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Accounting Principles II – Cost-Volume-Profit Relationships - Document preview page 1

Accounting Principles II – Cost-Volume-Profit Relationships - Page 1

Document preview content for Accounting Principles II – Cost-Volume-Profit Relationships

Accounting Principles II – Cost-Volume-Profit Relationships

This document provides study materials related to Accounting Principles II – Cost-Volume-Profit Relationships. It may include explanations, summarized notes, examples, or practice questions designed to help students understand key concepts and review important topics covered in their coursework.

Students studying Accounting or related courses can use this material as a reference when preparing for assignments, exams, or classroom discussions. Resources on CramX may include study notes, exam guides, solutions, lecture summaries, and other academic learning materials.

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Accounting Principles II – Cost-Volume-Profit Relationships - Page 1 preview imageStudy GuideAccounting Principles II–Cost-Volume-ProfitRelationships1.Cost BehaviorCost behaviorexplains how a cost changes when the level of activity changes.Activity can mean units produced, units sold, hours worked, or services provided.Some costsstay the same, while othersincrease or decreaseas activity changes.Understanding cost behavior helps managers:•Prepare budgets•Make forecasts•Estimate profits•Choose between different business options1.Fixed CostsFixed costsremain the samein total, no matter how many units are produced or sold.•Thetotal fixed cost does not change•Thefixed cost per unit changesas activity changesFor example, if production increases, the fixed cost is spread over more units, so thecost per unitdecreases.Example of a Fixed CostStraight-line depreciationis a fixed cost.
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Accounting Principles II – Cost-Volume-Profit Relationships - Page 2 preview imageStudy GuideA machine may be used to produce 1,000 units or 10,000,000 units in a month, but the depreciationexpense stays the same because it depends ontime, not usage.2.Variable CostsVariable costschangein totalwhen activity changes.•Thecost per unit stays the same•Thetotal cost increases or decreaseswith activityExample of a Variable CostDirect materialsare a variable cost.If:•One chair requires1 yard of fabric•Fabric costs$5 per yardThen:•1 chair costs$5
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Accounting Principles II – Cost-Volume-Profit Relationships - Page 3 preview imageStudy Guide•10 chairs cost$50•100 chairs cost$500The cost per unit stays at $5, but the total cost rises as more chairs are made.Comparing Fixed and Variable Costs GraphicallyWhen shown on a graph:•Total fixed costsappear as aflat horizontal line•Total variable costsslope upward as activity increases
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Accounting Principles II – Cost-Volume-Profit Relationships - Page 4 preview imageStudy Guide3.Mixed CostsMixed costscontainboth fixed and variable components.Example of a Mixed CostA phone plan charges:•$1,000for the first800 calls•$0.10 per callafter 800 callsIf a company makes2,000 callsin March:•Extra calls = 1,200•Extra cost = 1,200 × $0.10 = $120•Total cost = $1,120Because mixed costs behave like both fixed and variable costs, they must beseparatedinto twoparts before analysis.
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Accounting Principles II – Cost-Volume-Profit Relationships - Page 5 preview imageStudy Guide4.Methods Used to Analyze Mixed CostsTo separate mixed costs, companies use past data and the following methods:Scatter Diagram MethodAscatter diagramplots:•Activityon the horizontal (x) axis•Coston the vertical (y) axisEach dot represents one observation.A line is drawn through the points to estimate the cost pattern.•Where the line meets the vertical axis =fixed cost•Theslope of the line=variable cost per unitExample
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Accounting Principles II – Cost-Volume-Profit Relationships - Page 6 preview imageStudy GuideUsing two data points:•36,000 gallons → $14,000•60,000 gallons → $20,000Change in cost = $6,000Change in activity = 24,000 gallonsVariable cost per unit =$0.25Estimated fixed cost =$5,000High–Low MethodThehigh–low methoduses only:•Thehighestactivity level•Thelowestactivity level
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Document Details

University
Texas A&M University
Course
Accounting Principles II
Subject
Accounting

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