...1) 2) Variable Cost: Fixed Cost: Mixed Cost: with Variable and Fixed: cell phone bill which is $50 a month and additional 20 cents per message. Chapter 6: Cost Behavior: Analysis and Use LOOK AT CHAPTER 6 SLIDES Budget project: How many units do you need to break even. Also a cost volume profit graph. ON EXAM Mixed Costs Total Cost= Total fixed cost + Variable per unit * units ON EXAM: High-Low Method Ex: High hours of maintenance – Low hours / High Total Maintenance cost – Low Total Maintenance cost Predict Costs: 1) Account Analysis 2) High-Low Method Contribution Margin: Sales -Variable Costs = Contribution Margin -Fixed Costs =Net Operating Income Used for external reporting Used by management Sensitivity analysis: if sales are down 10% or If sales are up by 10% what’s your income. Can be checked by CM Contribution Margin Ratio: Total CM/ Total Sales In terms of Units: CM Ratio: Unit CM/ Unit SP Break even point in Units Sold: FC/ CM per Unit Break even point in total sales dollars: FC / CM Ratio Operating Leverage: Degree of Operating Leverage = Contribution Margin/ Net Operating Income 1) 2) Variable Cost: Fixed Cost: Mixed Cost: with Variable and Fixed: cell phone bill which is $50 a month and additional 20 cents per message. Chapter 6: Cost Behavior: Analysis and Use LOOK AT CHAPTER 6 SLIDES Budget project: How many units do you need to break even. Also...
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...with a particular cost. 2. A variable cost remains constant per unit at various levels of activity. 3. A fixed cost remains constant in total and on a per unit basis at various levels of activity. 4. If volume increases, all costs will increase. 5. If the activity index decreases, total variable costs will decrease proportionately. 6. Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions. 7. For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity. 8. The relevant range of activity is the activity level where the firm will earn income. 9. Costs will not change in total within the relevant range of activity. 10. The high-low method is used in classifying a mixed cost into its variable and fixed elements. 11. A mixed cost has both selling and administrative cost elements. 12. The fixed cost element of a mixed cost is the cost of having a service available. 13. For planning purposes, mixed costs are generally grouped with fixed costs. 14. The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost. 15. When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element. ...
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...Chapter 02 Cost Behavior, Operating Leverage, and Profitability Analysis Multiple Choice Questions 1. | Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost? A. | Fixed cost | B. | Variable cost | C. | Mixed cost | D. | Relevant cost | | 2. | Select the correct statement regarding fixed costs. A. | Because they do not change, fixed costs should be ignored in decision making. | B. | The fixed cost per unit decreases when volume increases. | C. | The fixed cost per unit increases when volume increases. | D. | The fixed cost per unit does not change when volume decreases. | | 3. | Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost: A. | varies inversely with the number of hours the lawn equipment is operated. | B. | is not affected by the number of hours the lawn equipment is operated. | C. | increases in direct proportion to the number of hours the lawn equipment is operated. | D. | None of these | | 4. | Select the correct statement regarding fixed costs. A. | There is a contradiction between the term...
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...with a particular cost. 2. A variable cost remains constant per unit at various levels of activity. 3. A fixed cost remains constant in total and on a per unit basis at various levels of activity. 4. If volume increases, all costs will increase. 5. If the activity index decreases, total variable costs will decrease proportionately. 6. Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions. 7. For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity. 8. The relevant range of activity is the activity level where the firm will earn income. 9. Costs will not change in total within the relevant range of activity. 10. The high-low method is used in classifying a mixed cost into its variable and fixed elements. 11. A mixed cost has both selling and administrative cost elements. 12. The fixed cost element of a mixed cost is the cost of having a service available. 13. For planning purposes, mixed costs are generally grouped with fixed costs. 14. The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost. 15. When applying the high-low method, the variable cost element of a mixed cost is calculated before the fixed cost element. ...
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...Resume Cost Behavior: Analysis and Use Type of variable costs: * True variable/ proportionately variable pattern: direct material is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity. Moreover, any amounts purchased but not used can be stored and carried forward to the next period as inventory. * Step variable pattern: is the cost of a resource that is obtained in large chunks and that increases or decreases only in response to fairly wide changes in activity. Moreover, any amounts purchased but not currently used can’t be stored as inventory and carried forward to the next period. The relevant range is that range of activity within which the assumptions made about cost behavior is reasonably valid. Except in the case of step variable costs, it’s ordinarily assumed that relationship between cost and volume is a strictly linear. Economist correctly point out that many costs that the accountant classifies as variable actually behave in a curvilinear fashion, that is the relation between cost and activity is a curve. Although many costs are not strictly linear, a curvilinear cost can be satisfactorily approximated with a straight line within a narrow band of activity (relevant range). The dashed line approximates the curvilinear cost with very little loss of accuracy within the shaded relevant range. However, outside of the relevant range this particular straight line...
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...Chapter 5 Cost Behavior : Analysis and Use Group Member: Jayanti Suli F12218004 Juan Hanam F12218005 Ricwilson Horax F12218006 Richard Hendrawan F12418022 Types of Cost Behavior Patterns Cost Structure is the relative proportion of fixed, variable and mixed costs found within an organization 1. Variable Costs An activity base (also called a cost driver) is a measure of what causes the incurrence of variable costs. As the level of the activity base increases, the total variable cost increases proportionally. Units produced (or sold) are not the only activity base within companies. A cost can be considered variable if it varies with activity bases such as miles driven, machine hours, or labor hours. True variable costs As an example of an activity base, consider your total long distance telephone bill. The activity base is the number of minutes that you talk. A true variable cost is one whose total dollar amount varies in direct proportion to changes in the level of activity. On your land-line, your total long distance telephone bill is determined by the number of minutes you talk. An activity base, or cost driver, is a measure of what causes the incurrence of variable costs. As the level of activity base increases, the variable cost increases proportionally. Variable Cost per Unit A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute. Example of variable cost 1. Merchandising...
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...2 Costs and Decision Making Chapter 5 Cost Behavior and Relevant Costs Chapter 6 Cost-Volume-Profit Analysis and Variable Costing Chapter 7 Short-Term Tactical Decision Making Chapter 8 Long-Term (Capital Investment) Decisions 140 Chapter 5 Cost Behavior and Relevant Costs Chapter 5 U 141 Cost Behavior and Relevant Costs nderstanding the behavior of costs is of vital importance to managers. Understanding how costs behave, whether costs are relevant to specific decisions, and how costs are affected by income taxes allows managers to determine the impact of changing costs and other factors on a variety of decisions. This chapter introduces concepts and tools that will be used in Chapters 6 through 8. Chapter 5 begins with a definition of cost behavior and illustrates the concepts of fixed costs, variable costs, and mixed costs. Next, the chapter revisits the concept of relevant costs (introduced in Chapter 1) as it applies to variable and fixed costs. The chapter also describes the impact of income taxes on costs. Learning Objectives After studying the material in this chapter, you should be able to: 1 Describe the nature and behavior of fixed, variable, and mixed costs Analyze mixed costs using regression analysis and the high/low method 2 Distinguish between relevant and irrelevant costs and apply the concept to decision making 3 Illustrate the impact of income taxes on costs and...
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...Module 5 Assignment ACC 502 Chapter 5 Problem 5-12 – Page 220 1. Identify each of the company’s expenses (including cost of goods sold) as either variable, fixed or mixed. Variable | Fixed | Mixed | Cost of goods soldShipping expense | Advertising expenseInsurance expenseDepreciation expense | Salaries and commissions | 2. Using the high-low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense. Shipping | Units Sold | Shipping | High activity level | 5000 | 38000 | Low activity level | 4000 | 34000 | | 1000 | 4000 | Variable cost = $4000/1000 = $4.00 Fixed cost = $38000 – (4x5000) = $18000 Salaries and commissions | Units Sold | Salaries and Commission | High activity level | 5000 | 90000 | Low activity level | 4000 | 78000 | Change | 1000 | 12000 | Variable cost = $12,000/1000 = $12.00 Fixed cost = $90000 – (12x5000) = $30000 3. Redo the company’s income statement at the 5,000-unit level of activity using the contribution format. Morrissey & Brown Ltd.Income StatementMonth Ended September 30 | | Sales in units | 5000 | | | Sales revenue | $500,000 | Variable expenses: | | Cost of goods sold | 300000 | Shipping expenses | 38000 | Commissions | 60000 | | | Contribution margin | $102,000 | Fixed expenses: | | Advertising expense | 21000 | Insurance expense | 6000 | Depreciation expense | 15000 | Salaries | 30000...
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...------------------------------------------------- COST BEHAVIOR and COST ESTIMATION ------------------------------------------------- LEARNING UNIT OBJECTIVES After studying Unit 2.1, you should be able to: * Identify basic cost behavior patterns and explain how changes in activity level affect total cost and unit cost. After studying Unit 2.2, you should be able to: * Estimate a cost equation from a set of cost data and predict future total cost from that equation. After studying Unit 2.3, you should be able to: * Prepare a contribution format income statement. ------------------------------------------------- PREVIEW OF CHAPTER 2 While GAAP-based income statements are required for external financial reporting, they are not very useful for internal decision making because expenses are categorized based on business function. Unit 2.1 explains why it is important for managers to understand cost behavior and how various types of costs behave. Unit 2.2 explains cost estimation and the methods of estimating costs. Unit 3 explains the contribution margin, contribution margin ratio, the contribution margin income statement, and how changes in costs affect operating income. The content and organization of this chapter are as follows: Cost Behavior and Cost Estimation | Unit 1 – Cost Behavior Patterns | Unit 2 – Cost Estimation | Unit 3 – Contribution Margin Analysis | * Variable costs * Fixed costs * Discretionary versus committed fixed costs * Step...
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...Lecture 2 (1)Costs Terms, Concepts and Classifications (2) Cost Behavior – Analysis and Use Costs Terms, Concepts and Classifications Manufacturing Costs Direct Materials Direct Labor Manufacturing Overhead The Product Direct Materials Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile Direct Labor Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers Manufacturing Overhead Manufacturing costs that cannot be traced directly to specific units produced. Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant. Classifications of Costs Manufacturing costs are often classified as follows: Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Non-manufacturing Costs Marketing or Selling Cost Administrative Cost Costs necessary to get the order and deliver the product. All executive, organizational, and clerical costs. Product Costs Versus Period Costs Product costs include Period costs include direct materials, direct all marketing or labor, and selling costs and manufacturing...
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...COST-VOLUME-PROFIT RELATIONSHIPS 1. Distinguish between variable and fixed costs. Variable costs are costs that vary in totaldirectly and proportionately with changes in the activity index. Fixed costs are costs thatremain the same in total regardless of changes in the activity index.2. Explain the significance of the relevant range. The relevant range is the range of activityin which a company expects to operate during a year. It is important in CVP analysisbecause the behavior of costs is linear throughout the relevant range.3. Explain the concept of mixed costs. Mixed costs increase in total but not proportionatelywith changes in the activity level. For purposes of CVP analysis, mixed costs must beclassified into their fixed and variable elements. One method that management may use isthe high-low method.4. List the five components of cost-volume-profit analysis. The five components of CVPanalysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit,(d) total fixed costs, and (e) sales mix.5. Indicate what contribution margin is and how it can be expressed. Contribution marginis the amount of revenue remaining after deducting variable costs. It can be expressed as aper unit amount or as a ratio.6. Identify the three ways to determine the break-even point. The break-even point can be(a) computed from a mathematical equation, (b) computed by using a contribution margintechnique, and (c) derived from a CVP graph...
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...number of pizzas made. | | Materials to make | | Employee Wages | the pizzas | a. | Fixed cost | Fixed cost | b. | Fixed cost | Variable cost | c. | Variable cost | Fixed cost | d. | Mixed cost | Variable cost | e. | Mixed cost | Mixed cost | | | Option A | | | Option B | | | Option C | | | Option D | Question 2 The estimated unit costs for a company to produce and sell a product at a level of 12,000 units per month are as follows: | Estimated | Cost Item | Unit Cost | Direct material | $32 | Direct labor | $20 | Variable manufacturing overhead | $15 | Fixed manufacturing overhead | $6 | Variable selling expense | $3 | Fixed selling expense | $4 | | | $70 | | | $38 | | | $67 | | | $52 | | | $18 | What are the estimated variable costs per unit? Question 3 Laner Company has the following data for the production and sale of 2,000 units. Sales price per unit | $800 per unit | Fixed costs: | | Marketing and administrative | $400,000 per period | Manufacturing overhead | $200,000 per period | Variable costs: | | Marketing and administrative | $50 per unit | Manufacturing overhead | $80 per unit | Direct labor | $100 per unit | Direct materials | $200 per unit | | | $380 | | | $430 | | | $480 | | | $730 | What is the variable manufacturing cost per unit? Question 4 Based on the information in #3 what is the total manufacturing...
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...SOLUTIONS TO EXERCISES EXERCISE 22-1 (a) The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost in total and on a per-unit basis at two different levels of production. | |Variable Costs | |Vary in total but remain constant on a per-unit basis. | | |Fixed Costs | |Remain constant in total but vary on a per-unit basis. | | |Mixed Costs | |Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis. | (b) Using these criteria as a guideline, the classification is as follows: | |Direct materials | |Variable | |Rent | |Fixed | | |Direct labor | |Variable | |Maintenance | |Mixed | | |Utilities | |Mixed | |Supervisory salaries | |Fixed | EXERCISE 22-2 (a) Maintenance Costs: [pic] = [pic] = $5 variable cost per machine hour | | | |800 | |300 | | | ...
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...1. Cost accounting relates to what industry? a. public accounting b. financial accounting c. service d. manufacturing 2.Sunk costs are ______. a. future costs b. costs that do not affect the decision c. costs from the past and cannot be changed. d. choice b & c are both correct 3.Which is not a characteristic of managerial accounting information? a. Emphasizes the external financial statements b. Emphasizes relevance c. Provides detailed information about individual parts of the company d. Focuses on the future 4._ cost driver is _____. a. The secondary factor that causes a cost to increase or decrease based on the cost drivers factor’s usage. b. The primary factor that causes a cost to increase or decrease based on the cost drivers factor’s usage. c. The individual that is driving to and from work this week in the car pool. d. Assigning direct costs to cost objects. 5.Using Figure 1 as a guide, which cost system is used? Figure 1 a. Process Costing b. Job Order Costing c. Service Costing d. Actual Costing 6.When a company announces that it is planning on cutting costs, what usually happens to the company’s stock? a. Nothing b. Goes down in value c. Goes up in value d. Depends on numerous factors 7.Spending on testing a product before shipment to customers is which type of quality cost? a. External failure cost b. Prevention cost c. Appraisal cost d. Test marketing cost 8.Which statement is false? a. An ABC system is more refined than one that uses a...
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...Chapter 18 Comparison of Management and Financial Accounting The role of management accounting Management accounting differs from financial accounting in many respects: * Primary users * Management accounting information: managers, employees, supply chain partners * Financial accounting information: owners or stockholders, lenders, customers, government agencies * Report format * Management accounting: flexible format, driven by user’s needs * Financial accounting: based on generally accepted accounting principles * Purpose of reports * Management accounting: to provide information for planning, control, performance measurement, and decision making * Financial accounting: to report on past performance * Nature of information * Management accounting: objective and verifiable for decision making; more subjective for planning (relies on estimates) * Financial accounting: historical, objective, and verifiable * Units of measure * Management accounting: dollars at historical, current market, or projected values; physical measures of time or number of objects * Financial accounting: dollars at historical and current market values * Frequency of reports * Management accounting: prepared as needed; may or may not be on a periodic basis * Financial accounting: prepared on a periodic basis (minimum of once a year) Management accounting provides relevant information at each stage...
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