Video - Cost Behavior Patterns

Question 1

Cost Behavior

Answer 1

Allows us to predict how costs change in response to changes in production or sales

Question 2

High-Low Method

Answer 2

provides a rough estimate of the fixed and variable cost components that comprise total costs

Question 3

High-Low Method Idea

Answer 3

calculate change in costs from two production volume extremes

Question 4

What’s more accurate, the high-low method or regression analysis?

Answer 4

Regression Analysis, because it takes more points into consideration (high-low just takes high and low)

Question 5

In July the Gibson Co. incurred total overhead costs of $58,000 and made 6,200 units. In December it produced 3,200 units and total OH costs were $40,000. What are the total fixed factory costs per month and average variable factory costs?

Answer 5

$58,000 - $40,000 = $18,000 (RISE)
6,200 units - 3,200 units = 3,000 (RUN)

Variable Cost / unit = Rise / Run

Rise = Y axis
Run = X axis

$18,000 represents the rise
3,000 units represents the run

$18,000 / 3,000 = $6 / unit

This is the slope, or the variable cost

Total Cost = FC + VC x X
$58,000 = FC + $6 x 6,200
$20,800 = FC

500 units
Total Costs = $20,800 + $6 x 500
TC = $23,800