Cost BehaviorsMGM624

Mari Glass, FacultyCTU Online

Terms:

• Variable cost• Direct cost• Fixed cost• Indirect cost• Overhead/Administrative costs• Mixed costs• Step costs

Sample Calculations

• Sales per item• Less variable cost per item• Equals contribution margin per item• Contribution margin per item divided by

selling price per item equals contribution margin

• $100 – $65 = $35 $35 / $100 = 35%

Fixed, Mixed and Total Costs• Fixed costs = costs that are not included in the

manufacturing process aka overhead or administrative costs.

• Fixed costs cannot be provided per unit, only by the month or by the year.

• Fixed costs are normally allocated to the products using ABC costing or a similar method.

• Mixed costs are part variable and part fixed and should be separated to give management the best possible information.

• Total costs = fixed and variable costs. All costs must be fixed or variable so that the total costs are accurate.

Sample Graph of Fixed Costs• A company with $120,000 in fixed costs per year will have average fixed costs of

$10,000 per month as shown below:• Month Cost • 1 $10,000 • 2 $10,000 • 3 $10,000 • 4 $10,000 • 5 $10,000 • 6 $10,000 • 7 $10,000 • 8 $10,000 • 9 $10,000 • 10 $10,000 • 11 $10,000 • 12 $10,000

Variable Costs• Variable costs will rise and fall with the production of products but

remember, the cost will rise and fall with the cost that matches how the product is made. For examples, costs may be incurred per unit, per gallon, per batch, per setup, per production run, per gross, per job, etc.

• An example of variable costs increasing over 12 months:• Notes that costs may • decrease if volume • purchases can be made,• or climb if capacity of the • space, labor, machinery or • other assets needed for • production reach capacity.

Sample Graphs• Fixed and Variable costs

Outliers in the Data

Sample Data Gallons Cost

1 1,000 2,000

2 2,500 4,500

3 3,500 6,500

4 4,500 8,500

5 5,000 9,000

6 6,000 10,000

7 6,500 12,500

8 8,000 17,500

9 9,000 19,500

10 5,000 9,500

11 3,000 8,000

12 1,000 2,500

Sample Scatter graph

Sample High Low Method

• Select the highest and the lowest of each column of data. Deduct lowest from highest.

• Gallons: 9,000-1,000=8,000• Cost: $19,500-$2,000=$17,500• Now divide cost by gallons

$17,500/8,000=2.1875• How does this compare to average cost $1.96• Why use the High Low Method

References:

• 2004 Prentice Hall Business Publishing, Introduction to Management Accounting, 2e Werner/Jones Chapter 5