Introduction to Management Accounting
Chapter 02 (Lecture 01)
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2-1
Cost Drivers and Cost Behavior
Learning
Objective 1
Traditional View of Cost Behavior
Resource A
Cost Driver =
Units of
Resource
Output
Resource B
Cost Driver =
Units of
Resource
Output
Activity-Based View of Cost Behavior
Resource A
Cost Driver =
Units of
Resource
Output
Activity A
Cost Driver =
Units of
Activity Output
Product or Service
Cost Driver = Units of Final
Product or Service
Resource B
Cost Driver =
Units of
Resource
Output
Activity B
Cost Driver =
Units of
Activity Output
Product or Service
Cost Driver = Output of Final
Product or Service
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
2-2
Cost Drivers and Cost Behavior
Cost drivers are measures
of activities that require
the use of resources
and thereby cause costs.
Cost behavior is how the
activities of an
organization affect its costs.
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2-3
Value Chain Functions, Costs, and Cost Drivers
Value Chain Function
Example Cost Drivers
And Resource Costs
Research and development
•Salaries of sales personnel
Number of new product proposals
costs of market surveys
•Salaries of product and process
Complexity of proposed products
engineers
Design of products, services, and
processes
•Salaries of product and process
Number of engineering hours
engineers
•Cost of computer-aided design
equipment used to develop
Number of distinct parts per
product
prototype of product for testing
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2-4
Value Chain Functions, Costs, and Cost Drivers
Value Chain Function
and Resource Costs
Production
•Labor wages
•Supervisory salaries
•Maintenance wages
•Depreciation of plant and machinery,
supplies
• Energy cost
Marketing
•Cost of advertisements
•Salaries of marketing personnel,
travel costs, entertainment costs
Example Cost Drivers
Labor hours
Number of people
supervised
Number of mechanic hours
Number of machine hours
Kilowatt hours
Number of advertisements
Sales dollars
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
2-5
Value Chain Functions, Costs, and Cost Drivers
Value Chain Function
And Resource Costs
Distribution
•Wages of shipping personnel
•Transportation costs including
depreciation of vehicles and fuel
Customer service
•Salaries of service personnel
•Costs of supplies, travel
Example Cost Drivers
Labor hours
Weight of items delivered
Hours spent servicing products
Number of service calls
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2-6
Learning
Objective 2
Variable and Fixed Cost Behavior
A variable cost
changes in direct
proportion to changes
in the cost-driver level.
A fixed cost is
not immediately
affected by changes
in the cost-driver.
Think of variable
costs on a per-unit basis.
Think of fixed costs
on a total-cost basis.
The per-unit variable
cost remains unchanged
regardless of changes in
the cost-driver.
Total fixed costs remain
unchanged regardless of
changes in the cost-driver.
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2-7
Relevant Range
The relevant range is the limit
of cost-driver activity level within which a
specific relationship between costs
and the cost driver is valid.
Even within the relevant range, a fixed
cost remains fixed only over a given
period of time—usually the budget period.
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2-8
Total Monthly Fixed Costs
Fixed Costs and Relevant Range
$115,000
100,000
60,000
20
40
60
80
100
20
40
60
80
Total Cost-Driver Activity in Thousands
of Cases per Month
100
Relevant range
$115,000
100,000
60,000
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2-9