ACCT90009 Chap.2 Cost Behaviour and Cost Estimation

Cost Behaviour and Cost Estimation

Standard canon anchored to the official Week 2 title. Classify fixed, variable, mixed and step cost only with a driver, horizon and relevant range.

High-low chooses activity extremes; richer estimation still needs causal logic, residual review and decision thresholds.

Detailed chapter study map

AskSia Library · ACCT90009 · Strategic Cost Management · University of Melbourne COST BEHAVIOUR Week 2 · standard canon STANDARD CANON Cost behaviour is a model of response Fixed, variable, mixed and step patterns inside a relevant range The official Week 2 topic is Cost Behavior and Estimation.

The treatment in this chapter is standard accounting canon rather than a claim about the lecturer’s exact notation or question emphasis. Cost behaviour describes how total cost is expected to respond when an activity changes. The classification belongs to a cost item, a driver, a time horizon and an operating range; remove any one of those and the label becomes dangerously vague.

Total-cost behaviour patterns The axes

are activity and total cost. Per-unit behaviour tells a different story: variable cost is approximately constant per unit, while fixed cost per unit falls as volume rises within the relevant range. Original schematic. Read total and per-unit views together Total variable cost rises with activity while variable cost per unit stays approximately constant.

Total fixed cost stays constant while fixed cost per unit falls as activity increases. This reciprocal pattern explains a frequent error: calling a fixed cost variable because its amount per unit changes. Per-unit allocation changes arithmetic presentation, not the underlying resource commitment.

i Classification sentence Within the stated relevant range and horizon, total cost [changes / remains stable] as [driver] changes because

[resource mechanism] . Add the mechanism. A line on a graph without an economic explanation is only pattern recognition. ! Do not classify an account name forever Electricity may include a fixed connection charge, activity-driven consumption and a demand step.

Salaries may be fixed this month, step-fixed as teams are added, and avoidable in a long redesign. Classification is contextual. A behaviour label is a conditional statement: driver, horizon and range are part of the label.

Cost-behaviour rule {PG} · asksia.ai/explore AskSia Library · ACCT90009 · Strategic Cost Management · University of Melbourne BEHAVIOUR MECHANICS Behaviour mechanics Fixed, variable, mixed and step costs Translate operational resource choices into a total-cost function A variable resource is

acquired or consumed in proportion to activity. A committed fixed resource is available as a block for the horizon.

A mixed cost combines a base commitment and an activity-sensitive amount. A step cost remains flat across a capacity interval and jumps when another block is needed. The graph is a compact forecast of how resources respond, not a definition copied from an account label. MIXED-COST MODEL [formula shown in the full chapter] Y = estimated total cost · a = fixed component · b = variable cost per activity unit · X = activity.

State units every time: dollars per order, machine-hour or consultation.

Pattern Total-cost response Per-unit response Operational source Variable Changes proportionally with activity Approximately constant Resources consumed

one-for-one Fixed Stable within range Falls as activity rises Capacity acquired in a block Mixed Base plus activity slope Average falls toward the slope Connection plus usage Step Stable then jumps Saw-tooth average Supervisors, vehicles or service cells Capacity creates steps Suppose one coordinator can handle up to 700 cases.

A second coordinator is not needed at case 701 if work can be delayed, redistributed or automated; the step depends on service constraints and policy. Conversely, peak timing may force the step before average volume reaches capacity. Understand the resource rule before fitting a line. Time changes avoidability In the next week, a lease may be fixed and unavoidable.

At renewal, it may become avoidable.

Over several years, facility configuration and technology may change the cost function itself. A strategic estimate should match the horizon of the decision, not the convenience of historical data. ✓ Unit discipline Write the driver beside every slope and the period beside every intercept.

‘$6 variable’ is incomplete; ‘$6 per labour-hour, plus $90,000 per month within 6,000–10,000 hours’ can be checked and used.

{PG} · asksia.ai/explore AskSia Library · ACCT90009 · Strategic Cost Management · University of Melbourne RELEVANT RANGE Relevant range The line works until the process changes Capacity, price breaks, overtime and learning create boundaries The relevant range is the band of activity over which the assumed cost relationship is reasonable. It is

not a licence to ignore observations that disagree.

Outside the band, the organisation may add capacity, trigger overtime, receive quantity discounts, redesign the process or experience congestion. A straight-line estimate can be useful inside the range and badly wrong outside it. Four boundary signals Capacity: another team, machine or site must be added. Input terms: wage premiums or supplier price breaks change the slope.

Process: learning, automation or bottlenecks alter resource consumption. Service policy: waiting-time or quality standards force resources to rise before physical capacity is exhausted. These are model changes, not random noise. Interpolation beats blind extrapolation An estimate at an activity level observed within the data range is interpolation.

Extending far beyond the

observations is extrapolation and needs stronger qualification. The arithmetic may be identical, but evidence quality is not. State how far the forecast sits from the observed range and which operational breakpoint could occur first. Observation Possible explanation Analytical response Cost jumps near peak Overtime or

What this chapter covers

• 01

  Total and per-unit behaviour

• 02

  Relevant range

• 03

  High-low and regression logic

• 04

  Sensitivity and capacity release

AskSia-authored practice weighting (not an official mark scheme): High-low estimate

Key terms

Relevant range

Operating band where assumed behaviour is reasonable.

Mixed cost

Fixed intercept plus variable slope.

Cost Behaviour and Cost Estimation FAQ

Exam move

Plot data, state units, derive and prove the line, then identify the capacity or evidence condition that can reverse use of the estimate.

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