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
