chapter%204%20-%20ACCT%202332%20-%20Spring%202010

chapter%204%20-%20ACCT%202332%20-%20Spring%202010 - CHAPTER...

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CHAPTER 4 CHAPTER 4 Cost-Volume-Profit Analysis
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Let us not forget incremental analysis! Job order system In a job order system we use an estimate of the overhead for the month to prepare an allocation rate. However, overhead is a mix of variable and fixed costs. So how do we come up with the estimate? Process cost system In process costing we calculate a cost per unit that includes overhead. But would that be the cost of producing an additional unit? Probably not, because some of the overhead is fixed.
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Incremental analysis: example Required: If selling 15,000,000 feet will be available only if the price will be lowered to $0.28 per foot, would that be a good move?
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Variable Costs Fixed Costs Mixed Costs Step Costs Common Cost Behavior Patterns
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Variable Costs Costs that change in (exact) proportion to changes in volume or activity At restaurants, food costs vary with the number of customers served For airlines, fuel costs vary with the number of miles flown
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Variable Costs
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Fixed Costs Do not change in response to changes in activity level: Depreciation (straight line) Supervisory salaries Building maintenance Rent for building Research for new products
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Fixed Costs
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When we increase the number of units produced: 1 2 3 4 25% 25% 25% 25% 1. Fixed cost per unit increases. 2. Variable cost per unit decreases. 3. Total variable cost decreases. 4. Fixed cost per unit decreases.
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Fixed Costs Discretionary Fixed Costs Management can easily change Advertising, Research and Development Committed Fixed Costs Cannot be easily changed Rent, Insurance
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Mixed Costs Contain variable and fixed cost elements Examples Salesperson’s salary: base salary (fixed) Commission (variable) Electricity for factory: Lights (fixed) Power for machines (variable)
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Mixed Costs
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With a mixed cost, when number of units increase, the cost per unit: 1 2 3 33% 33% 33% 1. Increases 2. Decreases 3. Stays the same.
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Step Costs Fixed cost for a specific range Increases to higher level when upper bound of range is exceeded Examples Company adds third production shift: costs increase to include supervisory costs Pizza deliveries: from a certain amount up need another delivery person.
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Step Costs
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Cost Estimation Methods How do we know the behavior of a certain cost (variable, fixed, or maybe in the middle)? Cost estimation methods: Account Analysis Scattergraphs High-Low Method Regression Analysis
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Account Analysis Management decides how to classify costs (fixed and variable) using professional judgment. Most common approach used in businesses.
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Required: a) Variable and fixed costs for this month. b) incremental cost of producing 200 units.
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chapter%204%20-%20ACCT%202332%20-%20Spring%202010 - CHAPTER...

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