Chapter 6

Activity Analysis,
Cost Behavior,
and Cost
Estimation

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Learning
Objective
1

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Copyright 2009 by The McGraw-Hill Companies, Inc. All

Introduction
Cost
estimation

Cost
behavior

Cost
prediction

Process of
determining
cost behavior,
often focusing
on historical
data.

Relationship
between
cost and
activity.

Using knowledge
of cost behavior
to forecast
level of cost at
a particular
activity. Focus
is on the future.

Learning
Objective
2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Total Variable Cost Example

Total Pay Per View Bill

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

Variable Cost Per Unit Example

Cost per Pay Per View

show

The cost per Pay Per View show is constant. For

example, $4.95 per show.

Number of Pay Per

View shows watched

Step-Variable Costs

Cost

Total cost remains

constant within a
narrow range of
activity.

Activity

Total Fixed Cost Example

Monthly Basic
Cable Bill

Your monthly basic cable TV bill probably does not

change no matter how many hours you watch.

Number of hours watched

Fixed Cost Per Unit Example

Monthly Basic cable Bill

per hour watched

The average cost per hour decreases as more hours

are spent watching cable television.

Number of hours watched

Step-Fixed Costs
Total cost doesnt change for a wide range of activity,
and then jumps to a new higher cost for the next
higher range of activity.

Rent Cost in
Thousands of Dollars

90

60

30

1,000
2,000
3,000
Rented Area (Square Feet)

Semivariable Cost

Total Utility Cost

Slope is
variable cost
per unit
of activity.

ta
o
T

em
s
l

le
b
ria
a
iv

st
o
c

Variable
Utility Charge
Fixed Monthly
Utility Charge

Activity (Kilowatt Hours)

Total Cost

Curvilinear Cost

Relevant Range

Activity

Curvilinear
Cost Function

A straight-line
(constant unit
variable cost) closely
approximates a
curvilinear line within
the relevant range.

Learning
Objective
3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Total Cost

Curvilinear Cost

Relevant Range

Activity

Curvilinear
Cost Function

A straight-Line
(constant unit
variable cost) closely
approximates a
curvilinear line within
the relevant range.

Learning
Objective
4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Engineered, Committed and

Discretionary Costs
Committed

Discretionary

Long-term, cannot be
reduced in the short
term.

May be altered in the

short term by current
managerial decisions.

Engineered
Physical relationship
with activity measure.
Depreciation on
Buildings and
equipment

Direct
Materials

Advertising and
Research and
Development

Learning
Objective
5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Account Classification Method

Cost estimates are based on a

review of each account making up
the total cost being analyzed.

Visual-Fit Method
A scatter diagram of past cost behavior
may be helpful in analyzing mixed costs.

Total Cost in
1,000s of Dollars

Estimated fixed cost = $10,000

20

10

* *
* *

* ** *
Vertical distance
**
is total cost,
approximately
$16,000.

0
1
2
3
4
Activity, 1,000s of Units Produced

The High-Low Method

OwlCo recorded the following production activity and
maintenance costs for two months:

Using these two levels of activity, compute:

the variable cost per unit.
the total fixed cost.

The High-Low Method

High activity level
Low activity level
Change

Units
9,000
5,000
4,000

Cost
$ 9,700
6,100
$ 3,600

Unit variable cost = $3,600 4,000 units = $.90 per unit

Fixed cost = Total cost Total variable cost
Fixed cost = $9,700 ($.90 per unit 9,000 units)
Fixed cost = $9,700 $8,100 = $1,600

Learning
Objective
5 cont., 6 and 7
can be found in
the Text Book

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

End of Chapter 6