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# Chapter 6 Notes ACCT 2102

UGA

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This 4 page Class Notes was uploaded by Rachel Moore on Monday February 29, 2016. The Class Notes belongs to ACCT 2102 at University of Georgia taught by Farmer in Spring 2016. Since its upload, it has received 125 views. For similar materials see Principles of Accounting II in Accounting at University of Georgia.

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Date Created: 02/29/16

ACCT 2102 February 22, 2016 – February 26, 2016 Chapter 6 Notes Cost Behavior Managers focus on… • Planning • Directing • Controlling Variable costs change based on activity level. Fixed costs change based on number of units. Mixed costs are a mixture of fixed and variable costs. Invitations NONE Venue Fixed cost $600 Food Variable cost $20/person Service Mixed cost $100+$2/person Entertainment Fixed cost $300 $22 ???????????? ???????????????????????? ???? # ???????? ???????????????????????? + $1,000 PowerPoint Example If 100 guests attend, what are the total expected costs? $3,200 Would you suggest just estimating the costs for 100 guests? No. What if we expect 300 people to come? Formula isn’t valid. **What if this was an event people had to pay to attend and we wanted to “break even” on the event? What would we need to charge per person?** $3,200 / 100 = $32/person Volume Increases Volume Decreases Per Unit Cost Total Cost Per Unit Cost Total Cost VC No change Change VC No change Change (increase) (decrease) FC Change No change FC Change No change (decrease) (increase) MC Change Change MC Change Change (decrease) (increase) (increase) (decrease) Directly proportional: same direction at same rate; total variable cost Inversely proportional: opposite direction at same rate; fixed cost per unit Neither directly nor inversely proportional: mixed costs Mixed cost equation (cost behavior formula): ???? = ???????? + ???? • Y is the total cost. • The slope represents the variable rate. • X is the cost driver. • The y-intercept (B) is the fixed cost. • The total cost is equal to the variable rate times the activity level plus the fixed cost. • Pure variable will have a B value of 0. • Pure fixed will have a M value of 0. • How do managers make predictions if the cost is non-linear? Make it linear by identifying relevant ranges. Account analysis – look at account and make an estimated guess • Advantage(s): easy, person involved • Disadvantage(s): subjective, person involved • Person involved is an advantage and disadvantage because a person needs to be involved but not just any person. A random person that has no idea what to do will not help. Scatter plot (visual fit) • Advantage(s): provides a picture, helps spot possible outliers • Disadvantage(s): subjective High-low method (most important method to know!) • Advantage(s): objective • Disadvantage(s): 2 data points Regression analysis (simple (1x) vs. multiple regression (more than 1x)) • Advantage(s): objective, ALL data points, statistically based, R 2 • Disadvantage(s): complicated, outlier could skew data Account Analysis • y ÷ x = cost per case • mixed cost Scatterplot (visual fit) for Motts • Very strong • 1 outlier – (124,000, 84,000) High-low Method for Motts • Estimate a cost equation for energy costs o Points (120,000, $72,300) (63,000, $66,600) o Variable rate ???? = ∆▯= $▯,▯▯▯= $0.10 ∆▯ $▯,▯▯▯ o Fixed costs $72,300 = $0.10 120,000 + ???? → ???? = $60,300 o y = mx + b ???? = $0.10???? + $60,300 (monthly formula) ???? = $0.10???? + $60,300(????12) (yearly formula) • Predict energy costs for a month if 110,000 cases are produced? $71,300 Summary Output • R Square (tells you if your X is a good predictor of your Y) .88 • Intercept Coefficient (B) 57,740 • X Variable Coefficient (M) .13 What range of values is possible for the r-squared statistic? How do we interpret these values? [0-1] If r-squared is equal to 0, then barely, if any, of the data points hit the line. If r-squared is equal to 1, then all of your data points hit the line. What is the cost equation? Is it the same as the cost equation we calculated using the high-low method? Explain. Is one better than the other? Predict energy costs for a month in which 110,000 cases are produced. ???? = $0.13???? + $57,740; it is not the same; the regression method is better because it uses all of the data points in the data set; $72,040 What do you think would have happened to r-squared if November was removed? The accuracy of the formula would have increased. What do you think would happen to r-squared if an identified outlier was removed? It would increase. Units Costs $3,000 ???? = = $60 90% 450 $200,000 50 occupied $200,000 = 450 $60 + ???? 80% 400 $197,000 ???? = $173,000 occupied ???? = $60???? + $173,000 ???? = $60 250 + $173,000 = $188,000 x3 x5 Shoe Rental = fixed cost ???? = $4 Game Fees = variable cost ???? = $4.25???? Total Cost to Bowl = mixed cost Cost behavior formula: ???? = $4.25???? + $4 How much cash would you need? ???? = $4.25(4) + $4 = $21

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