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MS-01: COST BEHAVTOR ANALYS|S

COST - the monetary amount of the resources given up or sacrificed to attain some objective such as
acquiring ggods and services. When notified by a term that defines the purpoue, .ost becomes
operQtional (e.9., acquisition cost; production cost; cost of goods sold).
COST BEHAVIOR
Cost behavior is the relationship between cost and activity - as to how costs react to changes in an
activity like production. As production increases, some costs remain the same (i.e., fixed) while sohe costs
increase or decrease (i.e., variable). Consider the following:
COSTS TOTAL amount PER UNIT amount
1. FIXED Constant Decreases as production increases
(i.e., inverse relationshio)
2. VARIABLE Increases as production increases
(i.e., direct relationship) Constant
3. MIXED Increases less proportionately (vs. tofal Decreases less proportionately (vs. unit
(semi-variable) variable costs) as production increases fixed costs) as production increases

FIXED COST (a) yaRIAELEea9l (bx)

Discretionary Fixed \ ) t-------* True Variabte
committedFixed a I T I , stepVariabre
MIXED COST
ij i.!_"'tp iit+- Y = o + bX
Where: [y] - the total costs (dependent variable)
Ia] - the total fixed costs (vertical/y-axis intercept)
Ib] - the variable cosr per unit (slope of the line)
[X] - the activity or cost driver (independent variable)
[bX] - the total variable costs
COS:r BEHA1f,TOR ASSUli]lTf(}i1S and LII,IITATIONS
RELEVANT RAN9E Assumption
- Te[eiant ringe refers to the range of activity within which the cost behavior patterns ar(^yatyf
u- eny
level of activity outside this range may show a different cost behavior pattern.
TIME Assumotion
.ThecostbehaviorpatternSidentifiedaretrueonlyoveru'p"@Beyondthis,the
.
_/-*_
cost may show a different cost behavior p-ttern.
WThe cost is assumed to manifest a linear relationship over a relevant range despite
its tendency to
show otherwi
COST ESTIMATION: ARIABLE & FIXED COSTS
1) HIGH. LOW P0TNTS Method
The fixed and variable portions of the mixed costs are computed from two sampled data points
the highest and lowest points based on activity or cosf driver'. -
Variable cost per unit (b) =
e in Activitv (X" - X
2) SCATTERGRAPH (Scatter Diagram) Method
All observed costs at various activlty levels are plotted on a graph. Based on sound judgment, a
regression line is then fitted to the plotted points to represent the line function.
3) LEAST-SQUARES REGRESSION Method
Least-squares method is a statistical technique that investigates the association between dependent
and independent variables. This method determines the /irre of best fit for a set of observations by
minimizing the sum of the squared deviations between cost line and the data points.
. I{ there is only one independent variable, the analysis is known as SIMpLE REGRESSION.
' If the analysis involves multiple independent variables, it is known as MULTIpLE REGRESSION.
4) Other Cost Estimation Methods;
A) Industrial. Engineering Method - based on the relationship between inputs and outputs in
physical forms; engineering estimates indicate what and how much costs should be.
B) Account Analysis Method - each account is classified as either fixed.or variable based on
experience and judgment of accounting and other qualified personnel in the organization.
C) Conference Method - costs are classified based on opinions from various com[uny departments
such as purchasing, process engineering, manufacturing, employee relations and so on.

Page '1 of 4 pages

 K"EQ - 71,* {"n** *},""1*; Aooao-f,^,.7 MAS-01
J::,:
CO$T BEHAVIOR ANALYSIS a

CORRELATIONANALYSIS " i -!',, ' I, .j ,' .

CORRELA"IIOI{ ANAIYSIS is used to rnea.sure the strength cif linear relationship

between two or more
variatrles.
The correlation between two v'ariebien' cen Lle seen by'rJrarr.rirlg a scatter diagram:
' If the points seerrr to forrn a strarrtrht line, there is a triEh correlatron]
' If the points fornr a rat"irlorr pattt:nn, thcre is a k:w i:orrelation or no cr:r.relation at all.
coEFFicIEhr"T oF coRRrtATiol,l {r} r:iealures ihe rela$ve st-rerrgth of linear relationship between two (2)
varialrles" Its value r{rnqes frorr .- 1" 0 ta I :l..lJ:
" If r = -1'0, l:here is 6:et{er:t inverse linerri"relal.ionship between X and y.
. If r = ('], nc, line*r relatiorrs;hip.
" If r = +'t.0, tlrere is pe:"fnct ctirtr:i: rcrati':;ilsnrp Lrctween X and y.

COEFFICITT\'if O[: t]El-tRlvlli.]ATl{ll\tr

1ri) is the propor-r.icn of tfue trrtal variation in y that is accounted
the regression equation, regarrlless of whelhr:r the relatiorrslrip betweeri X and y is direct or inverse. for by
rTleasure of 'goodness of fit'iir the reqr-essio.t. _1'he iriqher the rz, the mql;-e confirlence
it is a
one can have in the
estimatec! cost forrnula

E XLAII 5E5-qQ ::_T: B FTIAy } o-R A NA LY S I S

,.. Variable Costs vs. Fixed Costs

Adriel Company rnanufactilres <rrtd sells a ;rnqle prcrdirct. A prartialiy cornpleted schedule
cornpany's total and p':r un:t costs over a relevent range of 60 to i00 uniis proiu.*d
of the
uu.n vuii iJglrun
bclow:

l{ul_s_ ft9_q!tqq,!_
(t,t 60 (rr) s0 (rrr) taa
TOIAI. COS] S:
(A) \/ariabie costs P J.zC) p t lt., P 200
(3) Fixed c0sts , -- -,.
'1r,.
.-..J _t l 500 600
(C) Totai ccs,.s P _;iziJ ? - p
PER TJNIT COSI'S:
?$,Q
--"rla
(D) Variabrle costs l_ P?
-_ _P, __y_ _?____
(E) Fixed cosis P6
_t_ lu - P i:_l
REQUIRED:
l.-.:, 1. Complete the sr:herjr-rle by writing the rnissing anlourlls with mark (?).
2- Which two (2) specific coits rerlrain constanf nver the relevant
t, .'' 3. which two (z) specific ccst:n are rlirecuy reraterl with production?.ung*t
! 1 Which specific c.st is inversely rslated r,.,rith o'trduction?
rl I 5. Expr-ess the cost l'ortrtuia besed on the iine r:qriation form 'y - d + bX.,
t' 6' if the con-'p3ny pr(,clLlces 90 units, then lrow nrr.rch is the expr:cted total costs?
{Acl.zpted: Manaperiat Accaunting by Garrison & Noreen)
2. High-Low Method
The controller of DEA.DBAI-L HosPital rrioulc! like tr.r corne up ,,vith
a cost forrnula that links enrergency
departmerlt cost to the nirnlber of pr61;s111r a<JnritterJ during a month.
The emergency depaftment,s
costs arrd the nunrber of patients admrtted riuring the pasi ni'ie ,r,onilri
rorio*,t
lYo-tth l,tumber qf- pdiiq,$s E lle ft rne n{s st
April 18
Lq,e.Qq*y_-D_e-p_a
P 15.600
C o

Mav rg P 15,200
iune 17 P i3,700
July i5 P 1.4.600
Auqust 15 p 14,3(i0
Septernber j.l_
;r I -11,200
October ii P .1.2,900
November 48 P 72,500
Decernber 1(l P 14,000
REQUIRED: Using the irigh-low rnethod, ceternri,re:
1. Tlie variable cost per unit
2. The annuaf fixed costs
3. The ernergency depanmei-rt,s inontirly cost fr;nction
4. The department's estirnated ccst ii20 patients ale expecterl tr: be adrnitted
next nronth.
{Adapted: ltianagerial Accounting by Garrison & Nareen)

Page 2 of 4 pages )r.

,, Y'
 R EQ"- 7L* <?.,;€."1, */,4o/ of A..""*",a;",,*, MAS-01
COST BEHAViOR ANALYSIS

l. 3. Correlation Analysis
7 34) The closeness of the linear relationship between the cost and the activity is the
a. Correlation c. Deviation
b. Variation d. Standard error
3B) Looking at the following scatter diagrams, we can conclude that:
CoSt A Cost B

Costs (P) Costs (P)

Units Units
a. Cost A will be easier to predict than cost B.
b. Cost B will be easier to predict than cost A.
c. Cost A is outjof-control.
d. Cost B has no variable component.

3C) Which of these correlation coefficients represents strongest relationship between two variables?
a. + 0.50 c. - 0.05
-5-
a
ll
.:
b. - 0.80 d, + 1.05
;--f
'l (Adapted: Managerial Accounting by Louderback)
4. Least-Squares Regression Method
Syd Company's total overhead costs at various levels of activity are presented below:
Month Maehfng_HqqE Total Overhead Costs
March 5OO P 970
April 400 P 851
- May 5Oo P 1,089
June 70O P 1,208

The breakdown of the overhead costs in April at 400 machine-hour level of activity is as follows:
, Supplies (Variable) p 260 ,V'l
Salaries (Fixed) 300
Utilities (Mixed) - 291
Total P q51

REQUIRED:
{r';,
l.:::111.: t",L.,
1. How much of June's overhead cost of P 1,208 consisted of utilities cost?
2. Using high-low method, determine the cost function for utilities cost.
1,. .i,':, -' ' i,'rt' 3. Using high-low method, determine the cost function for total overhead cost.
4. Using least-squares method, determine the cost function for total overhead cosfs.
5. What would be the total overhead costs if operating level is at 2OO machine hours?
(Adapted: Managerial Accounting by Garrison & Noreen)

SOLUTIO*N GUIDE (requlremqtr,t 1J

Aprtl{{as hrs) &nelZ0a_bm)

Supplies (Variable) P 260
Salaries (Fixed) 300
Utilities (Mixed) 29t
Tatal Overhead Cosfs p:g$1 PJ.&
So L$-_queres_melhsfl
Manth Hours-{XJ Tota.l_Costs (Y) X.Y X2
Mar 500 P 970
Apr 400 P 851
May 600 P 1,089
Jun 700 P 1.208
SUM

Page3of4pages
 R 5&- 7l'* (.^,;.,* *./.""t 6***,'do,,*7 MAS-01
COST BEI-iAViOR ANALYSIS
"l

lyiAP:llP.lXERe$EllrJlUE-q& [AL!ie;-IS-u-LIIPIE-!}JOICE)
r_ 1. Unit variable costs are costs that change in direct proportion to changes in the activity level.
f
2- consider the foliowing graphic representation of certain ccists:
Costs (P)
0

Units
which of the following costs are rnost likely repr^esentec by the graph?
a" ]-otal fixed costs and tr:tal varlable costs
b. Total fixed costs and unit variable costs
c. Unil fixed costs and total variafrle costs
d. Unit fixed ccrsts an$ unii variahle cost:;
3. In cost analysis r-rsinq the line equation Y = ,t t" i;X. tire unit variable cost (b) is regardec! as the
t a. Independent varialrle c. Siope o{'the line
b. Dependent variable d_ y-axis tntercept
4- A company has developed a pr+drrctioir cost equation for its lcrrr: protiuct: y = 100 + 5X, where X is
based on the number of labor hours. Assuming a rele'vant range of 10 to 20 labor hor-rrs, what is the
P estinlated production cost at zero (0) labcr hotrr?
a. P5
b P100
c. P 105
d' An amount that cannot be determirred from !.rte given i*formetiorr
5. If the coefficient_of correlation (t') betweerr twr.; ';.-rriatrles is + 1, how mlght a scatter diagram of these
variables appear?
a. R.andom points
b. A regression line that slopes up to tire left
c. A regression line that slopes up ro ihe right
d. A regression line that slopes doitn to the right
t 6' Ana Company is interested iil the rel;rticnshipr tretweerr Eales {riependent variable) and occurrence of
rain^(independent variable). tJsing the proper rorrnulit, ttre.t:cefficient of correiation
{r) is computed as
- O.99. What conclusion ahor.rt the sales anci rain occ,.Ii-rertce cotrlri r.,ne make'l
a" An increase in sales causes an increase in rai;r oc(:rJrrelr(e.
pvJFrt
b' An increase in sares causes a dec.easr"- iir rain occui,ence.
c. An increase in rain occr',rrence caulie3 a uecrease in s;+les.
/l
..,' ,1 . r'
d' An increase in rain occurrenc(i ca*ses an increase in sales.
A 7. what is the appropriate range for tire coefficient of deter-rninarion ir2)?
a. 0to+1 c. -1ta0
$'iloi b. -1 to +1 rJ. [t to irrfinity
ri rtritti'n 8. Using statistical norrnal relationships, ti-re least-squares lnetiii:d devises which
equations?
of the followinq
n
)) a. Y=na+bx
IxY=a:'x+blx2
b. y=na+b)-x
IxY = 31 -1- i1r'x
c' Y=a+bx2
)-Y=na+blx
d" IY=na+bIx
IxY=21*+b'x2
$ 9' Which cost segregation technique qives the most rriatht:rnaticafirT precise cost estirnirte'?
a. Scatter-diagrarn metiir.,d
ilrt'.li b. Least-squares mett-rod
gu"i' c. High-low method
d. Calendar method
t
-[nr. 10. Knowledge on cost behavior rs r-ritical to prcrlLt pialr-ririit. pr:iticularlr,r in c+st-vr:lunle.-prrJfit analysis,