Chapter _5 - Lecture Notes

Chapter _5 - Lecture Notes - Chapter #5 Cost Behavior:...

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Chapter #5 Important Chapter Concepts: 1. Cost formula for mixed costs: Y = a + b X Where: Y = dependent variable (the total mixed cost) a = vertical intercept (the total fixed cost) b = slope of the line (the variable cost) X = independent variable (the activity level) Illustration: If your fixed monthly utility charge is $40, your variable cost is $0.03/kilowatt hour and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? Answer: Y = a + bx Y = $ 40 + ($0.03/kilowatt hr x 2,000 kilowatt hr Y = $ 100 2. New income statement known as The Contribution Income Statement which emphasizes cost behavior. This is an important format to memorize. Exhibit 5-13 1
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NOTE: Contribution approach is very useful in internal reports since it emphasizes the behavior of costs. This is very important in planning, budgeting, controlling operations and in performance evaluation. GAAP requires the traditional approach. 3. Absorption Costing v. Variable Costing Exhibit 5-1A Absorption Costing – all manufacturing costs, both variable and fixed, are included in unit product costs. Wong Co. has the following costs direct materials of $100, Direct labor of $50, variable manufacturing OH of $25 and fixed manufacturing OH of $30. What is the unit product cost? Direct materials $ 100 Direct labor 50 Variable manufacturing OH 25 Fixed manufacturing OH 30 Unit Product Cost $ 205 Variable Costing – only variable manufacturing costs – which usually consist of direct materials, direct labor, and variable manufacturing overhead – are included in unit product costs. 2
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Using the Wong Co. information above, what is the unit product cost? Direct materials $ 100 Direct labor 50 Variable manufacturing OH 25 Unit Product Cost $ 175 NOTE: Under variable costing, fixed manufacturing costs are treated as period costs and are expensed in the period in which they are incurred, just like selling and administrative expenses. Under absorption costing, fixed manufacturing cast may be shifted from one period to another due to changes in inventories. Important Chapter Definitions: Variable cost: A variable cost remains constant on a per unit basis, but changes in total in direct relation to changes in volume. 3
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Fixed cost: A fixed cost remains constant in total, but if expressed on a per unit basis, varies inversely with changes in volume. Committed fixed costs
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Chapter _5 - Lecture Notes - Chapter #5 Cost Behavior:...

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