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