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Feb+3+ch5

# Feb+3+ch5 - units 0 1 2 3 4 Total Activity Least-Squares...

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Managerial Accounting Discussion Session Feb 3, 2012 Hoyt She

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What you need to know… Understand how fixed and variable costs behave and how to use them to predict costs Understand the definition of mixed costs Predict total costs associated with certain level of production Analyse a mixed cost using the high-low method Least-Squares Regression Method The contribution format
How fixed and variable costs behave 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 costs remain the same even when the activity Average fixed costs per unit Fixed level changes within the decrease as the activity relevant range. level increases.

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A Typical Case Total Costs Fixed Costs Mixed Costs Variable Costs Fixed Costs Variable Costs
High-low Method (TC High – TC Low )/(Unit High – Unit Low ) = Variable Costs (per unit) Fixed Costs = TC – Variable Costs (per unit) * # of

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Unformatted text preview: units 0 1 2 3 4 Total Cost 10 20 Activity * * * * * * * * * * Least-Squares Regression Method Intercept = Fixed Costs; Slope = Variable Costs R-square = Goodness of fit (the higher the better fit) R2 varies from 0% to 100%. It is the percentage of the variation in the dependent variable (total cost) that is explained by variation in the independent variable (activity). X Y The Contribution Format Used primarily for external reporting. Used primarily by management. Comparison of the Contribution Income Statement with the Traditional Income Statement Traditional Approach Contribution Approach (costs organized by function ) (costs organized by behavior ) Sales 100,000 \$ Sales 100,000 \$ Less cost of goods sold 70,000 Less variable expenses 60,000 Gross margin 30,000 \$ Contribution margin 40,000 \$ Less operating expenses 20,000 Less fixed expenses 30,000 Net operating income 10,000 \$ Net operating income 10,000 \$...
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Feb+3+ch5 - units 0 1 2 3 4 Total Activity Least-Squares...

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