Managerial Accounting Chap 5

Sales Revenue - Variable Costs=

Contribution Margin

A fixed cost remains fixed [.....] within the relevant range of activity.

A fixed cost remains fixed IN TOTAL within the relevant range of activity.

Least-squares regression is

A statistical method used to analyze mixed costs The goal of this method is to minimize the sum of the squared errors. y = a + bx

Contribution margin ratio

Revenues- Variable Costs= Contribution Margin ratio

Variable Costs

Are those that change in total in direct proportion to changes in activity. Variable costs are the same per unit, but of course the total variable costs rise/fall as number of units rise/fall.

Cost assumptions are reasonably valid within the [.........] of activity

Cost assumptions are reasonably valid within the RELEVANT RANGE of activity

True or False? Within the relevant range of activity total variable costs do not change

False Within the relevant range of activity total variable costs remain constant per unit and change in total.

What does "a" represent?

Intercept Total fixed cost, an amount that will be incurred regardless of the activity level, and is called the intercept or the constant

Cost assumption are reasonably valid within the [...] of activity?

Relevant Range

How do we calculate Total Costs?

Total Costs = VC/unit (# units) + Total Fixed Costs

True or False? the Key to most managerial decision is understanding cost behavior.

True

How do you estimate Cost behavior?

Use least-squares regression

Variable cost per unit is

Variable cost per unit is

Within the relevant range of activity, variable costs:

Vary in total Remain constant per unit

Within the relevant range, [...] costs remain constant on a per unit basis.

Within the relevant range, VARIABLE COSTS remain constant on a per unit basis.

How is Sales Revenue computed?

Variable Costs - Contribution Margin= Sales Revenue

Cost per cup declines as

activity increases

Step-FIXED costs are

fixed over a fairly wide range of activities

What does "b" represent?

he slope of the line, the unit variable cost, which tells us how much the total cost (y) will increase for each unit increase in activity (x)

Step-VARIABLE costs

rise in multiple steps across the relevant range

Contribution Margin

sales price of a product - variable costs = Contribution margin

In the equation Y=a+bX, b denotes

the variable cost per unit of activity and slope of the line

What does "Y" represent and where is it plotted on a scatter graph?

total cost, which is plotted on the vertical axis, and is called the dependent variable

What does a Contribution Margin income statement identify?

A contribution Margin income statement Separates costs into their fixed and variable components Can assist with management decision making

What kind of costs remain constant in total and vary per unit?

Fixed Costs

High/Low Method

Pick the highest and lowest level of volume and their total costs. Calculate the difference in the total costs and divide by the difference in volume: (Total cost high volume) - (Total cost low volume) =Variable Cost Diff (High volume level) - (Low volume level) =Volume Difference

Fixed costs

Remain the same in total, regardless of activity level. Again, assuming we are in the relevant range. Fixed costs per unit change (rise/fall), depending upon the fall/rise in the number of units.

True or False? Outside of the relevant range cost behavior conclusions may not be valid.

True

True or False? The relevant range of activity is approximated by a straight line.

True

True or False? Within the relevant range of activity, fixed costs remain constant in total?

True

Per unit mixed costs decrease as

activity increases

Total FIXED costs remain constant as

activity increases

Total VARIABLE costs increase as

activity increases.

Step costs

are fixed over a range of activity and then increase in a step-like fashion. Mixed costs (aka semi-variable costs) have both a fixed and variable component.

Total mixed costs increase

as activity increases.

How is total variable cost per unit calculated?

Total variable cost per unit = total VC/# units (per unit, this will remain constant when # of units change..........total VC will change as # of units change

Which type of cost changes in total, in direct proportion to changes in activity level?

Variable Cost

How do we estimate cost behavior?

Y (TOTAL COST) = Total Fixed Costs + (Variable Cost per Unit)* # units of activity. Y is the dependent variable and the # units is the independent variable.

Mixed costs contain

a fixed portion that is incurred and a variable portion that increases with usage. Utilities typically behave in this manner.

The financial statement that organizes costs by their behavior instead of by the:

Contribution format income statement

What does "x" represent?

the activity that causes total cost (y) to change. Activity (x) is also called the cost driver, or the independent variable