This document discusses various methods for determining and estimating cost behavior. It defines different types of costs such as fixed, variable, and mixed costs. It also explains cost functions and how managers can use cost functions to understand how costs change with activity levels. The document outlines some common assumptions made in estimating cost behavior and lists several quantitative and qualitative approaches to cost estimation including the industrial engineering method, conference method, account analysis method, and high-low method.

1. Attributes
Confidence
Ibrar
Haider
I am Ibrar Haidar 23 Years Old ,
Student of Management Sciences
Hello….!
IQ Level
Academic Level
Personality
Experience

2. Determination of Cost Behavior

3. 3
Cost
$
Value of money occurred to produce something
or deliver a service.
What is Cost ?
Oost that change in relation to a chosen
activity or output
Variable Cost
Cost that have both fixed and variable
components: also called semi variable
costs
Mixed Cost
Cost that do not change with in the
relation to a chosen activity or out put
Fixed Cost

4. Your return to the past
enables you to better
understand and predict the
future, so that the best
decisions can be made
Why we Need to
Determine Cost
Behavior?

5. What is a Cost Function?
Managers are able to understand cost behavior through
cost functions.
The dependent
Variable
Y
Intercept: Fixed
cost
a Variable cost per unit
(Slope of line)
b
The independent
variable (Driver)
X
Cost Function
A cost function is a mathematical description of how a cost
changes with changes in the level of an activity relating to that
cost.
+

6. Assumptions in Cost-Behavior Estimation
Managers often estimate cost functions based on two assumptions:
Assumption 1
Variations in single activity effects total
cost
Assumption 2
Cost behavior is approximated by a linear
cost function within the relevant range.

7. Fixed
2. $8,000 per month
Y = $8,000
$8,000 is called a constant or intercept
The slope of the cost function is zero
Mixed
$3,000 per month plus $24 per room
This is an example of a mixed cost.
y = $3,000 + $24x
y = a + bx
Variable
1. $60 per night per room usage
2. Y = $60x
3. The slope of the cost function is $60.
La Playa Hotel offers an airline three alternative cost structures to accommodate its crew overnight
To understand Three Linear Cost Functions
Hotel

8. 8Graphical Presentation Of Cost
Variable MixedFixed

9. 9
Criteria Of Classifying
Variable & Fixed Cost
Choice of Cost Object
Time Span
Relevant Range

10. 10
Choice of Cost Object Example
If the number of taxis owned by a taxi company
is the cost object, annual taxi registration and
license fees would be variable costs.
If miles driven during a year on a particular taxi
is the cost object, registration and license fees
for that taxi are fixed costs.

11. 11
Time Span
Whether a cost is variable or fixed with
respect to a particular activity depends on
the time span
More costs are variable with longer time spans

12. Relevant Range
Variable and fixed cost behavior patterns are
valid for linear cost functions only within
the given relevant range.

13. 01
Industrial
Engineering
method
02
Conference
method
03
Account
Analysis
method
04
Cost Estimation Approaches
Quantitative
Analysis
methods

14. Detailed
Work
Industrial Engineering Method
Estimates cost functions by analyzing the relationship between inputs and outputs
14
Includes time studies Very thorough and
detailed
costly and time
consuming
Work-Measurement
Method

15. Conference Method
Gathered analysis and opinions about costs
and their drivers from various departments
•Pools expert knowledge
•Reliance on opinions makes this subjective

16. 16
Account
Method
Estimates cost functions by classifying various cost
accounts as variable, fixed, or mixed using experience
and Judgments with respect to the identified level of
activity
Is reasonably accurate, cost-effective, and easy to use,
but is subjective

17. S
H
X
C
V
Total sales(1000
units) = $390,000
Cost of goods
sold = $130,000
Commissions = 12% of sales
Secretary’s salary = $29,000
Manager’s salary = $60,000
What is the total
fixed cost?
$60,000 + $29,000 = $89,000
What is the variable cost
per unit ?
($130,000 + $46,800) ÷ 1,000 = $176.80
Commissions: $390,000 × .12 = $46,800
01 03 05
02 04
Avisha & Co.

18. EstimatingA Cost Function
3. Collect data1. Choose the
dependent variable.
2. Identify
cost driver
6. Evaluate
5. Estimate the
cost function.
4. Plot the Data

19. Simplest method of
quantitative analysis
Uses only the highest
and lowest observed
values
Variable cost is calculated by
the ratio of Difference of high &
low cost & Driver
Fixed cost is
calculated by linner
equation
s
d
c
v
High & Low Method

20. High & Low Method Example
Week Cost of Electricity Y Machine Hours X
1 13700 190
2 20900 275
3 13000 115
4 18800 395
5 14000 265
6 21500 455
7 16900 340
8 21000 305
455
Calculate variable cost per unit
-
21500
13000
-
Y
X
115
=
= 8500
340
Variable cost per unit=25
Y a += b X-
a = 21500 - 25(455) = 10125
a = 13000 - 25(115) = 10125
Y = 10125 + 25X

21. Thank You
Questions?