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Managerial Accounting Exam Notes

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ECON 2560
Nancy Bower

Chapter 6 cost behavior analysis and use • Types of cost o Variable 1. In Total variable cost is proportional to the activity level within the relevant range 2. Per unit, variable cost per unit remains the same over wide ranges of activity • Cost varies in direct proportion to changes in the activity level • A variable cost remains constant when expressed on a per unit basis o Direct materials are a proportionally variable cost because they vary in direct proportion to the amount of production activity 3. Step-variable cost • A resource that is only available in large chunks whose costs increase or decrease only in response to fairly wide changes in activity 4. High-low method • The variable cost per hour of activity is equal to the change in cost divided by the change in hours • You find your highest and lowest cost and your highest and lowest recorded time • Total fixed cost = total cost – total variable cost • E.g total fixed cost = 9800 – 6400 (8*800)= 3400 • Cost equation for maintenance o Y= 3400+8X o Fixed 1. Total fixed cost remains the same even when the activity level changes within the relevant range 2. Fixed cost per unit goes down as the activity level goes up 3. Average fixed cost per unit changes as the activity level increases 4. Types of fixed cost • Committed o Long term, cannot be significantly reduced in the short term o E.g depreciation on equipment and real estate taxes • Discretionary o May be altered in the short term by current managerial decisions o E.g advertising and research and development o Mixed cost 1. Both fixed and variable components • E.g a set price for utilities to a certain amount and the rest is variable based on consumption • Expressed as – Y= a + bX o Y = the total mixed cost o A = the total fixed cost (the vertical intercept of the line) o B = the variable cost per unit of activity o X = the level of activity o Contribution format income statement $/Unit 1. Sales XXX XX 2. Less: Variable costs XXX XX 3. Contribution margin XXX XX 4. Less: Fixed Costs XXX XX 5. Net operating income XXX XX Chapter 7 • Contribution income statement o Helps managers judge the impact on profits in changes of selling price, cost, or volume o The contibution margin  is the amount remaining from sales revenue after variable expenses have been deducted  Also can be expressed on a per unit basis  Contribution margin ratio = CM per unit/SP per unit • Total contribution margin / total sales • E.g racing bike company o 80 000 / 200 000 = .4 or 40% CM o So if they earn one more dollar then the contriution margin will earn 40 cents • Break-even analysis o Equation method  Profits =(sales – variable expenses) – fixed expenses  Sales (Q)= variable expenses (Q)+ fixed expenses + profits •
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