how can you tell if total cost is variable, fixed, or mixed
- total variable costs increase in direct proportion to increases in volume
- total fixed costs stay constant over a wide range volume
- total mixed costs increase but not in direct proportion to increase in volume
how can you tell if a per-unit cost is variable, fixed, or mixed
- on a per-unit basis, variable costs stay constant
- on a per-unit basis, fixed costs decrease in proportion to increases in volume
- on a per-unit basis, mixed costs decrease but not in direct proportion to increase in volume
how can you tell by looking at a graph if a cost is variable, fixed, or mixed
- variable costs lines slope upward and begin at the origin
- fixed costs lines are flat(no slope) and intersect the y-axis at a level equal to total fixed cost
- mixed costs lines slope upward but do not begin at the origin. They intersect the y-axis at a level equal to their fixed cost component
cost equations mathematically express cost behavior using the equation for a straight line
y = v x + f
y
total cost
v
variable cost per unit of activity (slope)
x
volume of activity
f
fixed cost(the vertical intercept)
for variable cost, f is zero
y = v x
for fixed cost, v is zero
y = x + f
how to seperate the fixed and variable components of a mixed cost
- managers typically use the high-low method or regression analysis
- the high-low is fast and easy but uses only two historical data points to form the cost equation and, therefore, may not be very indicative of the cost’s true behavior
- regression analysis uses every data point provided to determine the cost equation that best fits the data. It is simple to do with Excel, but tedious to do by hand
how to tell if the cost equation fits the data in a high-low
- by plotting the data
- drawing a line through the data points associated with the highest and lowest volume
- “visually inspecting” the resulting graph to see if the line is representative of the other plotted data points
how to tell if the cost equation fits the data in a regression
the R-squared is a “goodness-of-fit” statistic that tells how well the regression analysis cost equation fits the data. The R-square ranges from 0 - 1, with 1 being perfect. When the R-squared is high, the cost equation should render fairly accurate predictions
do i need to be concerned about anything before using the high-low or regression
cost equations are only as good as the data on which they are based. Managers should plot the historical data to see if a relationship between cost and volume exists. In addition, scatter plots help managers identify outliers. Managers should remove outliers before further analysis. Managers should also adjust cost equations for seasonal data, inflation, and price changes
can i present the club’s financial statements in a manner that will help with planning and decision making?
managers often use contribution margin income statements for internal planning and decision making. Contribution margin income statements organize costs by behavior (fixed vs variable) rather than by function(product vs period)
difference between absorption and variable costing
fixed manufacturing costs are treated as:
- invariable products costs under absorption costing
- period costs under variable costing
how are invariable product costs calculated under absorption costing
Direct materials \+ Direct Labor \+ Variable MOH \+ Fixed MOH = Product Cost
how are invariable product costs calculated under variable costing
Direct materials
+ Direct Labor
+ Variable MOH
= Product Cost
why is variable costing often used for internal management purposes
- variable costing and the contribution margin income statement help managers easily predict the cost of operating at different volumes within the relevant range
- variable costing helps managers with decision making, because it allows them to easily see the cost of making one more unit of product
- variable costing does not give managers incentives to build up unnecessary inventory
