Managerial Accounting Chapter 5

(y)

we assume that y is dependent on x. Is the dependent variable (part of linear assumption formula)

difference in variable costing and full absorption profit

= change in ending inventory (units produced-units sold) * Fixed manufacturing overhead per unit produced

variable cost per unit

= difference in total cost (y1-y2)/ difference in activity (x1-x2)

total overhead cost

= total fixed cost+ total variable cost

contribution margin ratio

= unit contribution margin/ unit sales price. Tells managers how much contribution margin is generated by every dollar of sales

scattergraph

A graph that provides a visual representation of the relationship between total cost (y) and the activity level (x). Is useful first step in analyzing cost behavior because it helps determine the nature of the relationship and whether the linearity assumption is valid

High-low method

A simple approach that uses the two most extreme data points to determine the slope of the line (variable cost per unit) and the intercept (total fixed cost)

Least-squares regression

A statistical technique for finding the best fitting line based on historical data. The slope of the line provides an estimate of the variable cost per unit, while the intercept provides an estimate of the total fixed cost

full absorption costing

External financial reporting (GAAP) which shows product costs reflect the full cost of manufacturing

visual fit method

Once a scattergraph has been created and we have confirmed that the relationship between total cost and activity is roughly linear, the next step is to fit a line through the data that will provide an estimate of total fixed cost and variable cost per unit

step-fixed costs

are fixed over a much wider range of activity than step-variable costs

step costs

are fixed over a range of activity and then increase in a step-like fashion when a capacity limit is reached

variable costing

costing method used for internal reporting that classifies cost as either variable or fixed

variable costs

costs that change in total in direct proportion to changes in activity

fixed costs

costs that remain the same in total regardless of activity level

cost behavior

describes the way total cost behaves, or changes when some measure of activity changes

mixed costs or semivariable costs

have both a fixed and a variable component. The fixed portion represents the base amount that will be incurred regardless of activity. The variable cost is the amount that is based on activity or usage

(b)

indicates how much y (total cost) will change as x (activity) changes. Is the variable cost per unit of x and is represented by the slope of the line. (part of linear assumption formula)

R Square

is a measure of the "goodness of fit" of the model. It identifies how much of the variability in y (total overhead cost) is explained by x (customers served)

contribution margin income statement

is based on cost behavior, or whether cost is variable or fixed

(x)

is the activity that causes y (total cost) to change. Is the independent variable or cost driver (part of linear assumption formula)

(a)

is the amount of cost that will be incurred regardless of activity level (x), or the total fixed cost. Is the intercept term or the constant (part of linear assumption formula)

unit contribution margin

is the difference between sales price per unit and variable cost per unit. It tells us how much each additional unit sold contributes to profit

gross margin

is the difference between sales revenue and cost of goods sold

contribution margin

is the difference between sales revenue and variable costs. Formula = sales revenue- Variable costs

step-variable costs

tend to be fixed over a fairly narrow range of activity and rise in multiple steps across the relevant range

linearity assumption

the assumption that the relationship between total cost and activity can be approximated by a straight line. Formula is total cost= total fixed cost+(variable cost per unit * activity) aka y=a+b(x)

relevant range

the range of activity over which we expect our assumptions about cost behavior to hold true