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ACC221ch05sp08

# ACC221ch05sp08 - ACC221 Chapter 5 Cost Behavior Analysis...

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1 ACC221 Chapter 5 Cost Behavior Analysis and Use 2 Objectives 1. Understand how fixed and variable costs behave and how to use them to predict costs. 2. Use a scattergraph to diagnose cost behavior. 3. Analyze a mixed cost using the high-low method. 4. Analyze a mixed cost using the least-squares regression method. (Appendix 5A) 5. Prepare an income statement using the contribution format.

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3 Objective 1 Understand how fixed and variable costs behave and how to use them to predict costs. 4 Variable Costs Variable Cost – a cost that changes in direct proportion to the level of activity or production. Examples: material, labor, shipping
5 Activity Base A measure of whatever causes the incurrence of variable cost. The number and type of variable costs present in an organization will depend on the organization’s structure and purpose. 6 Types of Variable Costs True Variable Costs – Cost that the amount used or incurred during a period will vary in direct proportion to the level of production activity. Example: Direct Materials. Step-Variable Costs – Cost that is obtainable only in large chunks and that increases or decreases only in response to fairly wide changes in the activity level. Example: Labor cost of maintenance workers.

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7 Fixed Costs Fixed Cost – a cost that remains constant within a defined range of activity or time period. Sometime referred to as capacity costs , since they result from outlays made for plan facilities, equipment, and other items needed to provide the basic capacity for sustained operations. Examples: Rent expense, property tax expense 8 Types of Fixed Costs 1. Committed Fixed Costs 2. Discretionary Fixed Costs
9 Committed Fixed Costs Committed Fixed Costs – relate to the investment in facilities, equipment, and the basic organizational structure of a firm. Two key factors: (1) they are long term in nature (2) they cannot be reduced to zero even for short periods of time without seriously impairing the profitability of long-run goals of a firm. Examples: Depreciation of buildings and equipment, taxes on real estate, insurance, salaries of top management and operating personnel. 10 Discretionary Fixed Costs Discretionary Fixed Costs – usually arise from annual decisions by management to spend in certain fixed cost areas. Often called managed fixed costs. Important characteristic: Management is not locked into a decision regarding such costs. They can be adjusted from year to year or even perhaps during the course of a year if circumstances demand such a modification. Examples: advertising, research, public relations, management development programs, and internships for students.

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11 Key Differences between Discretionary and Committed Fixed Costs Discretionary Committed 1. Planning Horizon Short-term Long-term 2. Possible to cut Yes No 12 Cost Behavior as Activity Increases In Total Per Unit Variable Cost Increase Remain the Same Fixed Cost Remain the Same Decrease
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ACC221ch05sp08 - ACC221 Chapter 5 Cost Behavior Analysis...

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