ch 3 Flashcards
is jumping to next relevant range worth it?
depends how large a jump.
must have/expect enough growth so that benefits outweigh additional costs
define cost behaviour
how cost reacts/changes to business activity fluctuations
examples of variable costs
DL hours
machine hours
units produced
units sold
public utility company: more variable or fixed costs?
large equipment investments
so less variable costs
service company: more variable or fixed costs?
high variable costs
merch company: more variable or fixed costs?
high proportion of variable costs
like cost of sales
manufacturing company: more variable or fixed costs?
many variable costs
define true variable cost
slope on graph is linear /
amount used in period directly relates to production levels
define step variable cost
line on graph looks like staircase
cost of resource only attainable in bulk
ex. salary of cleaning workers (can’t hire for just +1 hour)
relevant range line on a graph.
variable costs are often curved
relevant range is straight line (like ogive)
define nonlinear variable costs
per unit amount changed as activity levels changes
ex. UNIT cost of goods purchased in bulk
fixed cost per unit behaviour on a graph
drops by less and less
types of fixed costs
committed
discretionary
define committed fixed costs
investments that can’t be reduced without huge changes
multi year
define discretionary/managed fixed costs
single year and relatively easy to adjust
ex. value chain costs
mixed cost equation
Y = a + bx
total mixed costs = TF + (VC • units)
methods of analyzing mixed costs
account analysis
engineering approach
HIGH LOW METHOD
explain account analysis
ID each account as fixed, variable, or mixed based on the past
explain engineering approach to mixed cost analysis
determine what cost behaviour should be based on # of inputs needed per output
time consuming
only used when no prior data available
explain high low method of mixed cost analysis
-scatter plot
- find high and low BASED ON ACTIVITY
plug variable cost/unit into high or low point to find FC
contribution format of making income statements
sales
less variable expenses
contribution margin
less fixed exp
operation income
define contribution margin
amount remaining from sales ref after variable exp
