1、Copyright 2011 Pearson Education, Inc., Publishing as Prentice Hall. 79CHAPTER 3COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTALASSIGN-MENTMATERIALCRITICAL THINKING EXERCISES AND EXERCISES PROBLEMSCASES, NIKE 10K, EXCEL,COLLAB., materials costs are probably driven by levels of product o
2、utput; and support costs may be driven by a variety of drivers, such as output levels, product complexity, number of different products and/or parts, and so on.3-2 Linear cost behavior assumes that costs behave as a straight line. This line is anchored by an intercept, or fixed cost estimate, and to
3、tal costs increase proportionately as cost driver activity increases. The slope of the line is the estimate of variable cost per unit of cost driver activity.Copyright 2011 Pearson Education, Inc., Publishing as Prentice Hall. 843-3 Whether to categorize a step cost either as a fixed cost or as a va
4、riable cost depends on the “size“ of the steps (height and width) and on the desired accuracy of the description of step cost behavior. If the steps are wide, covering a wide range of cost driver activity, then within each range the cost may be regarded as fixed. If the steps are narrow and not too
5、high, with small changes in cost, then the cost may be regarded as variable over a wide range of activity level, with little error. If the steps are narrow and high, covering big changes in cost, then the cost probably should not be regarded as variable, since small changes in activity level can res
6、ult in large changes in cost.3-4 Mixed costs are costs that contain both fixed and variable elements. A mixed cost has a fixed portion that is usually a cost per time period. This is the minimum mixed cost per period. A mixed cost also has a variable portion that is a cost per unit of cost driver ac
7、tivity. The variable portion of a mixed cost increases proportionately with increases in the cost driver.3-5 In order to achieve the goals set for the organization, management makes critical choices - choices that guide the future activities of the organization. These choices include decisions about
8、 locations, products, services, organization structure, and so on. Choices about product or service attributes (mix, quality, features, performance, etc.), capacity (committed and discretionary fixed costs), technology (capital/labor considerations, alternative technologies), and incentives (standar
9、d-based performance evaluation) can greatly affect cost behavior. 3-6 Some fixed costs are called capacity costs because the levels of these fixed costs are determined by managements strategic decisions about the organizations expected levels of activities, or capacity.3-7 Committed fixed costs are
10、costs that are often driven by the planned scale of operations. These costs typically cannot be changed easily or quickly without drastically changing the operations of the organization. Typical committed fixed costs include lease or mortgage payments, property taxes, and long-term management compen
11、sation. Discretionary fixed costs are costs that may be necessary to achieve certain operational goals, but there are no contractual obligations to continue these payments. Typical discretionary fixed costs include advertising, research and development, and employee training programs. The distinctio
12、n between committed and discretionary fixed costs is that discretionary fixed costs are flexible and could be increased, decreased, or eliminated entirely on short notice if necessary, but committed fixed costs usually must be incurred for some time - greater effort is needed to change or eliminate
13、them.Copyright 2011 Pearson Education, Inc., Publishing as Prentice Hall. 853-8 Committed fixed costs are the most difficult to change because long-term commitments generally have been made. These long-term commitments may involve legal contracts that would be costly to renegotiate or dissolve. Comm
14、itted fixed costs also are difficult to change because doing so may mean greatly changing the way the organization conducts its activities. Changing these committed fixed costs may also mean changing organization structure, location, employment levels, and products or services.3-9 An organizations c
15、apacity generally determines its committed fixed costs. Managements choice is the main influence on discretionary fixed costs. Both committed and discretionary fixed costs depend on the organizations strategy relating to capacity, product attributes, and technology. These elements will determine lon
16、g-term cost commitments (committed costs) and flexible spending responses to changes in the environment (discretionary costs).3-10 Both planning for and controlling discretionary costs are important. It is hard to say that one is more important than the other, but certainly effective use of discreti
17、onary costs requires prior planning. One would not know, however, if these costs had been effective in meeting goals unless the organization has a reliable and timely control system - a means of checking accomplishments against goals.3-11 High technology production systems often mean higher fixed co
18、sts and lower variable costs.3-12 Incentives to control costs are means of making cost control in the best interests of the people responsible for making cost expenditures. A simple example will illustrate the use of incentives to control costs. Assume that you are an executive who travels for busin
19、ess, purchases professional literature, and keeps current with personal computer technology. Under one incentive system, you simply bill the organization for all your travel and professional expenses. Under another system, you are given an annual budget for travel and professional needs. Which syste
20、m do you think would cause you to be more careful about how you spend money for travel and professional needs? Most likely, the latter system would be more effective in controlling costs. Usually these incentives are economic, but other non-financial incentives may also be effective.3-13 Use of cost
21、 functions, or algebraic representations of cost behavior, allows cost analysts or management to build models of the organizations cost behavior. These models can be used to aid planning and control activities. One common use of cost functions is in financial planning models, which are algebraic mod
22、els of the cost and revenue behavior of the firm, essentially extended C-V-P models similar to those discussed in Chapter 2. Understanding relationships between costs and cost drivers allows managers to make better decisions.Copyright 2011 Pearson Education, Inc., Publishing as Prentice Hall. 863-14
23、 A “plausible“ cost function is one that is intuitively sound. A cost function is plausible if a knowledgeable analyst can make sound economic justifications why a particular cost driver could cause the cost in question. A “reliable“ cost function is one that accurately and consistently describes ac
24、tual cost behavior, past and future. Both plausibility and reliability are essential to useful cost functions. It is difficult to say that one is more important than the other, but one would not have much confidence in the future use of a cost function that is not plausible, even if past reliability
25、 (e.g., based on statistical measures) has been high. Likewise, one would not be confident using a cost function that is highly plausible, but that has not been shown to be reliable. The cost analyst should strive for plausible and reliable cost functions.3-15 Activity analysis identifies underlying
26、 causes of cost behavior (appropriate cost drivers) and measures the relationships of costs to their cost drivers. A variety of methods may be used to measure cost functions, including engineering analysis and account analysis.3-16 Engineering analysis is a method of identifying and measuring cost a
27、nd cost driver relationships that does not require the use of historical data. Engineering analysis proceeds by the use of interviews, experimentation, and observation of current cost generating activities. Engineering analysis will be more reliable if the organization has had past experience with t
28、he activities.Account analysis is a method of identifying and measuring costs and cost driver relationships that depend explicitly on historical cost data. An analyst selects a single cost driver and classifies each cost account as fixed or variable with respect to that cost driver. Account analysis
29、 will be reliable if the analyst is skilled and if the data are relevant to future uses of the derived cost function.3-17 There are four general methods covered in this text to measure mixed costs using historical data: (1) account analysis, (2) high-low, (3) visual fit, and (4) regression. Account
30、analysis looks to the organizations cost accounts and classifies each cost as either fixed, variable, or mixed with regard to an appropriate cost driver. High-low analysis algebraically measures mixed cost behavior by constructing a straight line between the cost at the highest activity level and th
31、at at the lowest activity level. Visual-fit analysis seeks to place a straight line among data points on a plot of each cost and its appropriate cost driver. Regression analysis fits a straight line to cost and activity data according to statistical criteria.Copyright 2011 Pearson Education, Inc., P
32、ublishing as Prentice Hall. 873-18 Engineering analysis and account analysis often are combined. One of the problems of account analysis is that historical data may contain past inefficiencies. Therefore, account analysis measures what costs were, not necessarily what they should be. Differences in
33、future costs may be desired and/or anticipated, and account analysis alone usually will not account for these differences. Engineering analysis may be combined with account analysis to revise account-based measures for desired improvements in efficiency and/or planned changes in inputs or processes.
34、3-19 The strengths of the high-low method are also its weaknesses - the method is simple to apply since it does not require extensive data or statistical sophistication. This simplicity also means that the method may not be reliable because it may not use all the relevant data that are available, an
35、d choice of the two points to measure the linear cost relationship is subjective. The method itself also does not give any measures of reliability.The visual-fit method is an improvement over the high-low method because it uses all the available (relevant) data. However, this method, too, may not be
36、 reliable since it relies on the analysts judgment on where to place the line.3-20 The cost-driver level should be used to determine the two data points to be used to determine the cost function. Why? Because the high- and low-cost points are more likely to have measurement errors, an unusually high
37、 cost at the high-cost point and an unusually low cost at the low-cost point.3-21 Regression analysis is usually preferred to the high-low method (and the visual-fit method) because regression analysis uses all the relevant data and because easy-to-use computer software does the analysis and provide
38、s useful measures of cost function reliability. The major disadvantage of regression analysis is that it requires statistical sophistication to use properly. Because the software is easy to use, many users of regression analysis may not be able to critically evaluate the output and may be misled to
39、believe that they have developed a reliable cost function when they have not.3-22 This is a deceptive statement, because it is true on the face of it, but regression also has many pitfalls for the unwary. Yes, regression software provides useful output that can be used to evaluate the reliability of
40、 the measured cost function. If one understands the assumptions of least-squares regression, this output can be used to critically evaluate the measured function. However, the regression software cannot evaluate the relevance or accuracy of the data that are used. Even though regression analysis is
41、statistically objective, irrelevant or inaccurate data used as input will lead to unreliable cost functions, regardless of the strength of the statistical indicators of reliability.Copyright 2011 Pearson Education, Inc., Publishing as Prentice Hall. 883-23 Plotting data helps to identify outliers, t
42、hat is, observations that are unusual and may indicate a situation that is not representative of the environment for which cost predictions are being made. It can also show nonlinear cost behavior that can lead to transformations of the data before applying linear regression methods.3-24 R2 is a goo
43、dness-of-fit statistic that describes the percentage of variation in cost explained by changes in the cost driver.3-25 Control of costs does require measurement of cost behavior, either what costs have been or what costs should be. Problems of work rules and the like may make changing cost behavior
44、difficult. There are tradeoffs, of course, and the instructor should expect that students could get into an impassioned debate over where the balance lies - union job protection versus improved efficiency. This debate gets to one of the major roles of accounting in organizations, and it is important
45、 that students realize that accounting does matter greatly to individuals, and, ultimately, to society. 3-26 The fixed salary portion of the compensation is a fixed cost. It is independent of how much is sold. In contrast, the 5% commission is a variable cost. It varies directly with the amount of s
46、ales. Because the compensation is part fixed cost and part variable cost, it is considered a mixed cost.3-27 Both depreciation and research and development costs are fixed costs because they are independent of the volume of operations. Depreciation is generally a committed fixed cost. Managers have
47、little discretion over the amount of the cost. In contrast, research and development costs are discretionary fixed costs because their size is often the result of managements judgment.3-28 Decision makers should know a products cost function if their decisions affect the amount of product produced.
48、To know the cost impact of their decisions, decision makers apply the cost function to each possible volume of production. This is important in many decisions, such as pricing decisions, promotion and advertising decisions, sales staff deployment decisions, and many more decisions that affect the vo
49、lume of product that the company produces.3-29 Regression analysis is a statistical method of fitting a cost-function line to observed costs. It is objective; that is, each cost analyst would come up with the same regression line, whereas different analysts might have different cost functions when using a visual fit method. In addition, regression analysis provides measures of how well the cost-function line fits the data, so that managers know how much reliance they can p
