Relevant Range for Cost Behavior Analysis in Management Decisions

Cost-benefit balances - weighing estimated costs against probable benefits - are the primary consideration in choosing among accounting systems and methods. 2. Behavioral implications are the system's effect on the behavior, specifically the decisions, of managers. A budget is a quantitative expression of a plan of action. Budgets also help to coordinate and Implement plans. Performance reports provide feedback by comparing results with plans and by highlighting variances. Organizations use performance reports to Judge mangers' decisions and the productivity of organizational units.

Performance reports compare the actual results to budgets, thereby motivating managers to achieve the objectives. Management by exception means concentrating on the area's that deviate from the plan and, in the absence of other evidence, presuming that areas that conform with plans are running smoothly. The activities that are necessary for a company to create the goods or service that It sells belong to the value chain, the set of business functions or activities that add value to the products or services of an organization.

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These functions include the following: Research and development Design Production Marketing Distribution Costumer service Line managers are directly involved with making and selling the organization's products or services. In contrast, staff managers are advisory - they support the line managers. The treasurer is concerned mainly with the company's financial matters such as raising and managing cash, while the controller is concerned with operating matters such as aiding management decision-making.

Chapter 2 Introduction to Cost Behavior and Cost-volume Relationships Cost drivers, measures of activities that require the use of resources and thereby cause costs A variable cost changes In erect proportion to changes in the cost driver.

In contrast, changes in the cost driver do not immediately affect a fixed cost. When analyzing costs, you may find these two rules of thumb useful: 1. Think of fixed costs on a total-cost basis. Total fixed costs remain unchanged regardless of changes in the cost-driver 2. Think of variable costs on a per-unit basis.

The per-unit variable cost remains unchanged regardless of with the level of the cost-driver. Although we have Just described fixed costs as unchanging regardless of changes in the given cost driver, this rule of thumb holds rue only within reasonable limits. The relevant range is the limit of cost-driver level within which a specific relationship between costs and the cost driver is valid. Even within the relevant range, though, a fixed cost remains fixed only over a given period of time - usually the budget period.

The managers of profit-seeking organizations usually study the effects of output volume on revenue (sales), expenses (costs) and net income (net profit). We call this study cost-volume-profit (CUP) analysis. The manager of nonprofit organizations also benefit from the study of CUP. The most Asia CUP analysis computes the monthly break-even point in number of units and in dollar sales. The break-even point is the level of sales at which the revenue equals expenses and net income is zero. Contribution-margin method Unit contribution margin = unit sales price - variable cost per unit When do we reach break-even?

X = fixed costs / unit contribution margin To check Break-even = X* unit sales price Equation method Sales - variable expenses - fixed expenses = zero net income (break-even point (p*q) - (variable cost*q) - fixed expenses = O Let N = number of units sold to break even. Sales*N) - (Variable*N) - fixed = O Salvageable*N = fixed N units Let S = sales in dollars needed to be break-even. Then Variable costs per unit / sales price per unit = a S - as - fixed costs = O as = fixed costs S = fixed costs / a Graphing the break-even point 1 . Draw the axes. Horizontal axis is sales, and the vertical axis dollars 2.

Plot sales volume. Select a convenient sales volume and plot point A for total sales dollars at that volume. Draw the revenue from point A to the origin, point O. 3. Plot fixed expenses. It should be a horizontal line intersecting the vertical axis, point B 4. Plot variable expenses. Determine the variable portion of expenses at a convenient level of activity. Add this to the fixed expenses, point C. Then draw a line between this point and point B. This is the total expenses line 5. Locate the break-even point - where the total expenses line crosses the sales line.

Margin of safety = planned unit sales - break-even unit sales Gross margin, also called gross profit, is the excess of sales over the cost of goods sold. Cost of goods sold is the cost of the merchandise that a company acquires or produces and then sells. Compare the gross margin with he contribution margin: Gross margin = sales price - cost of goods sold Chapter 3 Measurement of Cost Behavior Step costs change abruptly at different intervals of activity because the resources and their costs are only available in indivisible chunks.

Mixed costs contain elements of both fixed- and variable-cost behavior. The fixed cost element is unchanged over a range of cost-driver activity levels. The variable-cost element varies proportionately with cost-driver activity. In addition to measuring and evaluating current cost behavior, managers can influence cost behavior thought decisions about such factors as product or service attributes, capacity, technology, and policies to create incentives to control costs.

Product and Service Decisions, adding services for increased business, for example Hertz, would add a feature to its service only if the cost of the feature could be more than recovered in profit from increased business and/or extra fees it could charge for the feature. Capacity decisions: the fixed costs of being able to achieve a desired level of production or to provide a desired level of service while maintaining product or service attributes. Committed fixed costs usually arise from the possession of facilities, equipment, and a basic organization. Depreciation) Discretionary fixed costs are costs fixed at certain levels only because management decided that these levels of cost should be incurred to meet the organization's goals. As a manager, you will use cost functions often as a planning and control tool. A few of the reasons why cost functions are imported are listed here: 1 . Planning and controlling the activities of an organization require accurate and useful estimates of future fixed and variable costs. 2. Understanding legislations between costs and their cost drivers allows managers to... Valuate strategic plans and operational improvement programs make short- and long-run decisions plan or budget the effects of future activities The first step in estimating or predicting costs is measuring cost behavior as a function of appropriate cost drivers. The second step is to use these cost measures to estimate future costs at expected levels of cost-driver activity. To describe the relationship between a cost and its cost drivers, managers often use an algebraic equation called a cost function. Y = fixed cost + (variable costs * X)

After determining the most plausible drivers behind costs, managers can choose from a broad selection of methods of approximating cost functions. These methods include: 1 . Engineering analysis, it measures cost behavior according to what costs should be, not by what costs have been. Engineering analysis entails a systematic review of materials, supplies, labor, support services, and facilities needed for products and services. 2. Account analysis, the simplest method of account analysis selects a plausible cost driver and classifies each account as a variable or fixed cost. 3. High-low analysis page 114

Chapter 4 Cost Management Systems and Activity-Based Costing To support managers' decisions, accountants develop cost management systems (SMS) - collections of tools and techniques that identify how management's decisions affect costs. A cost management system provides 1 . Cost information for strategic management decisions 2. Cost information for operational control; and investors, creditors, and other external stakeholders. We define cost as a sacrifice or giving up of resources for particular purpose. Anything for which decision makers desire a separate measurement of costs is a cost object.