Cost Behavior

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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


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