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BAAC 221 Chapter 6
Cost Behavior
| Question | Answer |
|---|---|
| Cost Behavior | how costs change as volume changes |
| Variable Costs | costs incurred for every unit of volume. Change in direct proportion to volume |
| What happens to variable costs as volume changes? | Volume increase= TVC increase Volume decrease= TVC decrease |
| Formula for variable cost | TVC= Variable cost per unit x volume of activity |
| Total Variable cost per unit of activity | remains constant and is the slope of the variable cost line |
| Fixed Costs | Costs that do not change in total despite wide changes in volume. Include: taxes/depreciation, insurance, salaries |
| Committed Fixed Costs | Fixed costs that are locked in due to previous management decisions; management has little or no control over these costs in the short run ex. property taxes |
| Discretionary Fixed Costs | Fixed costs that are results of management decisions; more control over these costs in the short run ex. advertising |
| Cost Equation for a fixed cost | TFC= Fixed amount over a period of time y = f |
| What happens to fixed costs as volume changes? | Volume increase = TFC decrease Volume decrease = TFC increase |
| Mixed Costs | contain both a variable and fixed cost component ex. utilities |
| Does the mixed cost line begin at the origin? | NO. It intersects at the level equal to the fixed cost component |
| Mixed Cost cost equation | total mixed costs=variable costs +fixed costs y=vx+f y=total cost v=variable cost PER UNIT x=volume of activity f=fixed costs |
| relevant range | THe band of volume where total fixed costs and variable costs PER UNIT remain constant |
| What does it mean if there is a change in cost behavior? | There is a change in relevant range |
| Step Costs | Resemble Stair Steps; fixed over a small range of activity and then jump up to a new fixed level with moderate changes in volume |
| Account Analysis | managers use judgement to classify each general ledger account as variable, fixed, or mixed |
| High-Low Method how to find the slope | slope = VC/unit = rise/run y(high)-y(low)/ x(@y1)- (x@y2) |
| Regression Analysis | statistical procedure for determine the best-fit equations of ALL data points (not just high and low) |
| What is R-square usually referred to as ? | Goodness-of-fit |
| Absorption Costing | all manufacturing-related costs are part of the cost of the product |
| Examples of Variable Manufacturing Costs | direct material, direct labor, variable MH like utilities |
| Examples of Fixed MOH costs | property takes and insurance, depreciation, lease payments |
| Variable Costing | AKA direct costing Only variable costs are treated as inventoriable product costs Only for internal management purposes |
| What is the ONLY difference between absorption and variable costing? | Treatment of Fixed MOH and timing it is expensed Variable Fixed MOH is immediately expensed as part of operating expense Absorption Fixed MOH is expensed only as CGS when inventory is sold |
| Contribution Margin Income Statement | income statement organized by cost behavior. Variable costing usually reported in this way |
| Contribution Margin | Shows managers how much profit has been made on sales before considering fixed costs |
| Contribution Margin Equation | Sales revenue - variable expenses |
| When is Op Inc equal for a manufacturing company's traditional and contribution income statements? | ONLY when all units produced are sold in the same period |
| When is Op Inc equal for a service or merchandising company's traditional and contribution income statements? | ALWAYS |
| If units produced = units sold then? | Absorption inc = variable inc Inventory Constant |
| If units produced > units sold | Absorption inc > Variable inc Inventory increase |
| If units produced < units sold | Absorption inc < Variable inc Inventory decrease |
| When do inventory levels usually decrease? | economic recession |
| Difference in operating income equation | Difference in op inc = (change in inv level, units) x (Fixed MOH PER UNIT) |
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