ACCT 2521 1st EditionExam # 1 Study Guide Chapters: 6 – 7Chapter 6Cost behavior: how costs change as volume changes- Variable costs- Fixed costs- Mixed costs- Variable costs: costs that are incurred for every unit of volume- Total variable costs change in direct proportion to changes in volume- Graphs of variable costs always begin at the origin, the point that represents zero volume and zero costEx: If a hotel has zero guests, it will not incur any variable costs for toiletries or breakfasts- The slope of the variable cost line represents the variable cost per unit of activity- y = total costs- x = volume of activity- v = volume of activity Cost Equation Total variable cost (y) = Variable cost per unit of activity (v) x Volume of activity (x)OR y = vxy = $3xThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.y = total toiletry cost$3 = variable cost per guestx = number of guestsy = $3 per guest x 2,000 guests = $6,000y = $10xy = total breakfast and refreshment hour cost$10 = variable cost per guestx = number of guestsy = $10 per guest x 2,000 = $20,000 2. Fixed costs: costs that do not change in total despite wide changes in volumeCommitted fixed costs: costs that the business is locked in to these costs because of previous management decisionsDiscretionary fixed costs: result of annual management decisionsEx: advertising expenses- Companies have more control over these fixed costs in the short runTotal fixed cost (y) = Fixed amount over a period of time (f)OR y = fy = $100,000Fixed cost per guest depends on the number of guestsIf the hotel serves 2,000 guests:$100,000/2,000 guests = $50/guest Fixed cost per guest is inversely proportional to the number of guests3. Mixed costs: contain both variable and fixed costs components Ex: A hotel’s utilities are mixed costs because it requires a certain amount of utilities just to operate. But, the most guests at the hotel, the more water, electricity, and gas are required - The total mixed costs line increases as the volume of activity increases- The line des NOT begin at the originEx: If no guest stay at a hotel, the hotel still incurs a certain amount of utilitiesTotal mixed cost = Variable cost component + Fixed cost componentORy= vx + fEx: y = $8x + $8,000y = total utilities cost per monthx = number of guests Total mixed costs increase as volume increases, but not in direct proportion to changes in volume Mixed costs per unit decrease as volume increases, but not in direct proportion to change in volumeRelevant range: the band of volume where the following remain constant- Total fixed costs- Variable cost per unitStep costs: fixed over small range of activity and then jump up to a new fixed level with moderately smallchanges in volume (resemble stairs steps)Ex: Hotels (maid to room ratio) Restaurants (server to table ratio) Hospitals (nurse to bed ratio)- Steps costs differ from fixed costs only in that they stop up to a new relevant range with relatively small changes in volume- Fixed costs hold constant over much longer ranges of volumeCurvilinear costs: are not linear and do not fit into any neat patternAccount analysis: managers use their judgment to classify each general ledger account as variable, fixed, or mixed cost Methods to Estimate the Cost Equation- High-low method- Regression analysis1. High- low method: easy way to estimate the variable and fixed cost components of a mixed costs1. Identify the month with the highest and lowest volume of activity2. Find the slope= ∆ in cost ∆ in volume3. Total mixed costs = variable cost component + fixed cost componenty = vx + f4. Write the cost equationRegression Analysis: statistical procedure for determining the line, and associated cost equation, thatbest fits all of the data points in the data set, not just the high-volume and low-volume data points1. Intercept coefficient-vertical intercept2. X Variable 1- slope3. R- square value- goodness of fitEx: R Square= .94726 Intercept= 14538.05 X Variable 1= 7.849766Cost Equation= y =$7.85x+$14,538.80> very reliable.50-.80 use with caution.50< use different cost equationAbsorption Costing: all manufacturing-related costs, whether fixed or variable, are absorbed into thecost of the product- All direct materials, direct labor, and MOH costs are treated as inventoriable product costs- Variable manufacturing costs would include DM, DL, and variable MOH such as utilities used during the production process- Fixed MOH cost would include property taxes and insurance on the plant, depreciation on the plant, lease payments that are not affected by changes in production volume GAAP requires absorption costing for external financial reportingVariable Costing: only variable manufacturing costs are treated as inventoriable product costs- No fixed MOH is assigned Variable costing may only be usedPeriod CostsAbsorption- none of the fixed expensed as a period costVariable- all of the fixed MOH is expensed as a period cost The only difference between absorption and variable costing is the treatment of fixed MOH and the timing with which it is expensed:- Under absorption costing, fixed MOH becomes part of the inventoriable product cost of each unit, which isn’t expensed until the inventory is sold- Under variable costing, fixed MOH is expensed immediately as a period cost Traditional Income StatementSales Revenue- COGSGross Profit- Operating ExpensesOperating IncomeContribution Margin Income StatementSales Revenue- Variable Expenses- Variable COGS- Variable Operating ExpensesContribution Margin- Fixed ExpensesFixed MOH Fixed Operating ExpensesOperating Income Contribution margin income statement may only be used for internal management purposes, never for external reporting Contribution Margin Income Statement: Service CompanySales Revenue- Variable expensesContribution Margin- Fixed expensesOperating Income- No COGSContribution Margin Income Statement: Merchandising CompanySales Revenue- Variable expensesCOGSV. Operating Ex.Contribution Margin- Fixed Operating Ex.Operating Income Operating income will not always be the same between the two costing systems They will only be the same if the manufacturer sells exactly what it producd during the periodIf unties produced=units sold thenInventory levels remain constant, and...Absorption income=variable costing