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Ch 5 Cost-Volume-Profit Relationships.pdf
1.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 11th Edition Chapter 5
2.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter Five Cost Behavior: Analysis and Use
3.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Recall the summary of our cost behavior Recall the summary of our cost behavior discussion from an earlier chapter. discussion from an earlier chapter. Types of Cost Behavior Patterns
4.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Activity Base A measure of what causes the incurrence of a variable cost A measure of what causes the incurrence of a variable cost Units Units produced produced Units Units produced produced Miles driven Miles driven Labor hours Labor hours Machine hours Machine hours
5.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Minutes Talked Total Long Distance Telephone Bill True Variable Cost Example A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.
6.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Recall the summary of our cost behavior Recall the summary of our cost behavior discussion from an earlier chapter. discussion from an earlier chapter. Types of Cost Behavior Patterns
7.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Minutes Talked Per Minute Telephone Charge Variable Cost Per Unit Example A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute.
8.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Extent of Variable Costs The proportion of variable costs differs across organizations. For example . . . A public utility with A public utility with large investments in large investments in equipment will tend equipment will tend to have to have fewer fewer variable costs. variable costs. A public utility with A public utility with large investments in large investments in equipment will tend equipment will tend to have to have fewer fewer variable costs. variable costs. A manufacturing company A manufacturing company will often have will often have many many variable costs. variable costs. A manufacturing company A manufacturing company will often have will often have many many variable costs. variable costs. A merchandising company A merchandising company usually will have a usually will have a high high proportion proportion of variable costs of variable costs like cost of sales. like cost of sales. A merchandising company A merchandising company usually will have a usually will have a high high proportion proportion of variable costs of variable costs like cost of sales. like cost of sales. A service company A service company will normally have a will normally have a high high proportion proportion of variable costs. of variable costs. A service company A service company will normally have a will normally have a high high proportion proportion of variable costs. of variable costs.
9.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Examples of Variable Costs 1. Merchandising companies â cost of goods sold. 2. Manufacturing companies â direct materials, direct labor, and variable overhead. 3. Merchandising and manufacturing companies â commissions, shipping costs, and clerical costs such as invoicing. 4. Service companies â supplies, travel, and clerical. 1. Merchandising companies â cost of goods sold. 2. Manufacturing companies â direct materials, direct labor, and variable overhead. 3. Merchandising and manufacturing companies â commissions, shipping costs, and clerical costs such as invoicing. 4. Service companies â supplies, travel, and clerical.
10.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Volume Cost True Variable Cost Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity.
11.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Step-Variable Costs A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease only in response to fairly wide changes in activity is known as a step-variable cost step-variable cost. Volume Cost
12.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Step-Variable Costs Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed. Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed. Volume Cost
13.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Step-Variable Costs Only fairly wide changes in the activity level will cause a change in the number of maintenance workers employed Only fairly wide changes in the activity level will cause a change in the number of maintenance workers employed Volume Cost
14.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economistâs Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountantâs Straight-Line Approximation (constant unit variable cost)
15.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Letâs look at fixed cost behavior on the next Letâs look at fixed cost behavior on the next screens. screens. Types of Cost Behavior Patterns
16.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Number of Local Calls Monthly Basic Telephone Bill Total Fixed Cost Example A fixed cost is a cost whose total dollar amount remains constant as the activity level changes. Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
17.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Recall the summary of our cost behavior Recall the summary of our cost behavior discussion from an earlier chapter. discussion from an earlier chapter. Types of Cost Behavior Patterns
18.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Number of Local Calls Monthly Basic Telephone Bill per Local Call Fixed Cost Per Unit Example Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call decreases as more local calls are made.
19.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Examples Advertising and Research and Development Examples Advertising and Research and Development Examples Depreciation on Equipment and Real Estate Taxes Examples Depreciation on Equipment and Real Estate Taxes Types of Fixed Costs Discretionary May be altered in the short-term by current managerial decisions Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be significantly reduced in the short term. Committed Long-term, cannot be significantly reduced in the short term.
20.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Trend Toward Fixed Costs The trend in many industries is toward greater fixed costs relative to variable costs. As machines take over As machines take over many mundane tasks many mundane tasks previously performed previously performed by humans, by humans, â âknowledge workers knowledge workersâ â are demanded for are demanded for their minds rather their minds rather than their muscles than their muscles As machines take over As machines take over many mundane tasks many mundane tasks previously performed previously performed by humans, by humans, â âknowledge workers knowledge workersâ â are demanded for are demanded for their minds rather their minds rather than their muscles than their muscles Knowledge workers Knowledge workers tend to be salaried, tend to be salaried, highly-trained and highly-trained and difficult to replace. The difficult to replace. The cost to compensate cost to compensate these valued employees these valued employees is is relatively fixed relatively fixed rather than variable. rather than variable. Knowledge workers Knowledge workers tend to be salaried, tend to be salaried, highly-trained and highly-trained and difficult to replace. The difficult to replace. The cost to compensate cost to compensate these valued employees these valued employees is is relatively fixed relatively fixed rather than variable. rather than variable.
21.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Is Labor a Variable or a Fixed Cost? The behavior of wage and salary costs can differ across countries, depending on labor regulations, labor contracts, and custom. In France, Germany, China, and Japan management has little flexibility in adjusting the size of the labor force. Labor costs are more fixed in nature. In France, Germany, China, and Japan management has little flexibility in adjusting the size of the labor force. Labor costs are more fixed in nature. In the United States and the United Kingdom management has greater latitude. Labor costs are more variable in nature. In the United States and the United Kingdom management has greater latitude. Labor costs are more variable in nature.
22.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 Fixed Costs and Relevant Range 90 Relevant Range Total cost doesnât change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity. Total cost doesnât change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
23.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Fixed Costs and Relevant Range Example: Example: Office space is Office space is available at a rental rate of available at a rental rate of $30,000 per year in $30,000 per year in increments of 1,000 square increments of 1,000 square feet. As the business grows feet. As the business grows more space is rented, more space is rented, increasing the total cost. increasing the total cost. Example: Example: Office space is Office space is available at a rental rate of available at a rental rate of $30,000 per year in $30,000 per year in increments of 1,000 square increments of 1,000 square feet. As the business grows feet. As the business grows more space is rented, more space is rented, increasing the total cost. increasing the total cost. The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.
24.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin How does this How does this type of fixed cost type of fixed cost differ from a step- differ from a step- variable cost? variable cost? Step-variable costs can be adjusted more quickly and . . . The width of the activity steps is much wider for the fixed cost. Fixed Costs and Relevant Range
25.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Which of the following statements about cost behavior are true? 1. Fixed costs per unit vary with the level of activity. 2. Variable costs per unit are constant within the relevant range. 3. Total fixed costs are constant within the relevant range. 4. Total variable costs are constant within the relevant range. Which of the following statements about cost behavior are true? 1. Fixed costs per unit vary with the level of activity. 2. Variable costs per unit are constant within the relevant range. 3. Total fixed costs are constant within the relevant range. 4. Total variable costs are constant within the relevant range.
26.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Which of the following statements about cost behavior are true? 1. Fixed costs per unit vary with the level of activity. 2. Variable costs per unit are constant within the relevant range. 3. Total fixed costs are constant within the relevant range. 4. Total variable costs are constant within the relevant range. Which of the following statements about cost behavior are true? 1. Fixed costs per unit vary with the level of activity. 2. Variable costs per unit are constant within the relevant range. 3. Total fixed costs are constant within the relevant range. 4. Total variable costs are constant within the relevant range.
27.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y A mixed cost has both fixed and variable components. Consider the example of utility cost. A mixed cost has both fixed and variable components. Consider the example of utility cost. Mixed Costs Total mixed cost
28.
Copyright © 2006,
The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost X Y Mixed Costs Total mixed cost
29.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Mixed Costs Example If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? what is the amount of your utility bill? If your fixed monthly utility charge is $40, your If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill? what is the amount of your utility bill? Y = a + bX Y = $40 + ($0.03 Ă 2,000) Y = $100
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Analysis of Mixed Costs Each account is classified as either Each account is classified as either variable or fixed based on the analystâs variable or fixed based on the analystâs knowledge of how the account behaves. knowledge of how the account behaves. Each account is classified as either Each account is classified as either variable or fixed based on the analystâs variable or fixed based on the analystâs knowledge of how the account behaves. knowledge of how the account behaves. Cost estimates are based on an Cost estimates are based on an evaluation of production methods, and evaluation of production methods, and material, labor and overhead material, labor and overhead requirements. requirements. Cost estimates are based on an Cost estimates are based on an evaluation of production methods, and evaluation of production methods, and material, labor and overhead material, labor and overhead requirements. requirements. Account Analysis and the Engineering Approach Account Analysis and the Engineering Approach Account Analysis and the Engineering Approach Account Analysis and the Engineering Approach
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Plot the data points on a graph Plot the data points on a graph (total cost vs. activity). (total cost vs. activity). Plot the data points on a graph Plot the data points on a graph (total cost vs. activity). (total cost vs. activity). 0 1 2 3 4 * Maintenance Cost 1,000âs of Dollars 10 20 0 * * * * * * * * * Patient-days in 1,000âs X Y The Scattergraph Method
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Scattergraph Method Draw a line through the data points with about an Draw a line through the data points with about an equal numbers of points above and below the line. equal numbers of points above and below the line. Draw a line through the data points with about an Draw a line through the data points with about an equal numbers of points above and below the line. equal numbers of points above and below the line. 0 1 2 3 4 * Maintenance Cost 1,000âs of Dollars 10 20 0 * * * * * * * * * Patient-days in 1,000âs X Y
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Scattergraph Method Use one data point to estimate the total level of activity Use one data point to estimate the total level of activity and the total cost. and the total cost. Use one data point to estimate the total level of activity Use one data point to estimate the total level of activity and the total cost. and the total cost. Intercept = Fixed cost: $10,000 0 1 2 3 4 * Maintenance Cost 1,000âs of Dollars 10 20 0 * * * * * * * * * Patient-days in 1,000âs X Y Patient days = 800 Patient days = 800 Total maintenance cost = $11,000 Total maintenance cost = $11,000
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Scattergraph Method Make a quick estimate of variable cost per unit and Make a quick estimate of variable cost per unit and determine the cost equation. determine the cost equation. Make a quick estimate of variable cost per unit and Make a quick estimate of variable cost per unit and determine the cost equation. determine the cost equation. Variable cost per unit = $1,000 800 = $1.25/patient-day $1.25/patient-day Y = $10,000 + $1.25X Y = $10,000 + $1.25X Y = $10,000 + $1.25X Y = $10,000 + $1.25X Total maintenance at 800 patients 11,000 $ Less: Fixed cost 10,000 Estimated total variable cost for 800 patients 1,000 $ Total maintenance cost Total maintenance cost Total maintenance cost Total maintenance cost Number of patient days Number of patient days Number of patient days Number of patient days
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The High-Low Method Assume the following hours of maintenance work and the total maintenance costs for six months.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The High-Low Method The The variable cost variable cost per hour per hour of of maintenance is maintenance is equal to the change equal to the change in cost divided by in cost divided by the change in hours. the change in hours. The The variable cost variable cost per hour per hour of of maintenance is maintenance is equal to the change equal to the change in cost divided by in cost divided by the change in hours. the change in hours. = $8.00/hour $8.00/hour $2,400 300
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The High-Low Method Total Fixed Cost = Total Cost â Total Variable Cost Total Fixed Cost = Total Cost â Total Variable Cost Total Fixed Cost = $9,800 â ($8/hour Total Fixed Cost = $9,800 â ($8/hour Ă 800 hours) Ă 800 hours) Total Fixed Cost = $9,800 â $6,400 Total Fixed Cost = $9,800 â $6,400 Total Fixed Cost = Total Fixed Cost = $3,400 $3,400
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The High-Low Method Y = $3,400 + $8.00 Y = $3,400 + $8.00X X The Cost Equation for Maintenance
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? a. $0.08 per unit b. $0.10 per unit c. $0.12 per unit d. $0.125 per unit $4,000 Ă· 40,000 units = $0.10 per unit Units Cost High level 120,000 14,000 $ Low level 80,000 10,000 Change 40,000 4,000 $
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
42.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Quick Check ïŒ Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000 Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions? a. $ 2,000 b. $ 4,000 c. $10,000 d. $12,000
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Least-Squares Regression Method A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables. This method uses This method uses all all of the of the data points to estimate data points to estimate the fixed and variable the fixed and variable cost components of a cost components of a mixed cost. mixed cost. This method uses This method uses all all of the of the data points to estimate data points to estimate the fixed and variable the fixed and variable cost components of a cost components of a mixed cost. mixed cost. The goal of this method is The goal of this method is to fit a straight line to the to fit a straight line to the data that data that minimizes the minimizes the sum of the squared errors sum of the squared errors. . The goal of this method is The goal of this method is to fit a straight line to the to fit a straight line to the data that data that minimizes the minimizes the sum of the squared errors sum of the squared errors. .
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Least-Squares Regression Method âą Software can be used to fit a regression line through the data points. âą The cost analysis objective is the same: Y = a + bX Least-squares regression also provides a statistic, called the R2 , that is a measure of the goodness of fit of the regression line to the data points. Least-squares regression also provides a statistic, called the R2 , that is a measure of the goodness of fit of the regression line to the data points.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin 0 1 2 3 4 Total Cost 10 20 0 Activity * * * * * * * * * * Least-Squares Regression Method R2 is the percentage of the variation in total cost explained by the activity. R2 is the percentage of the variation in total cost explained by the activity. R2 varies from 0% to 100%, and the higher the percentage the better. X Y
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Comparing Results From the Three Methods The three methods just discussed provide The three methods just discussed provide slightly different estimates of the fixed and slightly different estimates of the fixed and variable cost components of the mixed cost. variable cost components of the mixed cost. This is to be expected because each method This is to be expected because each method uses differing amounts of the data points to uses differing amounts of the data points to provide estimates. provide estimates. Least-squares regression provides the most Least-squares regression provides the most accurate estimate because it uses all the data accurate estimate because it uses all the data points. points. The three methods just discussed provide The three methods just discussed provide slightly different estimates of the fixed and slightly different estimates of the fixed and variable cost components of the mixed cost. variable cost components of the mixed cost. This is to be expected because each method This is to be expected because each method uses differing amounts of the data points to uses differing amounts of the data points to provide estimates. provide estimates. Least-squares regression provides the most Least-squares regression provides the most accurate estimate because it uses all the data accurate estimate because it uses all the data points. points.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Letâs put our knowledge of cost behavior to work by preparing a contribution format income statement.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Contribution Format Total Unit Sales Revenue 100,000 $ 50 $ Less: Variable costs 60,000 30 Contribution margin 40,000 $ 20 $ Less: Fixed costs 30,000 Net operating income 10,000 $ The contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cost behavior. Contribution margin covers fixed costs and provides for income. costs and provides for income. The contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cost behavior. Contribution margin covers fixed costs and provides for income. costs and provides for income.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Uses of the Contribution Format The contribution income statement format is used The contribution income statement format is used as an internal planning and decision making tool. as an internal planning and decision making tool. We will use this approach for: We will use this approach for: 1. 1. Cost-volume-profit analysis (Chapter 6). Cost-volume-profit analysis (Chapter 6). 2. 2. Budgeting (Chapter 9). Budgeting (Chapter 9). 3. 3. Segmented reporting of profit data (Chapter 12). Segmented reporting of profit data (Chapter 12). 4. 4. Special decisions such as pricing and make-or- Special decisions such as pricing and make-or- buy analysis (Chapter 13). buy analysis (Chapter 13). The contribution income statement format is used The contribution income statement format is used as an internal planning and decision making tool. as an internal planning and decision making tool. We will use this approach for: We will use this approach for: 1. 1. Cost-volume-profit analysis (Chapter 6). Cost-volume-profit analysis (Chapter 6). 2. 2. Budgeting (Chapter 9). Budgeting (Chapter 9). 3. 3. Segmented reporting of profit data (Chapter 12). Segmented reporting of profit data (Chapter 12). 4. 4. Special decisions such as pricing and make-or- Special decisions such as pricing and make-or- buy analysis (Chapter 13). buy analysis (Chapter 13).
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin The Contribution Format Comparison of the Contribution Income Statement with the Traditional Income Statement Traditional Approach Contribution Approach (costs organized by function) (costs organized by behavior) Sales 100,000 $ Sales 100,000 $ Less cost of goods sold 70,000 Less variable expenses 60,000 Gross margin 30,000 $ Contribution margin 40,000 $ Less operating expenses 20,000 Less fixed expenses 30,000 Net operating income 10,000 $ Net operating income 10,000 $ Used primarily for Used primarily for external reporting. external reporting. Used primarily by Used primarily by management. management.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Appendix 5A Least-Squares Regression Using Microsoft Excel.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Analysis Example Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average fixed cost and fixed cost and variable cost per unit. variable cost per unit. Using the data to the Using the data to the right, letâs see how to right, letâs see how to do a regression using do a regression using Microsoft Excel. Microsoft Excel. Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average fixed cost and fixed cost and variable cost per unit. variable cost per unit. Using the data to the Using the data to the right, letâs see how to right, letâs see how to do a regression using do a regression using Microsoft Excel. Microsoft Excel.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel You will need three pieces of You will need three pieces of information from your information from your regression analysis: regression analysis: 1. 1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope) Unit (line slope) 2. 2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept) intercept) 3. 3. Goodness of fit, or R Goodness of fit, or R2 2 You will need three pieces of You will need three pieces of information from your information from your regression analysis: regression analysis: 1. 1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope) Unit (line slope) 2. 2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept) intercept) 3. 3. Goodness of fit, or R Goodness of fit, or R2 2 To get these three pieces To get these three pieces information we will need to information we will need to use use three three different Excel different Excel functions. functions. LINEST, INTERCEPT, & RSQ LINEST, INTERCEPT, & RSQ To get these three pieces To get these three pieces information we will need to information we will need to use use three three different Excel different Excel functions. functions. LINEST, INTERCEPT, & RSQ LINEST, INTERCEPT, & RSQ
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the pull down menu and pull down menu and scroll down to âMore scroll down to âMore Functions . . .â Functions . . .â Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the pull down menu and pull down menu and scroll down to âMore scroll down to âMore Functions . . .â Functions . . .â
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel Scroll down to the Scroll down to the â âStatistical Statisticalâ, â, functions. Now functions. Now scroll down the scroll down the statistical statistical functions until you functions until you highlight highlight â âLINEST LINESTâ â Scroll down to the Scroll down to the â âStatistical Statisticalâ, â, functions. Now functions. Now scroll down the scroll down the statistical statistical functions until you functions until you highlight highlight â âLINEST LINESTâ â
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. Here is the Here is the estimate of the estimate of the slope of the line. slope of the line.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel With you cursor in cell With you cursor in cell F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for special functions. special functions. Select Select Statistical Statistical and and scroll down to scroll down to highlight the highlight the INTERCEPT INTERCEPT function. function. With you cursor in cell With you cursor in cell F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for special functions. special functions. Select Select Statistical Statistical and and scroll down to scroll down to highlight the highlight the INTERCEPT INTERCEPT function. function.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. Here is the Here is the estimate of the estimate of the fixed costs. fixed costs.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel Finally, we will Finally, we will determine the determine the â âgoodness of goodness of fit fitâ, or â, or R R2 2 , by , by using the using the RSQ RSQ function. function. Finally, we will Finally, we will determine the determine the â âgoodness of goodness of fit fitâ, or â, or R R2 2 , by , by using the using the RSQ RSQ function. function.
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Simple Regression Using Excel 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. 1. In the Known_yâs box enter C4:C19 for the range. 2. In the Known_xâs box enter D4:D19 for the range. Here is the Here is the estimate of estimate of R R2 2 . .
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The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin End of Chapter 5
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