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# what is Cost Behavior? Description

##### Description: These notes cover possible material that could be on exam 2.
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Exam 2 Review

## what is Cost Behavior?

Chapter 6: Activity Analysis, Cost Behavior, and Cost Estimation Conceptual – 4 : Graph – 4 : Computational – 2

 Cost Behavior – managers have to know how costs will be affected by  changes in activity.

 Cost Estimation – process of determining cost behavior – how particular  cost behaves.

o Often focuses on Historical Data.

o Methods:

 Account Classification Method

∙ Cost estimates are based on a review of each general

ledger account making up the total cost being analyzed.

 Visual-Fit Method

∙ Used for semi-variable costs or if the analyst has no clear  idea about the behavior of a cost item

o Scatter-Graph

 High-Low Method

∙ Difference between the COSTS corresponding to the

highest and lowest activity levels / difference between the

highest and lowest ACTIVITY levels = Variable Cost per

## what is Cost Estimation?

Dozen Bakery Items

 Cost Prediction – using knowledge of cost behavior to forecast level of cost  at a particular activity level.

o Focuses on the Future.

 Types of Costs:

o Step-Variable Costs

 Total cost increases to a new higher cost for the next higher  range of activity

 Total cost remains constant within a NARROW range of activity o Step-fixed Costs

 Total cost doesn’t change for a wide range of activity, and then  jumps to a new higher cost for the next higher range of activity  Step variable costs can be adjusted more quickly and the width  of the activity steps is much wider for the step-fixed costs

o Semi-Variable (Mixed) Costs

Computational

∙ Cost amount of month/broadcast hours during month = Cost per Broadcast  Hour for Month

∙ Total Amount incurred for Cost

## what is Account Classification Method?

o Variable = Cost x Hours

o Fixed = Stays the Same

∙ VC per ____ = Difference in high-low cost/Difference in high-low activity ∙ FC per month = Cost - Activity Level x VC

Chapter 7: Cost Volume Profit Analysis

Conceptual – 6 : Computational – 4 If you want to learn more check out What does Epiphenomenalism mean?

 CVP Analysis

o It provides management within comprehensive overview of the effects  on cost revenue.

o Total Revenue = linear

o Total Expenses = linear over relevant range

 Can be fixed, variable or semi-variable.

o Sales Mix – the relative combo (proportion) that a company’s products are sold.

 Break Even Point – the level of activity where total revenues equal total  expenses (variable and fixed).

 Total Contribution Margin – the amount of revenue available to cover fixed costs.

 Weighted-Average Unit Cost Margin - The average of the several  products unit contribution margins, weighted by the relative sales proportion  of each product.

 Contribution Margin Income Statement - the contribution format  highlights the distinction between variable and fixed expenses.

Computational

∙ Total Sales Revenue – Total Variable Expense = Total Contribution Margin ∙ Break Even Point in Units = Fixed Expenses / Contribution Margin per Unit  (Sales Price – VC per Unit)

o To find Target Profit add Target Profit to Fixed Expenses in

Numerator We also discuss several other topics like what is city democracy?

∙ Break Even Point in Dollars = Fixed Expenses / Contribution Margin Ratio o To find Target Profit add Target Profit to Fixed Expenses in

Numerator

∙ Contribution Margin Ratio = Contribution Margin per Unit / Sales Price per  Unit

∙ Safety Margin = Budget Sales Revenue – Break-even Sales Revenue ∙ Weighted Average Contribution Margin = SUM(Contribution Margins *  Sales Mix)

Chapter 8: Variable Costing and the Costs of Quality

Conceptual – 3 : Graph – 3 : Computational – 3

 In a manufacturing firm, two alternative accounting treatments of fixed  manufacturing overhead can result in different reported income amounts for  the company.

 Absorption Costing – a system of accounting for costs in which BOTH fixed  and variable production costs are considered product costs.

 Variable Costing – a system of cost accounting that only assigns the  variable cost of production to products.

 Grade vs. Quality: We also discuss several other topics like What drug did Dennis Quaid's twins receive at too high of a dose?
If you want to learn more check out what is Marketing Concept?

o A product’s grade refers to the extent of its capabilities in performing  intended purpose, in relation to other products with the same

functional use.

o Quality of Design – how well it is conceived or designed for its  intended use.

o Quality of Conformance – the extent to which a product meets the  specification of its design.

 Four Types of Quality Costs:

o Prevention Costs – costs of preventing defects.

o Appraisal Costs – costs of determining whether defects exist. o Internal Failure Costs – cost of repairing defects found prior to  product delivery.

o External Failure Costs – those costs incurred after product delivery. Computational

∙ Shortcut Method:

o Change in inventory in units (Difference of Sales over Years)

* Predetermined Fixed-Overhead Rate per unit (FMO/Production) = Difference in fixed overhead expensed under absorption and variable costing We also discuss several other topics like What is Buffalo Jump?
If you want to learn more check out Why do astronomers believe that the angular momentum problem is no longer an objection to the solar nebula problem?

∙    Prevention Costs + Appraisal Costs = Internal + External Failure Costs ∙ When Sales > Production = Variable Costing

∙ When Production > Sales = Absorption Costing

∙ Variable Costing – Inventorial Cost

DM used + DL + VMO

∙ Absorption Costing – Inventorial Cost

DM used + DL + VMO + FMO

∙ Operating Income – Absorption

o Sales Revenue – Cost of Goods Sold = Gross Margin

o Gross Margin – Selling and Administrative Expenses (Fixed and  Variable) = Operating Income

∙ Operating Income – Variable

o Sales Revenue – Variable Expenses (Variable Manufacturing Overhead  and Variable Selling and Administrative) = Contribution Margin o Contribution Margin – Fixed Expenses (FMO and FS&A) = Operating  Income

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