Hansen AISE IM Ch03.pptVIP

LEARNING OBJECTIVES LEARNING OBJECTIVES Define cost behavior for fixed, variable, mixed costs. Explain the role of the resource usage model in understanding cost behavior. Separate mixed costs into their fixed variable components using the high-low method, scatterplot method, and method of least squares. LEARNING OBJECTIVES Evaluate the reliability of a cost equation. Discuss the role of multiple regression in assessing cost behavior. Describe the use of managerial judgment in determining cost behavior. QUESTIONS TO THINK ABOUT:Reddy Heaters QUESTIONS TO THINK ABOUT:Reddy Heaters QUESTIONS TO THINK ABOUT: Reddy Heaters QUESTIONS TO THINK ABOUT: Reddy Heaters REDDY HEATERS: Cutting Activity Cutting activity uses 2 inputs Cutting machine 1 machine can produce up to 240,000, 3-inch segments per year fixed cost Power to operate machine variable cost FIXED COST: Definition VARIABLE COST: Definition VARIABLE COSTS: $0.20 per Unit Produced MIXED COST: Definition COST BEHAVIOR ACTIVITIES Every activity has a Time horizon for measurement Resources to accomplish the task Materials Labor Capital Output measures activity drivers ACTIVITY DRIVERS 1 Production drivers unit level Explain changes in unit cost as units produced changes Are inputs with direct relationship with production level Examples: Pounds direct materials Direct labor ACTIVITY DRIVERS 2 Non-unit level activity drivers Explain changes in cost in terms other than changes in units of production Have no direct relationship with production Examples Depreciation Set-up costs incurred to change the items produced ACTIVITY DRIVERS COST BEHAVIOR FBM Functional-based cost system includes only unit-level costs in observations of cost behavior ABM Activity-based cost system includes both unit- and non-unit level costs in observations of cost behavior Implication ABM produces richer view of cost behavior CAPACITY: Definition FLEXIBLE RESOURCES Are resources that can be acquired as needed No long term commi