Ch04.pdf - Chapter 4 How to Estimate Fixed and Variable...

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1 Chapter 4 How to Estimate Fixed and Variable Costs from the Available Data Lecture outline cost structure estimation methods account classification high-low method regression analysis contribution margin statement
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2 3 Cost Structure Estimation: Why do we care? To make decisions, we need to predict profit = revenue − costs in various scenarios => need to be able to predict costs in various scenarios Predicted costs depend on the cost structure (mix of fixed and variable costs) => need to estimate the cost structure from the available data 4 Cost Structure Estimation The relation between total costs (TC) and volume is TC = FC + unit VC × Volume where FC = total fixed costs unit VC = variable costs per unit Volume = activity volume: # units sold (sales volume) or # units produced (production volume) We do not know the cost structure parameters FC and unit VC we estimate FC and unit VC from the available data after that, we use TC = FC + unit VC × Volume to predict costs in various scenarios on volume
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3 5 Method 1: Account Classification Detailed cost data for one period. Activity volume was 100 units. Cost account Amount rent $2,000 fire insurance $500 sales staff salaries $5,000 sales commissions $600 cost of merchandise $20,000 TV advertising $1,000 F V F V F V F V F V F V Step 1: Fixed or Variable?
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  • Spring '10
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