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COST CONCEPT AND

ESTIMATION

QUIZ: Group
1. What is the cost object?
2. What are the direct cost?
3. What are the indirect cost?

1. Cost object: aluminum foil


2. Direct cost: materials: aluminum
block, titanium silica,
3. Indirect cost: MH operator, QC
operator, power, maintenance cost,
machine depreciation, liquid coolant

1. Cost object: skateboard


2. Direct cost: materials: board, direct
labor
3. Indirect cost: MH operator, QC
operator, power, maintenance cost,
machine depreciation, support
material: ink, coat: epoxy, screw

Cost Terms

Cost Driver:

Manufacturing
Cost:

Sales and General


Administrative
Costs:

Direct and
Indirect Costs:

Controllable and
Uncontrollable
Costs:

Product/Period
Cost:

Any activity or event that causes costs to


be incurred.
Direct material (DM), direct labor (DL), and
manufacturing overhead (MOH).
All costs associated with running the
business, excluding production costs.
Costs that can either be traced (direct) or
not traced (indirect) to a specific
department in the organization.
Costs used to describe the extent of a
managers influence on cost.

Refers to the timing which costs become


expenses.

Economic Terms
Opportunity
Cost:

Benefit lost because the choice of one


action precludes another action.

Sunk Cost:

Costs that have already been incurred


and can not be altered by current or
future decisions.

Differential
and
Incremental
Cost:

Difference in the costs incurred under


two alternative actions.

Marginal
Cost:

Cost associated with producing one


additional unit.

Average
Cost per
Unit:

Total cost for the quantity produced,


divided by the number of units
produced.

Cost Classifications

Assigning Costs to a Cost


Object
Determining the costs that should attach to a cost object is
Cost Assignment

called cost assignment.

cost tracing

Direct
Costs

Cost
Object

Indirect
Costs

Direct costs are


easily traced to the
cost object.
Indirect costs are
not easily traced to
the cost object, and
must be allocated.

cost allocation

Examples: a Candy
Manufacturer

Cost
Behavior
Fixed Costs: costs that
remain constant regardless of
the quantity of product
produced.

Output

Variable Costs: costs that


increase linearly and
proportionately as production
volume increases.

Output

Profit = (Sales Revenue-Variable Cost) - Fixed Cost

Total Contribution

Behavior of Total (Linear)


Costs
$

Total Costs
If costs are linear, then total costs graphically
look like this.

Cost Driver
$

Total Fixed Costs

Total fixed costs do not change as the cost


driver increases.

Higher total fixed costs are higher above the x


axis.

Cost Driver

Behavior of Total (Linear)


Costs
$

Total Costs
If costs are linear, then total costs graphically
look like this.

Cost Driver
$

Total Variable Costs

Total variable costs increase as the cost driver


increases.

A steeper slope represents higher variable


costs per unit of the cost driver.

Cost Driver

Total Versus Per-unit (Average)


Cost Behavior
$

Total Variable Costs


slope = $m/unit

If total variable costs


look like this . . .

Cost Driver
$/unit

Per-Unit Variable Costs

Cost Driver

. . . then variable costs per


unit look like this.

Total Versus Per-Unit (Average)


Cost Behavior
$

Total Fixed Costs

If total fixed costs look


like this . . .

Cost Driver
$/unit

Per-Unit Fixed Costs

Cost Driver

. . . then fixed costs per


unit look like this.

Mixed Costs/ Semi


Variable
Cost
Mixed costs are costs that have both a fixed and a
variable component. For example, overhead for a
company may consist of a fixed supervisor salary plus
the cost of supplies that vary with the quantity of output
produced. The formula and graph depiction for a mixed
Totaliscost
= Total fixed cost + Total variable cost
cost
as follows:

Volume

Methods for Separating


Mixed Costs

Three methods of separating a mixed cost


into its fixed and variable components are
commonly used:
the high-low method
the scattergraph method
the method of least squares
Each method requires the simplifying
assumption of a linear cost relationship.

Recall the expression of cost as an equation for a straight


line is:

Total cost = Fixed cost + (Variable


rate x Output)

The dependent variable is a variable whose value


depends on the value of another variable. In the previous
equation, total cost is the dependent variable; it is the cost
we are trying to predict.
The independent variable is a variable that measures
output and explains changes in the cost or other dependent
variable.
A good independent variable is one that causes or is
closely associated with the dependent variable.
Therefore, many managers refer to an independent
variable as a cost driver.

The High-Low Method

Given two points, the slope and the intercept can be


determined.
The high-low method is method of separating mixed costs
into fixed and variable components by using just the high
and low data points.

3 The High-Low Method


Four steps must be taken in the high-low method:
Step 1: Find the high point and the low point for a
given data set.
Step 2: Using the high and low point, calculate the
variable rate.
Variable rate = (High point cost - Low point
cost) (High point output - Low point
output)
Step 3: Calculate the fixed cost using the variable
rate (from Step 2) and either the high point or low
point.
Fixed cost = Total cost at high point (Variable rate x Output at high point)
Step 4: Form the cost formula for materials
handling based on the high-low method.

Solution:
Step 1Find the high and low points: The high number of machine hours is in March, and the low number of
machine hours is in June. (Hint: Did you notice that the high cost of $4,200 was for August? Yet August is not the high point because its
number of machine hours is not the highest activity level. Remember, the high point is associated with the highest activity
level; the low point is associated with the lowest activity level.)

Scattergraph Method
The scattergraph method is a way to see the cost
relationship by plotting the data points on a
graph.
The first step in applying the scattergraph
method is to plot the data points so that the
relationship can be seen.

First, remember that our two points are (100,


$2,000) and (0, $800). Next, use these two
points to compute the variable rate (the
slope):

Variable rate = ($2,000 - $800)


$100 - 0
= $1,200/100
= $12
Thus the variable rate is $12 per material
move.
Fixed rate= $2,000 ($12 * 100) = $800
The fixed cost and variable rate for materials
handling cost have now been identified.
The cost formula for the materials handling
activity can be expressed as:
Total cost = $800 + ($12 x Number of moves)

The Method of Least Squares


The method of least squares (regression) is a
statistical way to find the best-fitting line through
a set of data points.
Basically, the best-fitting line is the one in which
the data points are closer to the line than to any
other line.

Simple Linear Regression Model


Shows linear relationship between
dependent & explanatory variables

Example: Sales & advertising (not time)


Y-intercept

Slope

^
Yi = a + b X i
Dependent
(response) variable

Independent
(explanatory) variable

Linear Regression Equations


Equation:

i a bx i
Y
n

x i y i nx y

Slope:

b i n
x i n x
i

Y-Intercept:

a y bx

Comparison of Methods
Knowing how costs change in relation
to changes in output is essential to
planning, controlling, and decision
making.
Each of the methods for separating
mixed costs into fixed and variable
components help managers
understand cost behavior and
consequently make good business
decisions.

Task high low method

Calculate the cost formula for the maintenance


below:
Maintenance cost
Month

Januari
Februari
Maret
April
Mei
Juni
Juli
Agustus
September
Oktober
November
Desember

(Y)
6.900.000
7.500.000
6.400.000
7.200.000
8.100.000
8.800.000
6.800.000
7.090.000
6.500.000
6.900.000
8.500.000
6.700.000

Number of
activity
(X)
46
61
40
55
63
70
52
46
42
47
65
43

ANSWER
- Var rate= (Rp 8.800.000-6.400.000)/
(70-40)

= Rp 80.000 per activity


- Fixed cost= Rp 8.800.000 (Rp
80.000 x 70)

= Rp. 3.200.000
Cost formula =
Total maintenance cost = Rp.
3.200.000 + (Rp 80.000 X activity)

HAVE A NICE DAY