Managerial accounting Charles E. Davis Elizabeth Davis

Cost Behavior Patterns Cost Estimation Contribution Margin Analysis

Cost Behavior Patterns Why is it important for managers to understand cost behavior patterns? What is a variable cost? If the activity level increases, what happens to the total cost incurred? Give three examples of a variable cost. What is a fixed cost? If the activity level increases, what happens to the total cost incurred? Give three examples of a fixed cost.

… Cost Behavior Patterns Distinguish between committed and discretionary fixed costs. What is a mixed cost? If the activity level increases, what happens to the total cost incurred? Give three examples of a mixed cost. What is a step cost? If the activity level increases, what happens to the total cost incurred? Give three examples of a step cost.

Cost Estimation Express the relationship between total cost (TC), variable cost per unit (VC), volume (x), and fixed cost (FC) in equation form. Explain how a scattergraph is used to separate a mixed cost into its fixed and variable components. Explain how the high-low method is used to separate mixed cost into its fixed and variable components for cost estimation.

… Cost Estimation Given a choice between the high-low method, a scattergraph, or regression analysis, which method would you prefer for separating a mixed cost into its fixed and variable components? Why? Explain the concept of the relevant range. How does a company’s relevant range differ from the steps found in a step cost?

Contribution Margin Analysis Define the term contribution margin. What is the contribution margin ratio? How is it related to the variable cost ratio? If a product’s variable cost per unit increases while the selling price and fixed cost decrease, what will happen to the contribution margin per unit? How can a company increase a product’s contribution margin?

Macon Vitamins sells a variety of vitamins and herbal supplements to small health food stores. Macon purchases the vitamins and supplements from leading manufacturers. Identify each of the following costs incurred by Macon Vitamins in terms of its cost behavior—variable, fixed, mixed, or step. a. Vitamin C tablets b. President’s salary c. Sales commissions ($1.00 per case) d. Straight line depreciation on office equipment e. Shipping (billed in 100-pound increments) f. Advertising g. Telephone charges (monthly fee of $35 plus long distance charges)

Identify each of the following costs in terms of its cost behavior variable, fixed, mixed, or step. a. The cost of coffee beans at a Starbucks shop b. Depreciation of airplanes at Southwest Airlines c. Nurses’ wages at M. D. Anderson Cancer Center, assuming a ratio of one nurse to every five patients d. Electricity cost at a Krispy Kreme Doughnuts store e. The cost of hard drives installed in computers built by Dell f. Store managers’ salaries at Barnes and Noble bookstores g. Actors’ wages and salaries at Paramount Studios, when the star is paid a base amount plus a percentage of box office receipts h. The cost of fabric used in making shirts at Lands’ End i. The cost of cookies provided to guests at check-in at Doubletree Hotels j. The cost of a national advertising campaign for Burger King

Will Jones, LLP is a small CPA firm that focuses primarily on preparing tax returns for small businesses. The company pays a $500 annual fee plus $10 per tax return for a license to use Mega Tax software. Required a. What is the company’s total annual cost for the Mega Tax software if 300 returns are filed? If 400 returns are fi led? If 500 returns are fi led? b. What is the company’s cost per return for the Mega Tax software if 300 returns are filed? If 400 returns are fi led? If 500 returns are fi led? c. Why does the cost per return differ at each of the three volume levels?

To calculate the unit cost of the MP3 players that he sells at his mall kiosk, Joel Lawson added up all his costs and divided by the number of units he sold during the year. He then used this unit cost to estimate total costs for the coming year. Required Explain to Joel why this unit cost is not useful in predicting total costs for the coming year.