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201-Wk5-Cost Estimation-S'12 (STUD)

# 201-Wk5-Cost Estimation-S'12 (STUD) - Mgmt 201 Managerial...

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Mgmt. 201 – Managerial Accounting – Week 5 Cost Behavior Cost Estimation Professor Thoman 2 Overview of Chapter 6 – Cost behavior and estimation In Chapter 6 we will: I. Learn terms that describe cost behavior Review the meaning of variable costs, fixed costs, and the relevant range. Both graph and represent algebraically the costs. Learn new cost terms: step fixed costs, discretionary costs and mixed costs. II. Discuss cost estimation techniques and use the estimates to predict future costs and earnings. Account-classification method Visual fit method High Lo method (terrible method) Least-squares method III. Discuss the learning curve.

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3 I. Variable versus fixed costs Definitions: Activity A measure of an organization’s output of goods or services bushels of wheat produced pairs of Dockers tons of ore mined number of Chevy Blazers Variable Costs Given a relevant range of activity, costs that automatically change with the activity level; accountants usually assume that variable costs vary proportionately with the activity level. Fixed Costs Given a relevant range of activity, costs that do not vary with the level of activity Variable costs for manufacture of textbook Fixed costs for manufacture of textbook: Must always specify an activity before one can determine if a cost is variable or fixed with respect to that activity. Must also specify a time frame—with more time, more items become variable. In past chapters we have been assuming a long time frame so that all of the ABC or traditional costs of the product are variable. 4 Graphs of variable and fixed costs:
5 I. Other cost behavior terms Definitions: Mixed or semi-variable costs Costs that have both a fixed and variable component. 6 Definitions: Step or step-fixed costs Costs that are fixed over a range of output levels. Discretionary fixed costs Costs that are fixed but the level at which they are fixed depends upon managerial discretion. Bottom line: Costs can be divided into variable costs and fixed (not variable) costs. This will be a useful classification for many purposes in this class.

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7 I. Contracts that use both fixed and variable costs. The Pacific Corporation operates car rental agencies at more than 20 airports. Customers can choose from one of three contracts for car rentals of one day or less: Contract 1: \$50 for the day, no mileage charge Contract 2: \$30 for the day plus \$0.20 per mile traveled Contract 3: \$1 per mile traveled If a customer needed the car for 2 days and expected to drive M miles, which contract is the cheapest? Equation for Contract 1:
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201-Wk5-Cost Estimation-S'12 (STUD) - Mgmt 201 Managerial...

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