Your Turn: Estimating Cost Functions Using Scatter Plots Problem 1

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From the course by University of Virginia

Managerial Accounting Fundamentals

40 ratings

University of Virginia

Managerial Accounting Fundamentals

40 ratings

This course will teach you the fundamentals of managerial accounting including how to navigate the financial and related information managers need to help them make decisions. You'll learn about cost behavior and cost allocation systems, how to conduct cost-volume-profit analysis, and how to determine if costs and benefits are relevant to your decisions. By the end of this course, you will be able to: - Describe different types of costs and how they are represented graphically; - Conduct cost-volume-profit analyses to answer questions around breaking even and generating profit; - Calculate and allocate overhead rates within both traditional and activity-based cost allocation systems; - Distinguish costs and benefits that are relevant from those that are irrelevant for a given management decision; - Determine a reasonable course of action, given the financial impact, for a given management decision.

From the lesson

MANAGERIAL ACCOUNTING AND COST BEHAVIOR

Welcome to the course -- we're glad you're here! During this first week, we'll distinguish managerial from financial accounting, including the financial and related information managers need to help them make decisions. We'll then move on to cost behavior including different types of costs, their classifications, and how these classifications help with decision-making. From there, we'll show how to use a scatterplot and the high-low method to estimate cost functions. Let's get started!

Different Costs for Different Purposes2:05

Different Costs in More Detail7:32

Cost Behavior3:49

Using a Line to Represent Cost Behavior2:29

Estimating Cost Functions Using Scatter Plots5:36

Your Turn: Estimating Cost Functions Using Scatter Plots Problem 15:23

Your Turn: Estimating Cost Functions Using Scatter Plots Problem 24:54

Estimating Cost Functions Using the High-Low Method5:52

Your Turn: Estimating Cost Functions Using the High-Low Method Problem 17:17

Your Turn: Estimating Cost Functions Using the High Low Method Problem 25:56

Important Caveats10:12

Meet the Instructors

Luann J. Lynch
Almand R. Coleman Professor of Business Administration
Darden School of Business

Now it's your turn.

I'm going to give you the opportunity to practice.

Here is a scatterplot of observations where costs are on

the vertical axis or the y-axis and number of units or on the horizontal or x-axis.

Remember, you'll need to do several things.

You'll need to use a straight edge such as a ruler to draw a line through the plot,

then you'll need to see where the line intersects the y-axis.

This will be your estimate of fixed cost.

Then to get the variable costs,

estimate the slope of the line.

How do you do that?

Pick any two points on the line that you drew and then calculate

the change in cost and divide by the change in the number of units.

And then finally, use that information to write the equation of the line.

So take a few minutes,

give it a try, and then come back and we'll see how you did.

And I'll meet you over at the light board.

Okay, here we are at the light board.

How did it go? Let's take a look and see how you did here.

And we using our scatterplot and we're

going to estimate a cost equation from the scatterplot.

And remember what I'm going to do here is I'm going to

take my straight edge and I'm going to

eyeball this and I'm going to draw a line through those observations.

And from that we'll be able to estimate our cost equation.

So let's see, I'm just sort of just eyeballing things here, approximating.

OK. Let's see.

How about that?

OK. That line looks like it goes through

those observations in a pretty reasonable manner.

OK, so remember after I've done that,

the next thing I want to do,

what I want to see where that line intersects the y-axis,

and that's going to be my estimate of fixed costs.

So here it looks like it it intersects just above $500,000,

maybe $510,000 or so,

yours may have looked a little different.

Right? Remember we're estimating this, we're eyeballing it.

So your line might be slightly different than the one I've drawn up here.

That's OK because this is about estimating here,

so I'm going to say mine is intersecting at about $510,000.

OK, that would be my estimate of fixed costs.

Second thing I need to do is I need to pick any two points on

that line and use those two points to estimate the slope of the line.

So let's go pick a couple of points.

Let's pick this one,

and here's a good one that falls on that line.

OK, so let's see this.

This one right here is a cost of about $1.4

million at about 20,000 units.

And then this one here is a cost

of about $2.3 million.

At about 40,000 units.

So if I can take those, pick my two points,

I can take those two points and use them to

estimate the slope of the line. How do I do that?

Well we take the change in the costs and divide by the change in the number of units.

So the change in the y values divided by the change in the x value.

So let's do that.

OK, so we have a change in cost

of $900,000 for a change in units of 20,000 units.

OK, so 900,000 divided by 20,000 is $45.

So it looks like our variable cost is about $45 per year. OK?

Want to make sure you can see me out there.

So I mean I'll leave this right here for me to look through,

but now what we're going to do is we're going to

take the information that we've gathered here,

the y intercept of the fixed cost and the slope or the variable cost,

and we'll be able to write our equation of the line y=M, that's our slope.

$45 times the number of units X plus

our fixed cost which we said we're looking like around $510,000.

So based on the work here that we've done,

this would be the estimated cost function that I've come up with.

Again, you might have something slightly different because

your line might have intersected at a slightly different location on the y-axis,

and your slope might be slightly different.

You might have had a slightly different angle at which you drew the line that's OK,

this is not as sophisticated as

the High-Low method and what we're doing is some estimating here.

So great work.

We'll do another one shortly.

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