Pages: 17 (2990 words) Published: February 1, 2013
CH 5: cost behavior
Cost behavior
Reaction of costs to changes in levels of business activity
Fixed cost vs variable costs vs mixed cost
Fixed costs remain constant
Regardless of activity
Variable
Costs that change in direct proportion in response to change in level of activity Mixed
Total Mixed costs= fixed cost element + variable cost element Variable cost element
= cost / activity on the line
Total cost equation
Y = a + bx
Y= total cost
A = fixed cost
BX = total variable cost
B = variable cost per unit
X = activity (volume)
Graph
Y – vertical- dependent
\$
x –horizontal - independent
activity
horizontal line for FC,
VC start at zero and go up
TC = start at x=0 and where fc line is @ y.
Translate VC to this starting spot
Explain the concept of a relevant range and its effect on cost behavior information Relevant range
The range of activity within which cost behavior assumptions are valid Difficult to specify range, but can be considered the range of activity the company usually operates. Splitting costs
Engineering approach (easiest)
Hire experts
Use expertise and historical data
Use technical aspect of activity and associatied cost
Time and motion studies
Scatter graph (rarely used)
Plot historical data and cost data on a graph
See how cost relates to activity
Line of best fit
Half of the data points are above the line and half are below Graph
Manually plotting points creates HUMAN ERROR!!
Total Mixed costs= fixed cost element + variable cost element Variable cost element
= cost / activity on the line
Regression analysis (Least squares method) – most accurate Statistically accurate
Use software to make scatterplot and equation
Historical data
Y= a +bX
Y = total cost
A = fixed cost
B = unit variable cost
X = activity level
High-Low Method
Historical data
Only two data points are used to determine the fixed and variable cost components Pick the Highest and lowest activity.
Also use cost but do not decide data points based on cost
Flaw
Only use two points
Equation
Y = a +bx
For high
Y = high cost
A= fixed
B = unit variable cost
X = high activity
For low
Y = low cost
A = fixed
B = unit variable cost
X = low activity
Step 1: select period with highest activity and select period with lowest activity Step 2: Find b: Find variable cost element (unit variable cost) b = ( \$H -\$L) / (ActivityH – ActivityL)
Step 3: Find a: fixed cost element for both high or low
High cost = Fixed+unit variable cost* high activity
Y = a +bx
Low cost = fixed + unit variable cost*low activity
Step 4: determine total cost equation
Y = 1050 + (\$.05)x
Step 5: estimate cost per a given amount of activity
Y = 1050 + (\$.05)28000
Y= \$2450

Ch 6 Business Decisions using Cost Behavior

LO1 Describe the differences between a traditional income statement and a contribution income statement. Traditional income statement (T I/S) ~ functional
Required by GAAP
Used by external users
Separates costs by
Product costs ~ mix of FC and VC
CGS
Absorption costing
Fixed and variable product costs
Variable Costing
ONLY VARIABLE product costs
Period costs ~mix of FC and VC
Operating expenses
Format using the following info:
3000 T-shirts sold; selling price = \$12; purchase cost = \$7.2; Selling expenses= \$9500; Admin expenses=\$7900
Sales Revenue \$36,000
CGS 21,600.
= Gross profit 14,400
Operating expenses:
Selling expenses 9500
17,400.
= Operating LOSS (\$3000)
Contribution income Statement C I/S)
Not allowed by GAAP
Used by internal users
Classifies cost by behavior
Fixed ~ mix of period and product
Variable ~ mix of period and product
Format using the following info:
3000 T-shirts sold; selling price = \$12; purchase cost = \$7.2; Selling expenses= \$9500; Admin expenses=\$7900;...