201-Wk5-Cost Estimation-F'10

# 201-Wk5-Cost Estimation-F'10 - Mgmt 201 Managerial...

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Mgmt. 201 - Managerial Accounting – Week #5 Cost Behavior Cost Estimation Professor Thoman Fall 2010 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 SOME KIND OF FIXED COSTS (NOT VARIABLE). WE WILL FIND THIS IS A USEFUL CLASSIFICATION FOR MANY PURPOSES

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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.
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201-Wk5-Cost Estimation-F'10 - Mgmt 201 Managerial...

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