Lecture Managerial accounting - Chapter 2: Cost behavior and cost estimation. After studying this chapter you will be able to understand: Cost behavior patterns, cost estimation, contribution margin analysis. | 2 CHAPTER COST BEHAVIOR AND COST ESTIMATION photo: © Tischenko Irina/Shutterstock UNIVERSAL SPORTS’ INCOME STATEMENT Sales $ 1,039,500 COGS 769,230 Gross Profit $ 270,270 Selling and administrative expense 230,370 Operating income $ 39,900 Tax expense (30%) 11,970 Net Income $ 27,930 What would Universal Sports’ net income be if it met the original sales volume projection? COST BEHAVIOR PATTERNS Unit 2 1 . Unit Unit © Tomwang112 / iStockphoto 4 TYPES OF COST BEHAVIOR Variable Fixed Step-Variable Mixed IT’S TIME FOR A STUDY BREAK! You’ve been studying for several hours and are getting ready to take a study break, so you break open a nice cold can of soda. Just then the doorbell rings and in come three friends. HERE’S THE DRINK BILL Friends Cost per can Total cost 1 $ $ 2 $ $ 3 $ $ 4 $ $ VARIABLE COST Cost per unit remains constant with changes in volume Total cost varies proportionately with changes in volume LET’S ORDER PIZZA! The soda . | 2 CHAPTER COST BEHAVIOR AND COST ESTIMATION photo: © Tischenko Irina/Shutterstock UNIVERSAL SPORTS’ INCOME STATEMENT Sales $ 1,039,500 COGS 769,230 Gross Profit $ 270,270 Selling and administrative expense 230,370 Operating income $ 39,900 Tax expense (30%) 11,970 Net Income $ 27,930 What would Universal Sports’ net income be if it met the original sales volume projection? COST BEHAVIOR PATTERNS Unit 2 1 . Unit Unit © Tomwang112 / iStockphoto 4 TYPES OF COST BEHAVIOR Variable Fixed Step-Variable Mixed IT’S TIME FOR A STUDY BREAK! You’ve been studying for several hours and are getting ready to take a study break, so you break open a nice cold can of soda. Just then the doorbell rings and in come three friends. HERE’S THE DRINK BILL Friends Cost per can Total cost 1 $ $ 2 $ $ 3 $ $ 4 $ $ VARIABLE COST Cost per unit remains constant with changes in volume Total cost varies proportionately with changes in volume LET’S ORDER PIZZA! The soda didn’t do the trick, so you order a $12 large pizza from your favorite pizza place. THE PIZZA BILL Friends Total cost Cost per person 1 $ $ 2 $ $ 3 $ $ 4 $ $ FIXED COST Total cost remains constant with changes in volume Unit cost changes inversely with changes in volume Fixed relationship only holds over the relevant range REMEMBER TO KEEP IT CONSTANT Friends Cost per can Total cost 1 $ $ 2 $ $ 3 $ $ 4 $ $ Friends Cost per person Total cost 1 $ $ 2 $ $ 3 $ $ 4 $ $ Variable Cost Fixed Cost COMMITTED VS. DISCRETIONARY Depends on the time frame over which the costs are incurred and fixed. 10-year factory lease COMMITTED 6-month advertising DISCRETIONARY CAUTION What effect will reducing the cost to $0 have on the long-term health of the company? STEP-VARIABLE COST Cost remains fixed in total over small range of volume or activity These small ranges are smaller than the relevant
