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BAAC 221 Chapter 6

Cost Behavior

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)
Created by: 1229955762