212 Review
Basic Cost Behavior
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Basic Model of Total Cost
 In A&MIS 212, we use the basic
model of total cost,
Independent
TC = F + vQ
Variable
Dependent
Variable
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Parameters (coefficients)
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Model Characteristics
 Total cost depends exclusively on
the volume of activity
 Total cost is a linear function of
activity volume
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Illustration
 Consider an illustration of five ways
information might be presented to
you on a quiz, exam, or practical
situation. All five are based on the
same fact situation, so the answers
will be the same. What differs is the
manner in which the information is
presented.
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Basic Data
 Fact situation:
◈ Sales volume measured in units
or dollars
◈ Fixed cost, F = $20,000
◈ Variable cost v = $1.50 per unit
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Case A
 Given the two cost estimation
parameters, estimate total cost for
a specified volume level (like GN
exercise 5 - 1)
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Case A
 Variable cost, v = $1.50
 Fixed cost, F = $20,000
 Compute total cost (TC) of 13, 000
units
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Case A
 TC = $20,000 + $1.50(13,000)
= $20,000 + $19,500
= $39,500
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Case B
 Given the total cost for a specified
level of volume, and the proportion
of total cost represented by either
the fixed or the variable component
of total cost, estimate total cost for
a different volume level
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Case B
 Given:
◈ TC = $50,000 for 20,000 units
◈ Fixed cost is 40% of total cost at this
volume
 Compute total cost (TC) of 13, 000
units
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Case B
 TC = F + vQ
 vQ = TC – F
 vQ = $50,000 – 40%($50,000)
= $50,000 - $20,000
v(20,000) = $30,000
v = $30,000 / 20,000 units
= $1.50 per unit
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Case B
 TC = $20,000 + $1.50(13,000)
= $20,000 + $19,500
= $39,500
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Case C
 Given per-unit fixed and variable
costs for a specified level of
volume, estimate total cost for a
different level of volume
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Case C
 Given the cost per unit by
component for 12,000 units:
◈ Variable $ 1.50000
◈ Fixed
1.66667
◈ Total
$ 3.16667
 Compute total cost (TC) of 13, 000
units
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Case C
 F = 12,000 units @ $1.66667
F = $20,000
v = $1.50 per unit (given)
Therefore, the cost estimation
equation is:
TC = $20,000 + $1.50 Q
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Case C
 Compute total cost of 13,000 units
TC = $20,000 + $1.50(13,000)
= $20,000 + $19,500
= $39,500
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Case D
 Given two volume levels, and the
total costs at each of those two
levels of volume, develop the
information required to estimate
total cost for a different level of
volume and prepare that estimate.
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Case D
 Given volume in units and total cost
at each of the volume levels:
Sales 1 Sales 2
◈ Sales (units) 12,000
14,000
◈ Total cost $38,000 $41,000
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Case D
 v = Change in cost/change in
volume
v = ($41,000 - $38,000)
(14,000 – 12,000)
v = $3,000 / 2,000 units
= $1.50 per unit
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Case D
 F =
=
F =
=
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TC – vQ
$41,000 - $1.50(14,000)
$41,000 - $21,000
$20,000
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Case D
 Compute total cost of 13,000 units
TC = $20,000 + $1.50(13,000)
= $20,000 + $19,500
= $39,500
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Case E
 Given two sales levels (in dollars),
and the total costs at each of these
two levels of sales, develop the
information required to estimate
total cost for a different level of
sales volume and prepare that
estimate.
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Case E
 Given total sales and total costs for
two different volumes:
Sales 1 Sales 2
◈ Sales
$40,000 $48,000
◈ Total cost $35,000 $38,000
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Case E
 v = Change in cost / change in
sales volume
v = ($38,000 - $35,000)
($48,000 - $40,000)
v = $3,000 / $8,000
= 3/8 or 37.5% of sales $
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Case E
 F =
=
F =
=
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TC – vQ
$38,000 – 0.375($48,000)
$38,000 - $18,000
$20,000
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Case E
 Compute total cost for sales of
$52,000:
TC = $20,000 + 0.375($52,000)
= $20,000 + $19,500
= $39,500
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Review of Illustration
 Obviously, there any number of
ways one might encounter the
information necessary to compute
the cost estimation equation to be
able to predict total costs for a
given level of volume. But they are
all based on the same fundamental
relationship of cost to volume.
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Exercise 5 -1
 With exercise 5 -1 we have three
ways to estimate the equation that
describes the behavior of total
shipping expense with respect to
the number of units shipped.
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Exercise 5 -1
 The method shows that, in fact, we
will can get three different answers
using the three methods. The
similarity of the three estimates is
totally determined by the data
presented and one cannot
generalize about the differences.
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Exercise 5 -1
 Zerbel Company, a wholesaler of
large, custom-built air conditioning
units or commercial buildings, has
noticed considerable fluctuation in
its shipping expense from month to
month, as shown on the following
slide:
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Data for Exercise 5 -1
Month
January
February
March
April
May
June
July
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Total
Units
Shipping
Shipped Expense
4
$ 2,200
7
3,100
5
2,600
2
1,500
3
2,200
6
3,000
8
3,600
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Low
High
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Ex. 5 –1, Requirement 1
1. Using the high-low method,
estimate the cost formula for
shipping expense.
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Ex. 5 –1, Requirement 1
High-Low Method
Computation of variable shipping cost:
High
Low
Difference
Cost
$ 3,600 $ 1,500 $ 2,100
A
Volume
8
2
6
B
Variable cost per unit
$
350 A/B
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Ex. 5 –1, Requirement 1
Computation of total fixed shipping cost:
Total shipping cost at high
Less variable (8 units @ $350)
Fixed shipping cost
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$
$
3,600
2,800
800
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Estimation equation
TC = $ 800 + $ 350 Q
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Ex. 5 –1, Requirement 2
2. The president has no confidence in
the high-low method and would like
you to “check out” your results using
the scattergraph method. Do the
following:
a. Prepare a scattergraph using the
data given above.
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Ex. 5 –1, Requirement 2
b. Using your scatter graph, estimate
the approximate variable cost per
unit shipped and the approximate
fixed cost per month with the
“quick-and-dirty method (see
below).
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Req. 2: Scattergraph Method
4,000
3,500
Total Shipping Expense
3,000
2,500
2,000
1,500
1,000
500
0
0
1
2
3
4
5
6
7
8
9
10
Units Shipped
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Req. 2: Scattergraph Method
Scattergraph Method
Computation of variable shipping
Total cost for five (5) units
$
Fixed cost on y-axis (estimate)
Variable cost for five (5) units
$
Divide by number of units
Per unit variable cost
$
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cost:
2,600
1,100
1,500
5
300
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Req. 2: Estimation equation
TC = $1,100 + $300 Q
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Regression Analysis Results
Intercept (fixed cost)
$ 1,010.71
Slope (variable unit cost) $ 317.86
Regression results provide the
theoretically correct standard
against which we can compare
ad-hoc methods.
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Estimation equation
TC = $1,100.71 + $317.86 Q
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Summary of results
1. High-Low method (unique answer)
TC = $800 + $350 Q
2. Scatter graph method (judgment)
TC = $1,100 + $300 Q
3. Regression analysis method
(unique answer)
TC = $1,010.71 + $317.86 Q
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High-Low Method
 In summary, the High-Low method
is the least accurate of the three
methods assuming the regression
model best captures the
information contained in all the
data points.
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Ex. 5 –1, Requirement 3
3. What factors, other than the
number of units shipped, are likely
to affect the company’s shipping
expense?
a.
b.
c.
d.
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Weather
Road construction and repairs
Fuel costs
Car and truck traffic
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General Assumption
 In the absence of evidence to the
contrary, for testing and homework
purposes in A&MIS 212, assume
that all costs can be modeled as
semi-variable (mixed) costs. This
is the assumption that underlies
the high-low method!
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