A202 Chapter 4 Notes
A202 Chapter 4 Notes BUS-A202
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This 2 page Class Notes was uploaded by Lauren Detweiler on Sunday February 8, 2015. The Class Notes belongs to BUS-A202 at Indiana University taught by Diane Biagioni in Spring2015. Since its upload, it has received 79 views. For similar materials see Managerial Accounting in Business at Indiana University.
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Date Created: 02/08/15
A202 Week 4 Prof Biagioni Textbook Notes Chapter 4 excluding Appendix A Techniques for Estimating Fixed and Variable Costs 1 Contribution Margin Statement a Contribution Margin the amount that remains after subtracting variable costs from revenue b The statement groups costs based on whether they are xed or variable and reports them as separate line items 11 Estimating Cost Structure a Cost Structure an estimate of the variable and xed portions of a company s costs b Most rms rely on historical data to estimate their cost structure 111 Method 1 Account Classi cation Method a Involves systematically categorizing a company s cost accounts as xed or variable b Estimate the change in variable costs i Sum the costs classi ed as variable to obtain total variable costs for the most recent period ii Divide the above amount by a measure of the volume of activity for the corresponding period to estimate the unit variable cost iii Multiply the estimated unit variable cost by the change in activity to estimate the total variable cost IV Method 2 HighLow Method a Uses two observations of aggregate cost data to estimate total xed cost and unit variable cost i This avoids classifying each cost as xed or variable individually making it much less timeconsuming than the account classi cation method b For any volume of activity total costs are Total Costs Fixed costs Unit Variable Costx Volume of Activity i We do not know this cost line so we must use observations of actual costs and actual activities to estimate the cost line c Managers use the two observations pertaining to the highest and lowest activity levels i Most likely to de ne the normal range of operations ii Apply the cost equation to these two points Total Costs HIGHACTIVITYLEVEL Fixed costs Unit Variable Cost x Activity Level HIGH Total Costs LOWACTIVITYLEVEL Fixed costs Unit Variable Cost x Activity Level LOW iii From these equations we can calculate unit variable cost as 39lbml quotmix lhm quotmix l m z39lrz1bcrosl If 1 IllI 1111 li hwlx mm1 U lllhll Illl Jul1 lzm39d VimHIM iv Then use the unit variable cost estimate with either the high or low total cost equation to estimate xed costs Fixed costs Total Costs HIGH Unit Variable Costx Activity Level HIGH Fixed costs Total Costs LOW Unit Variable CostxActivity Level LOW V Method 3 Regression Analysis a A statistical method for estimating xed and variable costs b Uses all available observations to come up with a line that best ts the data i Contrast to highlow method uses only two past observations to estimate xed and variable costs c Steps to t a regression line to data ie 12 months of membership and cost data for a gym i In Excel enter the months in column A the volume of activity of members in column B and total costs in column C Use a headingtitle for each column ii From the Tools menu choose the Data Analysis option iii From the Options box choose Regression iv You will see a dialog box can be seen in Exhibit 410 of the textbook 1 Enter the yaxis cell range total costs and the xaxis cell range of members 2 Check the Labels option to include the title cells in the range 3 Choose the Line Fit Plots option if you would like to see a graph of the tted line 4 Click OK and you should see the results in a separate worksheet d Other statistics i RSquare the value of this indicates the goodness of t 1 Will always lie between 0 and l 2 The closer it is to l the better the t ii Pvalue indicates the con dence that the coef cient estimates reliably differ from zero 1 Usually we look for pvalues below 005 2 Lower values indicate a higher level of con dence in the estimates VI Choosing an Appropriate Method a Choice of a particular method depends on how best we can implement each of the techniques in a given setting b Reminder for all three techniques we assumed revenues and variable costs are proportional to activity volume i This is only valid in the relevant range normal range of operations
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