Chapter 11

Total Cost

(Variable Cost per Unit x Units Produced) + Fixed Costs

Activity Base

An activity that drives a cost (causes it to increase)

Contribution Margin Ratio

Contribution Margin / Sales = CMR -Use CM Ratio to figure out how much operating income will change when a company's sales changes.

Variable cost per unit

Difference in (highest and lowest production level's associated...) total costs / difference in (highest and lowest level's...) production units

Fixed Cost Cont.

Effect if Changing Activity Level -Total Amount: Remains the same regardless of activity level -Per-Unit Amount: Increases and decreases inversely with activity level Examples: Straight-line depreciation, property taxes, production supervisor salaries, insurance expense

Variable Cost cont.

Effect of Changing Activity Level -Total Amount: Increases and decreases proportionately with activity level. -Per-Unit Amount: Remains the same regardless of activity level Examples: Direct Materials, Direct Labor, Electricity Expense, Supplies

Contribution Margin

Excess of sales over variable costs -Think of it as Gross Profit CM = Sales - Variable Costs

Break-even point (units)

Fixed Costs /UCM

High-Low Method

Helps estimate the difference between the units produced and total costs at the highest and lowest levels of production. -FOCUS ON PRODUCTION CHANGE (don't accidentally use high/low of costs) Steps: 1) what is highest and lowest production level? 2) what are the costs associated with these? 3)Calc. Variable Cost per Unit: Difference in total costs / difference in production units 4) Calc. Fixed Cost: Total Cost - (variable cost per unit x units produced) Once you have variable cost per unit and fixed cost...the total cost of other levels of production by plugging it in...

Cost Behavior

How a cost changes when the related activity changes -Useful to managers for a variety of reasons for example, predicting profits as sales and production volumes change Understanding Behavior of a cost depends on: 1) Identifying activities that cause the cost to change (Activity Bases) 2) Specifying the range of activity over which the changes in the cost are of interest (Relevant Range)

UCM

Price per unit - Variable costs per unit

Operating Income

Sales - Fixed Costs - Variable Costs

Fixed Cost

Total Cost - (Variable Cost per Unit x Units Produced) (Do for highest and lowest level, if it's right you should will get the SAME answer for BOTH)

Variable Costs

Total Variable Costs change with production level, but unit variable costs remain constant -Cost per unit - remains the same regardless of changes in the activity base (remains the same regardless of changes in the activity base) -Total cost - changes in proportion to changes in the activity base (pg. 432 makes sense with visual)

Fixed Costs

Total fixed costs remain constant regardless of production level, but unit fixed costs decrease as production level increases.

Fixed Cost Per Unit

Units Produced/Total Fixed Costs

Variable Cost Per Unit

Units Produced/Total Variable Cost