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Use one data point to estimate the total level of activity and the total cost. Make a quick estimate of VC per unit and determine the cost equation. A method ...
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Summary of VC and FC Behavior
Cost In Total Per Unit
Total VC is VC per unit remains VC proportional to the activity the same over wide ranges level within the RRlevel within the RR. of activityof activity. Total FC remains the same even when the activity FC per unit goes FC level changes within the down as activity level goes up. RR.
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A VC is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Supposed you had a phone bill that
$
to changes in the activity level. Supposed you had a phone bill that is based on the number of minutes talked.
e Bill $$
Phone
Total
Minutes Talked
The proportion of VCs differs across organizations. For example...
A public utility withA public utility with large investments inlarge investments inlarge investments inlarge investments in A manufacturing companyA manufacturing company equipment will tendequipment will tend to haveto have fewerfewer
A manufacturing companyA manufacturing company will often havewill often have manymany VCs.VCs. VCs.VCs.
A merchandising companyA merchandising company usually will have ausually will have a highhigh A service companyA service company will normally have awill normally have a highhigh proportionproportion of VCs,of VCs, like cost of sales.like cost of sales.
will normally have awill normally have a highhigh proportionproportion of VCs.of VCs.
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Cost $$
Total CT
Volume
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A FC is a cost whose total dollar amount remains constant as the activity level changes. Suppose your monthly phone bill is fixed and does not change, no matter how many calls you make.
$$
ne Bill $
al Phon Tota
Number of Calls
Relevant s R t $$ Range
tal Cos Tot
Activity
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Used primarily forUsed primarily for external reportingexternal reporting
Used primarily byUsed primarily by external reporting.external reporting. managementmanagementmanagement.management.
Use one data point to estimate the total level of activityUse one data point to estimate the total level of activity and the total cost.and the total cost. Y (^) Total maintenance costTotal maintenance cost = $11 000 = $11 000
Cost^ * ollars
(^) *
Total maintenance costTotal maintenance cost $11$11,000,
enances of Do 10 *^ *
Intercept = FC: $10, Mainte1,000โs 0 1 2 3 4
Patient-days in 1,000โs
Patient days in 1,000 s Patient days = 800Patient days = 800 19
Make a quick estimate of VC per unit and determine theMake a quick estimate of VC per unit and determine the cost equation.cost equation.
Total maintenance at 800 patientsTotal maintenance at 800 patients $$11 000 11 , Less: Fixed cost 10, Estimated total variable cost for 800 patients $ 1,
VC per unitVC per unit = $1,000 800 = $1 25/patient$1 25/patient-$1.25/patient$1.25/patient day-daydayday
Total maintenance costTotal maintenance costTotal maintenance costTotal maintenance cost Number of patient daysNumber of patient daysNumber of patient daysNumber of patient days
TheThe VC per hourVC per hour ofof maintenance is equal tomaintenance is equal to the change in cost dividedthe change in cost divided by the change in hours.by the change in hours.yy gg
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Regression also provides a statistic, called the R 2 , which is a measure of the goodness of fit of the regression line to the data points.
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RR 2 2 iis the percentage of the variation in total cost th t f th i ti i t t l t explained by the activity.
Cost *
Total
10 *^ * R 2 varies from 0% to 100%, and the higher the percentage the better
the higher the percentage the better.
Activity
