ACCTG 211 1st Edition Lecture 26 Review Areas for Focus Cost Behavior Variable costs VC when stated on a per unit basis variable costs remain constant across all production levels within the relevant range fixed costs FC Fixed costs do not vary with the production level Mixed costs If within a relevant range a cost is neither fixed nor variable it is called semivariable or mixed Relevant range issues The relevant range is the range of activity e g production or sales over which these relationships are valid Graphing the concepts Total Costs FC Total Revenue Contribution Margin Income Statement format Using the High Low Method to separate Mixed Costs into the respective Variable and Fixed Costs High Low Method First find the highest level of activity in terms of units Second find the lowest level of activity in terms of units Important you must use both the x and y from each of the highest and lowest levels of activity Third plug into the following formula to find the variable cost per unit or the slope of the trend line Variable Cost Per Unit Total Cost of Highest Level of Activity Total Cost of Lowest Level of Activity Units of Highest Level of Activity Units of Lowest Level of Activity Equations TC FC VC TC VC per Unit X of Units Total FC formula for a line y ax b y total cost x volume a slope of the line b y intercept Slope of the line variable costs per unit Y intercept total fixed costs Unit Contribution Margin Contribution Margin Think of contribution margin CM as the amount contributed to covering fixed costs Once fixed costs are covered by CM entirety of additional CM goes straight to profit Traditional Income Statement Sales Variable Costs Contribution Margin Sales COGS Gross Profit Expenses Net Income Contribution Margin Income Statement Sales VC CM Fixed Costs Net Income Contribution Margin Ratio CM ratio CM Sales in total per unit by percentage Break even analysis Cost Volume Profit In units or dollars Income Statement Approach Using the Contribution Margin Sales in dollars using the Contribution Margin Ratio The formulas What happens when Cost behavior dynamics Production increases decreases VC FC or Selling Price changes Weighted Average Contribution Margin more than 1 product Relevant irrelevant information Incremental analysis Short term decisions to deal with Special Order Pricing Target Costing Cost Plus Keep Drop i e Discontinue segments under the following scenarios Avoidable Fixed Costs Unavoidable Fixed Costs If we drop a segment there is impact on another segment Product Mix constrained resources Outsourcing we ll limit the discussion to Make or Buy Sell As Is or Process Further Joint Production Costs Capital Budgeting Minimum desired rates of return why we use them and how to calculate the weighted average cost of capital Capital investment decision methods Payback period Accounting rate of return Net present value Time value of money Equal and unequal cash flows Comparing the Cash flows vs Income flows of potential projects
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