Chapter 11 - Chapter 11: Cost Behavior and...

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Chapter 11: Cost Behavior and Cost-Volume-Profit (CVP) Analysis
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Cost Behavior Refers to the manner in which a cost changes as a related activity changes. Can be variable, fixed, or mixed.
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Cost Behavior: Variable Costs Costs that vary in proportion to changes in the activity level.
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Cost Behavior: Variable Costs
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Cost Behavior: Fixed Costs Costs that remain the same in total over the relevant range of activity, but change per unit with the level of activity.
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Cost Behavior: Fixed Costs
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Cost Behavior: Mixed Costs Characteristics of both a variable and a fixed cost. They are fixed over some range, but change per unit over a different range. Also called semivariable or semifixed. The high-low method is used to identify fixed and variable components.
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Cost Behavior: Mixed Costs
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High-Low Method Total costs during the last five months. Total cost at highest and lowest levels of production.
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High-Low Method
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Cost-Volume-Profit Analysis The systematic examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits. Provides management with useful information for decision making: Setting selling prices Selecting product mix Choosing marketing strategies Analyzing the effects of cost changes on profit
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Relevant Range Relevant Range is the range of activity within which the assumptions between fixed and variable costs are valid. i.e. Within the relevant range, total variable costs increases in proportion to change in activity level; or total fixed costs are not affected by change in activity level.
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Contribution Margin Contribution margin – identifies revenues available to cover fixed costs and contribute to net income. Contribution Margin = Sales – Variable Costs
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Contribution Margin Income Statement
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Contribution margin ratio – percentage of each sales dollar available to cover fixed costs and provide income from operations. Measures the effect of an increase/decrease
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Chapter 11 - Chapter 11: Cost Behavior and...

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