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C HAPTER 4 TECHNIQUES FOR ESTIMATING FIXED AND VARIABLE COSTS S OLUTIONS Review Questions 4.1 Because the statement groups costs by business function rather than variability. That is, the traditional income statement combines fixed (non-controllable) and variable (controllable) costs. 4.2 Revenues less variable costs. It is the amount that contributes toward recovering fixed costs and earning a profit. 4.3 The GAAP-based income statement, which is used for external reporting, groups costs by business function, separating product costs from period costs (as discussed in Chapter 3). In contrast, the contribution margin statement groups costs by variability, separating fixed costs from variable costs. 4.4 Yes, along with revenues and variable costs. 4.5 By separating out fixed costs, which relate to the costs of capacity resources and usually do not change in the short-term, from revenues and variable costs, which vary with activity volume and usually are controllable in the short term. 4.6 Account classification, the high-low method, and regression analysis. 4.7 (1) Sum the costs classified as variable to obtain the total variable costs for the most recent period; (2) Divide the amount in (1) by the volume of activity for the corresponding period to estimate the unit variable cost; and (3) Multiply (2) by the change in activity to estimate the total controllable variable cost. 4.8 The primary advantage is that it can provide very accurate estimates because it forces us to examine each cost account in detail. The primary disadvantages are that the method is time-consuming and subjective. 4.9 The two observations pertaining to the highest and lowest activity levels. These two values are most likely to define the normal range of operations. 4.10 The primary advantage is that the high-low method is easy to use and only requires summary data. The primary disadvantages are that it only uses two observations (“throwing away” much of the data) and yields only rough estimates of the fixed costs and unit variable costs. 4.11 While the high-low method only uses two observations, regression analysis uses all available observations to come up with a line that best fits the data.
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4.12 (1) R-square, which indicates the goodness of fit – this statistic is between 0 and 1, with values closer to 1 indicating a better fit; (2) p-value, which indicates the confidence that the coefficient estimate reliably differs from 0. 4.13 The relevant range is the normal range of operations, where we expect a stable relationship between activity and cost. 4.14 We compute a segment margin by subtracting traceable fixed costs related to the segment (e.g., a product, customer, geographical region) from its contribution margin. The two margins differ by the traceable fixed costs. 4.15 (1) products; (2) customers; (3) stores; (4) geographical regions; and, (5) distribution channels are some of the many ways an organization might segment its contribution margin statement.
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