MGMT 201: Chapter 6 Notes
MGMT 201: Chapter 6 Notes MGMT 201
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This 2 page Class Notes was uploaded by Zach Weinkauf on Sunday February 21, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 102 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 02/21/16
Lecture 11: February 16, 2016 Chapter 6: Activity Analysis, Cost Behavior, and Cost Estimation Cost Behavior – managers have to know how costs will be affected by changes in activity o If they don’t = bad budgeting o Also called Cost Functions o Slope is variable cost per unit of 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 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 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 Step-Fixed Costs Fixed costs that jump to a different amount outside of the relevant range 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 Semi-Variable (Mixed) Costs Using Costs Behavior Patterns to Predict Costs To build a budget you start with a sales forecast o Then, predict operating costs off that forecast Engineered – physical relationship with activity measure Direct Materials Committed – long-term cannot be reduced in the short-term Depreciation on Buildings and Equipment Discretionary – may be altered in the short-term by current management decisions Advertisements and Research & Development Data Collection Issues Missing Data - misplaced source documents or failure to record a transaction can result in missing data Outlier Data Points – should be eliminated from the data set Mismatched Time Period Costs – production activity may be recorded daily, but costs may be recorded monthly Trade-offs in choosing the time period – lots of data vs. a little Inflation – historical cost data may not reflect future cost behaviorvb Homework Cost amount of month/broadcast hours during month = Cost per Broadcast Hour for Month Total Amount incurred for Cost 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
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