Cost Framework 2 - Behavior Example

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Managerial Accounting: Cost Behaviors, Systems, and Analysis

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University of Illinois at Urbana-Champaign

Managerial Accounting: Cost Behaviors, Systems, and Analysis

401 notes

Cours 1 sur 7 dans Specialization Value Chain Management

In this course, you will learn how to use accounting to facilitate and align decisions made by owners, managers, and employees. You will learn how accountants create, organize, interpret, and communicate information that improves internal processes, and allows organizations to identify and leverage opportunities to create value within the supply chain and with customers. Upon successful completion of this course, you will be able to: • Understand what managerial accounting is and why it is important. • Describe fundamental concepts of managerial accounting. • Apply the financial perspective of accounting for costs. • Identify problems associated with relying on financial accounting information for internal decision making. • Organize cost information according to the decision-making needs of the organization. • Apply activity-based costing (ABC) and recognize the influence of setting and decision characteristics on the relevance of ABC systems. • Address common "what-if" questions using cost-volume-profit (CVP) analysis. • Apply CVP analysis in a variety of scenarios. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

À partir de la leçon

Course Overview and Introduction to Managerial Accounting

In this module, you will become familiar with the course, your instructor, your classmates, and our learning environment. Then, you will be introduced to Managerial Accounting and Costing Concepts.

Learning Objectives and Terminology2:58

Cost Framework 1 - Objects3:30

Cost Framework 2 - Behavior3:13

Cost Framework 2 - Behavior Example5:55

What We've Learned in Lesson 1.20:58

Module 1 Review0:49

Rencontrer les enseignants

Gary Hecht, Ph.D.
Associate Professor of Accountancy
Department of Accountancy, College of Business

>> So as far as an example scenario is concerned,

let's keep things simple

and assume we have the following information.

The first is we are producing a good and each good costs us

in terms of variable costs $1 per unit.

The second piece of information suggests

that our fixed costs are $100,000 in total.

And third we know that the production volume

in which we're interested is 1 to 100,000 units.

So to exemplify variable versus fixed costs,

let's start with variable costs.

And let's think of total variable costs to begin with.

Now this graph on the horizontal axis is production volume

starting with 0 or 1 up to 100,000.

And on the vertical axis we range

from low costs to high costs.

Now again this is total variable costs.

So over the range of production volume from low levels

to high levels, the graph of total variable costs would look

like an upward sloping line.

The reason is that total variable costs increase

with production volume.

The fewer units you produce, the less your total variable cost.

Each additional unit costs us an additional dollar.

So as we move from left to right on the production volume line,

total variable costs increase.

Now where this comes from is the fact

that unit variable costs are per unit amount.

So again looking

at the horizontal axis we have production volume

from low levels to high levels

and on the vertical axis we have cost.

But in this case it's per unit.

With variable costs by definition we're told

that it's $1 per unit.

So the graph of that line would be a flat line.

In this case unit variable costs do not change

with production volume.

It's always $1 per unit no matter where we are

on that production volume line.

On the flip side we can think about fixed costs.

And again let's start at the total.

Same deal.

Horizontal axis, low levels of production volume

to high levels of production volume.

And the vertical axis we're back to total cost.

Fixed costs do not change over production volume by definition.

So this line would be flat.

This is because total fixed costs do not change

over varying levels of production volume.

Taking this the fixed costs and putting them

in per unit terms makes the graph look different.

Again, horizontal axis is production volume,

low to high levels.

And vertical axis we're back to a unit cost.

When we produce very few units, say one,

then we have a very significant amount of fixed cost just

to produce that one unit.

In fact, we have $100,000 that we spent for one unit and so

that would yield a very significant per unit fixed cost,

$100,000.

As we produce more units,

the per unit fixed costs gets smaller.

It's the same dollar amount, the same $100,000 spread

over larger and larger volume.

So unit fixed costs vary with production volume.

The higher production volume, lower unit fixed costs.

Now in these graphs what's apparent is

that all these lines are drawn as though they are straight.

And in reality is everything really that linear?

Well, let's think about variable cost for a second.

Going back to that graph,

we said that unit variable cost is a flat line.

The reason being unit variable cost do not change

with production volume.

But you can think of a very common example

where a firm is engaged in learning curves.

So early on in its existence

or when it's producing very few units,

the cost per unit is actually quite significant.

And then over time or over larger volumes the firm engages

or enjoys economies of scale.

In this case the unit variable cost decreases compared

to lower production volumes.

So this graph drawn linearly here would likely have

non-linearities as we enter into the real world.

The same would go for total fixed costs.

We said that regardless of production volume from 1

to 100,000, we spend the same amount on fixed costs, $100,000.

But imagine if the firm were to produce more and more units.

If this was the case, then it might take a new factory

or additional management salaries

to produce these higher levels.

And in this case we might see a step-up in the amount

of fixed costs from that original $100,000 level

to something higher.

So even fixed costs are not necessarily linear

over all production volumes.

So when we graph the total cost, variable and fixed,

we can see non-linearities in the true relationship

between the units produced or production volume

and the total cost spent.

But oftentimes when we're doing cost analysis we limit our focus

to what we deem to be a relevant range.

And in that relevant range, linear patterns

and the assumption thereof is good enough.

If we're thinking about making decisions

that bring us really low on the level of production

or relatively much higher, then we're thinking more

about strategic decisions and cost analysis needs

to be supplemented with something else.

So for a lot of purposes we'll just assume linearity

for simplicity and also because we're focused

on a particular relevant range.

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