Cost Behavior
3 common cost behaviors
Variable, Fixed, and Mixed
Outliers
abnormal data points can skew the results
Committed fixed costs
locked in ex. building depreciation, long term lease
Absorption costing
required by GAAP for external reporting
Regression Analysis
statistical procedure to find the line that best fits data (cost equation)
regression analysis x variable 1
variable cost per activity
Why do scatter plots help managers
visually determine how strong the relationship between the cost and the volume of the chosen activity base
High Low Method
1. Find variable cost per unit (Slope) of cost line 2. Find the fixed costs (Vertical intercept) 3. Create the cost equation
Traditional (Conventional) Income Statement
Sales -COGS =Gross margin -SG&A =Operating Income
Contribution margin Income Statement
Sales -Variable Costs (Product and period) =Contribution Margin -Fixed costs (Manufacturing and period) =Operating Income
Scatter Plots
Use historical data to determine a costs behavior y axis= cost x axis=volume
4 methods to analyze cost behavior
account analysis, scatter plots, high- low method, regression analysis
Variable Costing
assigns only variable manufacturing costs to products (DM, DL, and varaible MOH) Fixed manufacturing overhead is treated as a period cost for internal management decisions only
Discretionary fixed cost
can be changed, fixed because it does not directly change with volume but it can be adjusted ex. advertising
Account Analysis
classify each general ledger account as wither variable, fixed, or mixed then use to build model
Advantage to high low method
easy to use
regression analysis intercept
fixed cost
regression analysis R square
goodness of fit
Cost Behavior
how do costs change as the volume changes
Cost equation
is a linear mathematical equation for a straight line prediction of the total cost Y=v(x)+f
relevant range
is the normal operating range of activity
Disadvantage to high low method
only uses 2 data points and is not very precise
Data Concerns with regression analysis
only valid within relevant range seasonal variations inflation over time outliers
Key Characteristics of fixed costs
total fixed costs stay constant over the relevant range
Key characteristics of mixed costs
total mixed costs increase as volume increases total mixed costs can be expressed as a combination of the variable and fixed cost equations
Key Characteristics of Variable costs
total variable costs change in direct proportion to changes in volume more units= more variable costs