ACCT 2230 Lecture Notes - Lecture 3: Contribution Margin, Fixed Cost, Income Statement

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12 Aug 2016
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Chapter 3
Contribution margin is the excess of revenues over variable costs
A contribution margin statement: 1) separates costs into their fixed and variable
components. 2) can assist with management decision making
Fixed and variable costs should only be computed if a scattergraph plot shows the
relationship to be aproximaately linear
The high-low method: 1) uses only two data points. 2) is based on periods where the
activity tends to be unusual.
When using account analysis, an account is classified as either fixed or variable based on
the analys’s prior knowledge of how the cost behaves.
Examples of discretionary fixed costs: advertising, research and development, and
management training programs
Mixed costs are also known as semi-variable costs
The engineering approach must be used in situations where no past experience is
available concerning activity and costs and can be used together with other methods to
improve the accuracy of cost analysis
An activity base: 1) sometimes called cost driver. 2) measures whatever causes costs to
vary.
The level of activity over which variable and fixed costs assumptions are valid is known
as the relevant range
The high-low method is simple to apply and the scattergraph methoud should be used
The costs of compensating knowledge workers are often relatively fixed and are
committed rather than discretionary costs
A variable cost changes in direct proportion to changes in the activity level
A mixed cost has a min. cost of having a service available and ready for use
When mixed costs are represented by a straight line, the steeper the slope the higher
the variable cost per unit
The behaviour of a curvilinear cost can be satisfactorily approximated with a straight
line within the relevant range
The high-low method is based on the rise over run formula for the slope of a straight
line
Engineering approach and account analysis are considered to be non-quantitative
approaches to mixed cost analysis
The trend in many companies is towards greater fixed costs relative to variable costs. As
a result, tasks that used to performed by hand have been taken over by machines
Common activity bases examples: machine hours, direct labour hours and number of
purchase orders
Scattergraphs are a way to diagnose cost behaviour and plotting data on a scattergraph
is an important diagnostic step
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