COST-ACTIVITY
RELATIONSHIPS
Accounting Principles II
AC 2102 - Fall Semester, 1999
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Activity Terms & Analysis
• Activity: a basic unit of work performed within an
organization
– Examples: moving material, setting up a machine,
typing a letter, approving a loan
• Activity Output: the result or product of an
activity
– Examples: Total pounds moved, number of setups,
number of letters typed, number of loans approved
• Activity Input: the resources consumed by an
activity in producing its output
– Examples: supplies, labor, electricity, rent,
depreciation, telephone
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Time Horizon
• Determining whether a cost is fixed or
variable depends on the time horizon under
consideration
• In the long-run all costs are variable
• In the short-run, some costs will be fixed
• Remember that “fixed” and “variable”
refers only to whether a cost is affected by
the level of activity
• The length of the “short-run” will vary
depending on the nature of the decision or
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issue under consideration
Calculating Activity Costs
• Activity Rate
– is obtained by dividing the total
resources expended by the appropriate
volume measure for the activity
• Cost of Activity Used
– is calculated by multiplying the activity
rate times the actual activity usage
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Measures of Activity Output
• Describing cost behavior requires measurement of
activity output
• Activity output is measured by activity drivers
• In order to understand the behavior of costs we
must first determine the underlying activities
– and the associated drivers that measure activity
capacity and usage
• The need to understand this cost-activity
relationship leads us to the determination of an
appropriate measure of activity output, or activity
driver
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Examples of Activity Outputs & Drivers
(Activity drivers explain changes in activity
costs by measuring changes in activity output)
Activity Outputs
Activity Drivers
Material Handling
Number of moves
Shipping Goods
Number of units sold
Laundering Hospital
Bedding
Pounds of laundry
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Two General Categories
of Activity Drivers
• Unit-level Drivers
– Explain changes in costs as units
produced change
• Non-unit level Drivers
– Explain changes in costs caused by
factors other than units changes
– There are three nonunit-level categories
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The Three Types of Nonunit-Level Drivers
• Batch Level
– batch-level costs tend to vary as the number of
batches changes
– example: setup costs
• Product Level
– product-level costs tend to change as the
number of different products change
– example: engineering drawing changes
• Facility Level
– facility-level costs tend to stay constant ( in SR)
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– example: equipment and rental costs
Traditional Vs. Contemporary
Management Accounting Systems
• Traditional Systems:
– Cost behavior is assumed to be described by
unit-based drivers only
• Contemporary Systems:
– Cost behavior is assumed to be affected by both
unit-based and nonunit-based factors
• Contemporary systems produce a much
richer, more complete view of cost behavior9