours - X3
Setups 62,500 500 125.00 No. of setups - X4
Supervision 48,000 4,000 12.00 Direct labor hours - X5
Total 210,500$
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EMBA 802 28
Problem 3-30
Equation:
Support costs = $50(orders) + $22(machine hrs.) + $1.2(Kwh) + $125(setups) + $12(DL hrs.)
Yt = 50X1t + 22X2t + 1.2X3t + 125X4t + 12X5t
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EMBA 802 29
Problem 3-30
• The budget equation for the five support activities would be:
Yt = 50X1t + 22X2t + 1.2X3t + 125X4t + 12X5t