Managerial Accounting, Chapter 6 by Crosson, Needles

Chapter 6

Cost Behavior Analysis

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 2

Cost Behavior and Management

• Objective 1– Define cost behavior and explain how

managers use this concept.


• Cost behavior is the way costs respond to changes in volume or activity

• Is a factor in almost every decision managers make

• Used to analyze alternative courses of action– Select the course that will generate income for

owners and maintain liquidity for creditors

Cost Behavior and Management


Planning

Managers use cost behavior:

• To determine how many units of products or services must be sold to generate a targeted amount of profit

• To determine how changes in planned operating, investing, and financing activities will affect operating income


Planning (cont’d)

Manufacturing companies decide how certain products contribute to the organization’s operating income

Service-based businesses determine the optimal mix of services to offer and decide whether to charge by the service provided or a flat monthly fee


Performing

• Managers determine how decisions about current operating, investing, and financing activities affect operating income– Must understand and anticipate cost behavior


Evaluating and Communicating

• Contribution margin income statement (variable costing income statementUsed to analyze how changes in cost and sales affect the profitability of

• Product lines

• Sales territories

• Customers

• Departments

• Other segments


Stop & Review

Q. What is cost behavior?

A. Cost behavior is the way costs respond to changes in volume or activity.


The Behavior of Costs

• Objective 2– Identify variable, fixed, and mixed costs, and

separate mixed costs into their variable and fixed components.


The Behavior of Costs

• Cost behavior can be observed as it relates to products and services, and in selling, administrative, and general activities

• If managers can predict how costs will behave, then costs become manageable


The Behavior of Costs (cont’d)

• Variable costs– Vary with volume or operating activity

• Fixed costs– Remain fixed as volume changes

• Mixed costs– Exhibit characteristics of both variable and fixed

costs


Variable Costs

Total costs that change in direct proportion to changes in productive

output or any other measure of volume


Variable Costs Illustrated

Total cost of tires is a variable cost because it changes in direct proportion to the number of vehicles produced.

On a per unit basis, a variable cost remains constant.

Land Rover Vehicles


Variable Costs Illustrated (cont’d)

Total cost of tires is a variable cost because it changes in direct proportion to the number of vehicles produced.

The cost of tires may vary depending on the number purchased if discounts apply for large purchases.

On a per unit basis, a variable cost remains constant.

Land Rover Vehicles


[[insert Figure 2]]

Examples of Variable, Fixed, and Mixed

Costs


Operating Capacity

The upper limit of an organization’s productive output capability,

given its existing resources

Any increase in volume or activity over operating capacity requires additional expenditures for buildings, machinery,

personnel, and operations


Operating Capacity (cont’d)

• Can be expressed in several ways, including– Total labor hours

– Total machine hours

– Total units of output

For purposes of the following discussion, assume that operating capacity is constant and

that all activities occur within the limits of current operating capacity


Operating Capacity (cont’d)

• Three common measures (or types) of operating capacity– Theoretical capacity

• Also called ideal capacity

– Practical capacity

– Normal capacity


Theoretical (Ideal) Capacity

The maximum production output for a given period in which all machinery and equipment are operating at optimum speed, without interruption

No company ever actually operates at such an ideal level

To approach theoretical capacity through continuous improvement is the long-term goal in a

JIT operating environment


Practical Capacity

Practical capacity, also called engineering capacity, is the theoretical capacity reduced

by normal and expected work stoppages

• Work stoppages– Machine breakdowns– Downtime for retooling, repairs, and

maintenance– Employees’ breaks

• Not realistic when planning operations


Normal Capacity

The average annual level of operating capacity needed to meet

expected sales demand

• Used to plan operations• Is a realistic measure of what an organization is

likely to produce, not what it can produce


Normal Capacity (cont’d)

• Relate variable costs to an appropriate measure of normal capacity– Operating costs can be related to

• Machine hours used

• Total units produced

– Sales commissions can be related to• Total sales dollars



1. An appropriate activity base simplifies cost planning and control

2. Many variable costs must be combined (aggregated) with the same activity base– So that costs can be analyzed in a reasonable

way

– Provides information for predicting future costs

Why should the basis for measuring the activity of variable cost be selected with care?



• General guide for selecting an activity base: Relate costs to their most logical or causal factor

• Example:– Machinery setup costs should be

considered variable in relation to the number of setups needed for a particular job• Allows machinery setup costs to be

budgeted and controlled more effectively


Linear Relationships and the Relevant Range

• Each unit of output requires $2.50 of labor cost• Total labor costs grow in direct proportion to

the increase in units of output

$0

$5

$10

$15

$20

0 1 2 3 4 5 6 7 8

Units

Lab

or C

ost


Other Variable Cost Behavior Patterns: Nonlinear Relationships

• Graph A: Behavior of power costs as usage increases and unit cost of power consumption falls

• Graph B: Behavior of rental costs when each additional hour of computer usage costs more than the previous hour

• Graph C: Shows how labor costs vary as efficiency increases or decreases


Using Variable Costs

• All costs must be included in an analysis if the results are to be useful– Variable costs with linear relationships

• Easy to analyze

– Variable costs with nonlinear relationships• More difficult to analyze

• Linear approximation– Method to convert nonlinear variable costs into

linear variable costs– Relies on the concept of relevant range


Relevant Range

– Within that range, it is assumed that both total fixed costs and per unit variable costs are constant

– Under that assumption, many nonlinear costs can be estimated using the linear approximation approach

• These costs can be treated as part of the other variable costs

The span of activity in which a company expects to operate


The Relevant Range and Linear Approximation

[[figure 5]]


Linear Approximation

• Is not a precise measure• Allows the inclusion of nonlinear variable costs in

cost behavior analysis• Loss of accuracy is not significant• Helps accomplish the goal of estimating costs and

preparing budgets


Fixed Costs

Total costs that remain constant within a relevant range of volume or activity

Fixed costs behave differently from variable costs

This is the range in which actual operations are likely to occur

• According to economic theory, all costs tend to be variable in the long run – A cost is only fixed within a limited period, usually

one year


Fixed Costs Illustrated

The manufacturer of aluminum cans needs one supervisor for an 8-hour work shift. Production can range from zero to 500,000 units per month per shift. The supervisor’s salary is $4,000 per month.

The relevant range is from zero to 500,000 units– Any output above 500,000 units would require another work

shift and another supervisor

If another shift is added, the new fixed cost remains constant in total within the new relevant range.


Fixed Costs Illustrated (cont’d)

– On a per unit basis, fixed costs go down as volume goes up

At 600,000 units, the activity is above the relevant range, which means another shift must be added and another supervisor hired.

Fixed unit costs vary inversely with activity or volume


[[figure 6]]

A Common Fixed Cost Behavior Pattern


Mixed Costs

• Part of a mixed cost changes with volume or usage

• Part is fixed over a particular period

Contain both variable and fixed components


[[Figure 7]]

Behavior Patterns of Mixed Costs


Mixed Costs

• For planning and control purposes, mixed costs must be divided into their variable and fixed components– These components can then be grouped with

other variable and fixed costs for analysis


Mixed Costs (cont’d)

1. Engineering method

2. Scatter diagram method

3. High-low method

4. Statistical method

Multiple approaches are often used because the results yielded by these

methods are likely to differ.

• Four methods are used to separate mixed costs into variable and fixed components


The Engineering Method of Separating Costs

Measures the work required by performing step-by-step analysis of tasks, costs, and processes

involved

Is generally used to estimate the cost of activities and new products

This method can be expensive because it is detailed and requires the work of engineers to determine the cost of a new product for

which no data exists


The Engineering Method Illustrated

U.S. Postal service• Conducts studies of how many letters a postal worker

should be able to deliver on a particular mail route within a certain period

This type of analysis sometimes called a

time and motion study


The Scatter Diagram Method

Plots past costs and related measures of volume in a scatter diagram

Scatter Diagram

•Helps determine whether a linear relationship exists between a cost item and its related activity measure

•If a linear relationship can be suggested, a cost line can be imposed on the data by visual means or statistical analysis


The Scatter Diagram Method Illustrated

Piedmont Corporation’s Park Division incurred the following machine hours and electricity costs last year:


[[figure 8]]

Scatter Diagram of Machine Hours and Electricity Costs


The Scatter Diagram Method Illustrated (cont’d)

• The diagram suggest a linear relationship between machine hours and electricity costs

– A line is added to the diagram to represent the linear relationship

• Estimated fixed electricity cost– Occurs at the point where the line intersects the vertical

axis

• Variable cost per unit– Can be estimated by determining the slope of the line


The High-Low Method

Identifies a linear relationship between activity level and cost by analyzing the highest and lowest volumes in an accounting period and

their related costs

Is a common, simple method–Somewhat crude since it uses only the high and low data to predict cost

behavior


The High-Low Method (cont’d)

1. Calculate the variable cost per activity base

2. Calculate the total fixed costs

3. Calculate the formula to estimate the total costs within the relevant range

Three steps:


The High-Low Method (cont’d)

Calculate the variable cost per activity base• Select the periods of highest and lowest activity

within the accounting period

• Find the difference between the highest and lowest amounts for both machine hours and their related electricity costs0

• Step 1


The High-Low Method Illustrated


Step 1: Calculate variable cost per machine hour

The High-LowMethod Illustrated (cont’d)

Hours Machinein Difference

Costin Difference Hour Machineper Cost Variable

Hours Machine 400

$1,100

(MH)Hour Machineper $2.75

The variable cost per machine hour will be used to calculate total fixed costs in Step 2 and total cost per month in Step 3.



Step 2: Calculate the total fixed costs

– Select the information from the month with either the highest or lowest volume

Costs Variable Total Costs Total Costs Fixed Total


The High-Low Method Illustrated• December

– Total Costs = $24,700– Total Variable Costs = 6,450 MH x $2.75 per MH

August– Total Costs = $23,600– Total Variable Costs = 6,050 MH x $2.75 per MH

MH)per $2.75 (6,450 $24,700 Costs Fixed Total

MH)per $2.75 (6,050 $23,600 Costs Fixed Total

$6,962.50

$6,962.50

You can check your answer by recalculating total fixed costs using the month with the lowest activity.

The total fixed costs in Step 2 will be used to calculate total cost per month in Step 3.



Step 3: Calculate the formula to estimate the total costs within the relevant range

Costs Variable Total Costs Fixed Total Month per Costs Total

Hour Machineper $2.75 $6,962.50 Month per Costs Total

From Step 2 From Step 1



• The cost formula will work only within the relevant range

– In this case, for amounts between 6,050 and 6,450 machine hours

• To estimate electricity costs for amounts outside of this range, a new formula must be calculated


Statistical Methods

– All data observations are used• Resulting linear equation is more representative of

cost behavior than either the high-low or scatter diagram methods

– One type of statistical method is called regression analysis

Mathematically describe the relationship between costs and activities


Regression Analysis

Simple regression analysis

– Overhead costs are predicted using one activity

• Machine hours to predict electricity costs

Multiple regression analysis

– Overhead costs are predicted using more than one activity

• Machine hours and labor hours to predict electricity costs; both activities affect overhead


Stop & Review

Q. What are the three steps in the high-low method of determining the fixed and variable components of mixed costs?

A. Step 1: Calculate the variable cost per activity base

Step 2: Calculate total fixed costs

Step 3: Calculate the formula to estimate total costs within the relevant range


Cost-Volume-Profit Analysis

• Objective 3– Define cost-volume-profit (C-V-P) analysis

and discuss how managers use it as a tool for planning and control.


Cost-Volume-Profit Analysis

An examination of the cost behavior patterns that underlie the relationships among cost,

volume of output, and profit


Cost-Volume-Profit Analysis (cont’d)

• Usually applies to a single product, product line, or division of a company– Therefore, the term profit is used

• Only part of an entire company’s operating income

• In cases involving the income statement of an entire company– The term operating income is more appropriate

• In the context of C-V-P analysis, both mean the same thing

Profit Costs Fixed Costs Variable Revenue Sales

P FC VC S


How Is C-V-P Used?

Control• Compare actual costs with expected costs

• Measure the effects of alternate courses of action– Changing variable or fixed costs

– Expanding or contracting sales volume

– Increasing or decreasing selling prices

Short-range planning• Calculate net income when sales volume is

known• Decide the level of sales needed to reach a

targeted amount of income• Budgeting


Limitations of C-V-P

Useful only under certain conditions and when certain assumptions hold true:

1. The behavior of variable and fixed costs can be measured accurately

2. Costs and revenues have a close linear approximation

3. Efficiency and productivity hold steady within the relevant range of activity


Limitations of C-V-P (cont’d)

4. Cost and price variables also hold steady during the period being planned

5. The sales mix does not change during the period being planned

6. Production and sales volume are roughly equal

If one or more of these conditions and assumptions are absent, the C-V-P

analysis may be misleading.


Stop & Review

Q. What are some ways that managers use C-V-P analysis as a tool for planning?

A. Managers can use C-V-P to calculate net income when sales volume is known, decide the level of sales needed to reach a targeted amount of net income, and for budgeting purposes.


Breakeven Analysis

• Objective 4– Define breakeven point and use

contribution margin to determine a company’s breakeven point for multiple products.


Breakeven Analysis

• Breakeven point– The point at which

• Total revenues equal total costs• The company begins to earn a profit

Uses the basic elements of cost-volume-profit analysis to determine the breakeven point


Margin of Safety

The number of sales units or amount of sales dollars by which actual sales can fall below planned sales

without resulting in a loss


Finding the Breakeven Point

$0 FC VC S

$0 Costs Fixed Costs Variable Sales


Breakeven Analysis Illustrated

$0 FC VC S

Valley Metal Products, Inc. makes ornamental iron plant stands. Variable costs are $50 per unit, and fixed costs average $20,000 per year. Each plant stand sells for $90.

Compute the breakeven point for plant stands in sales units, where x equals sales units.

$0 $20,000 $50x $90x $20,000 $40x

units 500 x Compute the breakeven point in sales dollars.

$45,000 units 500 $90


Valley Metal Products, Inc. makes ornamental iron plant stands. Variable costs are $50 per unit, and fixed costs average $20,000 per year. Each plant stand sells for $90.

Compute the breakeven point using a scatter graph.



The graph has five parts1. Horizontal axis for units of output2. Vertical axis for dollars of revenue3. A horizontal line running from the vertical axis at the

level of fixed costs



Breakeven Analysis Illustrated (cont’d)

4. A total cost line– Begins where the fixed costs line crosses the vertical axis and slopes

upward to the right

– Slope depends on variable cost per unit


5. A total revenue line– Begins at the origin of the vertical and horizontal axes and slopes

upward to the right

– Slope depends on the selling price per unit



• Revenues equal total costs– At the point at which the total revenue line crosses the

total cost line



• Breakeven point– Found by extending lines from this point to the axes– Valley Metal Products will break even when it has sold

500 plant stands for $45,000



Using Contribution Margin to Determine the Breakeven Point

• A product line’s contribution margin represents its net contribution to paying off fixed costs and earning a profit

• Profit is what remains after fixed costs are paid and subtracted from contribution margin

CM VC S

P FC CM

• Contribution margin (CM)– Is the amount that remains after all variable costs are

subtracted from sales


Breakeven point (BE)• Can be expressed as the point where

– Contribution margin minus total fixed costs equals zero– Contribution margin equals fixed costs

$0 FC Units)BE per Unit (CM

per Unit CM

FC UnitsBE

Using Contribution Margin to Determine the Breakeven Point (cont’d)



per Unit CM

FC UnitsBE

Compute the breakeven point in units for Valley Metal Products

Units500 $40

$20,000

$50 $90

$20,000



Compute the breakeven point in sales dollars by multiplying BE in units by the selling price (SP) per unit.

UnitsBE SP Dollars BE $45,000 Units500 $90



Compute the breakeven point in sales dollars using the CM Ratio.

SP

CM Ratio CM 4/9or .444,

$90

$40

Ratio CM

FC Dollars BE *$45,045

.444

$20,000

* Difference due to rounding up.


The Breakeven Point for Multiple Products

• To calculate the breakeven point for each product, its unit contribution must be weighted by the sales mix

• Sales mix– Proportion of each product's unit sales relative

to the company’s total unit sales


The Breakeven Point for Multiple Products Illustrated

Valley Metal Products sells two types of plant stands: a floor stand model and a smaller tabletop model. The company sells 500 units, of which 300 units are floor stand models and 200 are tabletop models.

Determine the sales mix.

• For every three floor stands sold, two tabletop models are sold• The sales mix is 3:2 or,• Of the 500 units sold, 60% (300 ÷ 500) are floor stands and 40%

(200 ÷ 500) are tabletop models


The Breakeven Point for Multiple Products Illustrated (cont’d)

Valley Metal Products sells two types of plant stands: a floor stand model and a smaller tabletop model. The company sells 500 units, of which 300 units are floor stand models and 200 are tabletop models. Total fixed costs are $32,000.

Step 1Compute the weighted-average contribution margin

– Multiply the contribution margin for each product by its percentage of the sales mix.

Selling Price

Variable Costs

Contribution Margin (CM)

% of Sales Mix

Weighted-Average

CM Floor stand $90 – $50 = $40 x 60% = $24 Tabletop $40 – $20 = $20 x 40% = 8 Weighted-average contribution margin $32



Valley Metal Products sells two types of plant stands: a floor stand model and a smaller tabletop model. The company sells 500 units, of which 300 unitsare floor stand models and 200 are tabletop models. Total fixed costs are $32,000

Step 2Calculate the weighted-average breakeven point

– Divide total fixed costs by the weighted-average contribution margin

CM Average- Weighted FC Total Point BE Average-Weighted

$32 $32,000

Units1,000




Step 3Calculate the breakeven point for each product

– Multiply the weighted-average breakeven point by each product’s percentage of sales mix




• Verify– Determine the contribution margin of each product and

subtract the total fixed costs


Stop & Review

Q. What is the general equation for finding the breakeven point in units?

A. Sales – Variable Costs – Fixed Costs = $0, or S – VC – FC = $0

The breakeven point is the point at which total revenues equal total costs


Using C-V-P Analysis to Plan Future Sales, Costs, and Profits

• Objective 5– Use C-V-P analysis to project the profitability of

products and services.


Using C-V-P Analysis to Plan Future Sales, Costs, and Profits

• Primary goal of a business venture is to generate profits, not to break even

• To estimate the profitability of a venture– Adjust C-V-P analysis for targeted profit

• Different scenarios can be analyzed for the amount of profit or loss they might generate


Applying C-V-P to a Manufacturing Business

Van Bryce, the president of Valley Metal Products, has set this year’s profit goal for plant stands at $4,000. All previous data for the company remains the same.

Calculate how many plant stands must be sold to reach the targeted profit (P).

P FC VC S $4,000 $20,000 $50x $90x

$24,000 $40x Units600 x


Van Bryce, the president of Valley Metal Products, has set this year’s profit goal for plant stands at $4,000. All previous data for the company remains the same.

Check the answer by inserting all known data into the equation.

P FC VC S

$4,000 $20,000 $50) (600 $90) Units(600

$4,000 $20,000 $30,000 $54,000

Applying C-V-P to a Manufacturing Business (cont’d)


Applying C-V-P to a Manufacturing Business (cont’d)

The contribution margin approach can also be used for profit planning– Add the targeted profit to the numerator of the

contribution margin breakeven equation

per Unit CM

P FC UnitsSales Targeted

$40

$4,000 $20,000

Units600


Applying C-V-P to a Manufacturing Business (cont’d)• Contribution income statements

– Prepared for internal use– Are useful in planning and making decisions

about operations


Contribution Income Statement

• Costs related to production, selling, and administration– Variable costs are subtracted from sales to

determine total contribution margin– Fixed costs are subtracted from contribution

margin to determine operating income

Van Bryce wants his company’s planning team to consider three alternatives to the original plan shown in the contribution income statement.

Focuses on cost behavior, not cost function


Alternative 1: Decrease Variable Costs, Increase Sales Volume

The planning team estimated what operating income would be if the company purchased and used aluminum rather than iron to make plant stands. If aluminum were used, direct materials costs per unit would decrease by $3. If the aluminum were painted to meet the needs of a new customer group, sales volume would increase by 10 percent.

Determine the estimated operating income for this alternative.

A sales increase of 60 units (.10 x 600) increases the total CM and operating income by $2,580 ($43 x 60).

A decrease in direct materials costs of $3 results in an $1,800 increase in total CM and operating income ($3 x 600).


Alternative 1: Decrease Variable Costs, Increase Sales Volume


The planning team estimated what operating income would be if the company purchased and used aluminum rather than iron to make plant stands. If aluminum were used, direct materials costs per unit would decrease by $3. If the aluminum were painted to meet the needs of a new customer group, sales volume would increase by 10 percent.


Alternative 2: Increase Fixed Costs, Increase Sales Volume

The planning team estimated what operating income would be if the company increased advertising costs instead of changing the direct materials. The Marketing Department suggested that a $500 increase in advertising costs would increase sales volume by 5 percent.


Additional advertising costs affects both sales volume and fixed costs.

Sales volume increases 30 units (.05 x 600), which

increases the total CM and operating income by

$1,200 ($40 x 30 units)



Fixed costs increase from $20,000 to $20,500, which decreases operating income

by $500.








Alternative 3: Increase Selling Price, Decrease Sales Volume

The planning team evaluated the impact of a $10 increase in selling price on the company’s operating income. The team believes that competitors are selling the same product at a lower price and that sales volume will decrease by 15 percent if the selling price is raised to $10.

Determine how this alternative affects operating income.

A sales decrease of 90 units (.15 x 600) decreases the sales revenue by $3,000 [(600 x $90) – (510 x $100)]




A sales decrease of 90 units (.15 x 600) decreases variable costs by $4,500 (90 x $50)







Comparative Summary of Alternatives at Valley Metal Products, Inc.


Comparative Summary

Alternative 1– Results in the highest operating income of the three

alternatives

Alternative 2– Highest breakeven point

More units must be sold to cover increased fixed costs

Alternative 3– Lowest breakeven point

Company will begin generating income more quickly than with other alternatives


Applying C-V-P Analysis to a Service Business

The manager of the Appraisal Department at Edmunds Mortgage Company estimates that over the next year her department will perform an average of 100 appraisals per month. The company charges $400 per appraisal. Variable costs are $160 for professional labor and $99 for a county survey map. Monthly service overhead costs were highest in March (180 appraisals at $23,380) and lowest in February (98 appraisals at $20,018).

Estimate service overhead costs.Step 1 – Calculate the variable service overhead cost per appraisal

VolumeLowest VolumeHighest

CostLowest Cost Highest Appraisalper Cost OH Variable

$41 98 180

$20,018 $23,380


Applying C-V-P Analysis to a Service Business (cont’d)

Estimate service overhead costs.

Step 2 – Calculate the total fixed service overhead costs

Costs OH Service Variable Total Costs OH Service Total Costs OH Service Fixed Total

180) ($41 $23,380

$16,000 Use data for March




Estimate service overhead costs.

Step 3 – Calculate the total service overhead costs for one month

Costs OH Service Fixed Total Costs OH Service Total

)Appraisals ofNumber Estimated Rate (Variable

)Appraisals of No. Appraisalper ($41 $16,000




Estimate service overhead costsStep 4 – Calculate the total service overhead costs for one month assuming that 100 appraisals will be made.

)Appraisals of No. Appraisalper ($41 $16,000 Costs Service OH Total

$20,100



Determining the Breakeven Point

PointBreakeven at /Month Appraisals of No. Let x

FC VC S

$16,000 $300 $400 xx

$16,000 $100 x

Monthper Appraisals 160 x

The variable rate of $300 includes the $41 variable service OH rate plus $160 direct

professional labor and $99 county survey map fee


Determining the Effect of a Change in Operating Costs

The Appraisal Department performs an average of 100 appraisals per month and its estimated breakeven point is 160 appraisals. Increasing the appraisal fee is not an option because of strong competition. The manager has determined that costs must be reduced by improving appraiser’s scheduling to reduce travel time. She estimates this could reduce travel time by 50 percent, cutting the professional labor cost to $80 per appraisal. The new process will also increase fixed costs by $200 per month.


FC VC S $16,200 $220 $400 xx

$16,200 $180 xMonthper Appraisals 90 x

Determine the new breakeven point


Determining the Effect of a Change in Operating Costs

(cont’d)How many appraisals would the department have to perform each month to achieve a targeted profit of

$18,000 per month?


P FC VC S $18,000 $16,200 $220 $400 xx

$34,200 $180 x

Monthper Appraisals 190 x


Stop & Review

Q. If a company sells its product for $10 per unit, variable costs are $2 per unit, and fixed costs are $10,000 per month, how many units would it need to sell to achieve a profit of $20,000 per month?

PointBreakeven at Unitsof No. Let x

P FC VC S $20,000 $10,000 $2 $10 xx

$30,000 $8 x

Monthper Units3,750 x

A.


Chapter Review

1. Define cost behavior and explain how managers use this concept.

2. Identify variable, fixed, and mixed costs, and separate mixed costs into their variable and fixed components.

3. Define cost-volume-profit (C-V-P) analysis and discuss how managers use it as a tool for planning and control.


Chapter Review (cont’d)

4. Define breakeven point and use contribution margin to determine a company’s breakeven point for multiple products.

5. Use C-V-P analysis to project the profitability of products and services.

Documents

Managerial Accounting, Chapter 6 by Crosson, Needles