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C1105-6s - ACCT 220 CostBehavior:AnalysisandUses (Chapters...

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1 ACCT 220 Cost Behavior: Analysis and Uses Cost-Volume-Profit Relationships (Chapters 5 and 6)
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2 Chapter 5 Cost Behavior: Analysis and Uses   Objectives: Understand how fixed and variable costs behave and how to use them to predict costs Prepare the income statement using the contribution format
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3 CHAPTER 5 Cost Behavior: Analysis and Uses Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range.
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4 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)
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5 Cost behavior: Examples Examples of Variable Costs Merchandising company Cost of goods sold Manufacturing company Direct materials Direct Labor Variable elements of manufacturing overhead: Indirect materials Lubricants Supplies Power Both merchandising and Variable elements of selling and administrative manufacturing companies Cost: Commissions Shipping costs Service organizations Supplies, travel
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6 Committed vs. Discretionary Costs Committed fixed costs Investments in facilities and equipment that cannot be changed for short period of time; Depreciation of buildings and equipment Real estate taxes Insurance expenses Salaries of top management and operating personnel Discretionary fixed costs Fixed costs that arise from (typically) annual decisions by management: Research and Development Advertising Public relations Management development programs Employee training and recruiting Internships for students
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7 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Mixed Costs   Total mixed cos t A mixed cost has both fixed and variable components. Consider the example of utility cost.
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8 Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Mixed Costs   Total mixed cos t The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y = the total mixed cost a = the total fixed cost (the vertical intercept of the line) b = the variable cost per unit of activity (the slope of the line) X = the level of activity
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9 Mixed Costs Example If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?
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