Managerial Accounting textbook Ch 6
Relevant range in fixed costs
-a range that the facilities are outgrown and need larger ability for output
Non quantitative approach to cost analysis
-account analysis -engineering approach
Quanititative Approaches to Cost Analysis
-high-low method -scattergraph method -lest squares regression method
two key differences between step variable costs and fixed costs
-step variable costs can often be adjusted quickly to changing conditions where fixed cannot -the width of the steps depicted for step variable costs is much narrower than the width of the steps for fixed costs
Two key differences between committed and discretionary costs
-the planning horizon for a discretionary cos is short usually a single year where committed is longer -discretionary costs can be cut for short periods with minimal damage for the long-term foals of the organization
Is labour variable or fixed
It depends on the flexibility management has and on their strategy -nevertheless, we will assume that unless otherwise stated direct labour is a variable cost
X
Level of acivity
Trend towards fixed costs
manually performed tasks are becoming more and more done by machines -demand for knowledge workers: using mind rather than muscle has increased and they are committed rather than discretionary costs
Contribution margin
product price - all variable costs
Mixed costs explanation of fixed and variable components
the fixed portion of a mixed costs represents the basic, minimum cost of just having a service ready and available for use and the variable portion represents the cost incurred for actual consumption of the service
Y
Toal Mixed cost
A
Total fixed cost (vertical intercept of line)
b
Variable cost per unit of activity (slope of the line)
Mixed cost and volume of activity can be expressed by
Y= a + bX
Step variable costs
a cost that increases or decreases only in response to more than a unit change in activity level
Account analysis
each account under consideration is classified as either variable or fixed based on how the account behaves
Engineering approach
involves a detailed analysis of what the cost behaviour should be, based on an industrial engineers evalutaion of the production methods used, material specifications, labour requirements, etc.
Mixed cost
is one that contains both variable and fixed costs elements -exmaple $25,000 license fee per year and then $3 per party to provincial authorites
relevant range
is the range of activity within which the assumptions made about cost behaviour by the manager are valid
Committed fixed costs
relate to the investment in facilities, equipment and the basic organization structure of the firm -examples: depreciation on buildings and equipment, taxes on real estate, insurance -long term in nature and cannot be reduced to zero even for short periods
Variable costs
remains constant when expressed on a per unit basis -must be in respect to something - activity base
Cost Driver
the unit of an activity that causes a change in activity's costs
True variable
those that vary in direct porptotion to changes in activity level
Discretionary fixed costs
usually arise form annual decisions by management to spend in certain areas -examples: advertising, research, public relations, internships