Jiambalvo_Ch 4_Cost-Volume-Profit Analysis_Commentary

Jiambalvo_Ch 4_Cost-Volume-Profit Analysis_Commentary - M...

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MGMT 640 Jiambalvo Text Chapter 4: Cost-Volume-Profit Analysis Commentary by Chenchu Bathala This chapter builds on the basic concepts and analytical aspects relating to cost structures (variable, fixed, and so forth) presented in Chapter 1 and leads us into some advanced techniques relating to assessing/monitoring costs and profits. Variable and Fixed Costs The definitions and underlying concepts/implications are the same as in Chapter 1. The behavior of costs are presented in Illustrations 4-1 (for variable costs) and Illustration 4-2 (for fixed costs), both in p. 127. Note that in simple examples such as the one presented in the text, variable costs per unit and the overall fixed costs are constant --- within a given range of production. Two kinds of new cost structures are presented – Mixed Costs (discussion in pp. 128-129 and Illustration 4-3) and Step Costs (discussion in pp. 129-130, Illustration 4-4). Take note of the computations relating to these costs. Total of Mixed Costs = Fixed cost + (Variable cost per unit x # of units) Total of Step Costs = (Step 1 cost x # of units) + (Step 2 cost x # of units) + ……………………… Cost Estimation Mehtods The cost estimation examples relating to variable and fixed costs presented in pp. 130-137 are quite helpful in understanding the underlying computations. The first one is the Accounting Analysis. The next two methods Scatter Diagram and High- Low Method are related to the fourth method (Regression Analysis, p. 136). The scatter diagram provides a visual approximation of the total cost structure and the high-low method works well if the variable costs per unit is relatively constant at different levels of production. Accounting Analysis
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Jiambalvo_Ch 4_Cost-Volume-Profit Analysis_Commentary - M...

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