Chapter 6 Cost Behaviors 1 Describe Key Characteristics and Graphs of Various Cost Behaviors Cost Behavior how cost change as volume changes three common cost behaviors 1 Variable Cost total variable cost change in direct proportion to changes in volume variable cost per unit remains constant slope y axis total cost x axis volume of activity total variable cost y variable cost per unit of activity v volume of activity x 2 Use Cost Equations to Express and Predict Cost Cost Equation mathematical equation for a straight line to predict total cost total cost total variable cost total fixed cost y vx f 2 Fixed Cost stays constant over relevant range fixed cost per unit of activity vary inversely w changes in volume fixed cost per unit decreases when volume increases Costs and Decisions Committed fixed costs ex Lease locked in Discretionary fixed costs 3 Mixed Cost increases when volume increases expressed as combination of the variable and fixed cost equations total mixed cost variable cost vx fixed cost f Relevant Range band of volume where total fixed costs remains same at certain level variable costs per unit remain same at certain level Other Cost Behavior Step Costs and Curvilinear Sustainability and Cost Behaviors e banking billing drive down variable costs greener lifestyle 3 Use Account Analysis and Scatter Plots to Analyze Cost Behavior Cost Behavior Analysis four methods to analyze cost behavior 1 account analysis 2 scatter plots 3 high low method 4 regression analysis 1 Account Analysis fixed or mixed subjective 2 Scatter Plots use of judgment to classify each general ledger account as variable use historical data to determine a costs behavior graph of historical cost data y axis volume x axis 4 Use the High Low Method to Analze Cost Behavior 3 High Low Method determine a cost equation y vx f Step 1 find variable cost per unit slope of cost line Step 2 find the fixed costs vertical intercepts Step 3 create the cost equation USE HIGH AND LOW VOLUME POINTS 5 Use Regression Analysis to Analyze Cost Behavior 4 Regression Analysis statistical procedure to find the line that best fits data uses all data points R square goodness of fit Intercepts fixed costs X Variable 1 variable cost per activity R square value goodness of fit how well does the line fit the data points ranges from 0 1 0 menas no relationship 1 perfect relationship 80 1 very reliable 50 80 use equation with caution 0 50 weakly related use different base 6 Describe Variable Costing and Prepare a Contribution Margin Income Statement Absorption Costing ch 2 required by GAAP assign manufacturing cost to products DL DM MOH traditional income statement Contribution Margin Income Statement Sales variable cost contribution margin fixed cost operating income
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