Ch04.pdf

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

• 9

This preview shows page 1 - 4 out of 9 pages.

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

Subscribe to view the full document.

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
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?

Subscribe to view the full document.

• Spring '10
• GARY
• LOW  HIGH

{[ snackBarMessage ]}

###### "Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern