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Managerial Accounting

by: Nikita Hendricks

Managerial Accounting 2304

Marketplace > Baylor University > Accounts > 2304 > Managerial Accounting
Nikita Hendricks


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Week 2 8/30/16 Cost Behaviour
Managerial Accounting
Prof. Stuebs
Class Notes
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This 3 page Class Notes was uploaded by Nikita Hendricks on Tuesday August 30, 2016. The Class Notes belongs to 2304 at Baylor University taught by Prof. Stuebs in Fall 2016. Since its upload, it has received 11 views. For similar materials see Managerial Accounting in Accounts at Baylor University.

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Date Created: 08/30/16
MANAGERIAL ACCOUNTING CLASS NOTES CHAPTER 2 I. Cost Behavior Patterns A. What is cost behavior? The way in which a change in response to the changes in the level of activity, B. What is meant by activity? Repetitive event that serves as a measure of output or usage such as units produced. C. What is a Variable Cost? Costs that vary with the quantity of output produced 1. Total variable cost- Varies in proportion to changes in the level of activity 2. Variable cost per unit- remains constant, regardless of the level of activity D. What is a Fixed Cost? A cost that is constant in total within relevant range of activity but per unit varies inversely with activity. 1. Total cost: Does not change 2. Cost per unit: varies inversely to the level of activity 2. Discretionary vs committed fixed costs. a. What is a committed fixed cost? A cost that can’t be change in short term. It is usually a cost that is set by someone else or because you are in contact. b. What is a discretionary fixed cost? A cost that can be changed in the short term and basically we have its A cost we have control over. 3. Mixed Cost: What is a mixed cost? Mixed cost contains both a fixed component and variable component. Total cost will vary with level of activity because it has a variable component Cost per unit will vary with the level of activity because it has a fixed component Variable cost: Costs that vary with the quantity of output produced 2-1 Fixed cost: Costs that do not vary with the quantity of output produced Mixed cost: both fixed and variable. For example, standard wages for employees (fixed) plus any overtime worked (variable) Step cost: Fixed over a small range of activity and then jump to a new fixed level with moderate changes in volume. The high-low method: A method for determining cost behavior based on two historical data points: the highest volume of activity and the lowest volume of activity. It is A quick way to estimate the variable and fixed components of a mixed cost. The High low method steps 1. Identify the highest and lowest level of ACTIVITY (x) 2. Compute the variable cost/unit (M) Variable cost per unit (M) = Change in cost (Y) = cost at highest level of activity (Y HIGH– cost at lowest level of activity (YLOW) Change in activity (x) = highest activity level (x HIGH – lowest activity level (x LOW) 3. Calculate the fixed cost (b) Total Cost = Variable Cost + Fixed Cost Y = Mx + b Fixed cost (b) = Total Cost (Y) – Variable cost (Mx) 4. Complete the Total Cost Equation by showing that: Total Cost = Variable Costs (VC/unit x Units) + Fixed Costs 2-2 5. What are the strengths and weaknesses of the high-low method: a. Strengths: 1. Relatively simple calculations 2. Only requires two points of data 3. More objective than scatter graph b. Weaknesses: 1. Only uses a limited amount of data 2. Can be based on outlines (high and low points that are non- representative) 3. No statistical evaluation model validity Scatter graph: A graph that shows total costs in relation to volume or activity level. The scatter plot is the graph of historical data on the y-axis and the volume data on the x-axis Advantages: Simple and Graphical Disadvantages: Subjective estimate based on visual preferences 2-3


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