ACCT 210 1st Edition Lecture 2 Outline of Last Lecture I Managerial accounting II Four types of cost behavior a Variable b Fixed c Step variable d Mixed Outline of Current Lecture I Review cost behaviors II Cost estimation III Contribution margin Current Lecture 1 Review cost behavior a Variable costs are incurred only if there is activity b Fixed costs are incurred even with no activity c Mixed cost involves both variable and fixed costs Total Cost Mixed Costs 40 35 30 25 20 15 10 5 0 Variable cost Fixed cost 0 1 2 3 of units 2 Cost estimation a Scatter graph method i Find line of best fit ii y mx b iii b y intercept fixed cost portion 4 5 iv y total cost v m variable cost per unit vi x number of units vii b total fixed cost viii mx total variable cost b High low method i Based on two points Highest lowest levels of activity and costs associated with it ii Using points compute variable cost per unit VCPU Change total cost iii VCPU Change activity c Regression i Most accurate method ii Not on exam 3 Contribution Margin a Contribution margin Sales revenue total variable expenses b Contribution margin format for income statements Sales revenue Variable expenses Total contribution margin Total fixed expenses Net income c Example convert following income statement to contribution format Sales revenue Cost of goods sold Gross margin Selling expenses Administrative expenses Operating income 49 800 24 000 25 800 9 000 12 000 4 800 NOTE all of COGS are variable expenses 20 of selling expenses are variable 60 of admin expenses are variable ANSWER ON NEXT PAGE Sales revenue Less variable costs Cost of goods sold Selling expenses Admin expenses Total variable costs Contribution margin Less fixed costs Selling expenses Admin expenses Total fixed expenses Operating income 49 800 24 000 1 800 9 000 20 7 200 12 000 60 7 200 9 000 80 4 800 12 000 40 33 000 16 800 49 80033 000 12 000 4 800 16 80012 000
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