Principles of managerial accounting, accounting homework help

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Please discuss how the information in the Statement of Cash Flows can be used to predict future company performance and cash in/outflows.


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ACCT Cost Behavior Learning Objectives Introduction W I n Chapter 5, we focus our attention on the behavior of costs. As L production volume changes, some costs may increase or decrease and other costs may remain stable, but specific costs S behave in predictable ways as volume changes. This concept of predictable O cost behavior based on volume is very important to the effective use of accounting N information for managerial decision making. , I LO1 Describe the nature and behavior of fixed and variable costs. LO2 Use regression analysis and the high/low method to define and analyze mixed costs. LO3 Illustrate the impact of income taxes on costs and decision making. LO4 Fixed and Variable Costs J A Fixed costs are costs that remain the same in total, M but vary per unit, when production volume changes. Facility-level costs, I such as rent, depreciation of a factory building, the salary of a plant manager, insurE ance, and property taxes, are likely to be fixed costs. Summarizing this LO1 After studying the material in this chapter, you should be able to: Identify the difference between variable costing and absorption costing. LO5 Identify the impact on the income statement of variable costing and absorption costing. LO6 Recognize the benefits of using variable costing for decision making. cost behavior, fixed costs stay the same in total but vary when expressed on a per-unit basis. 5 0 5 Behavior of Fixed Costs Exhibit 5-1 The 1 $ B U $10,000 92 $2.00 $1.33 0 2,500 5,000 7,500 Volume Fixed Cost in Total 0 2,500 5,000 7,500 Volume Fixed Cost per Unit Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. © Cengage Learning 2013 $4.00 Cost behavior How costs react to changes in production volume or other levels of activity. Fixed costs Costs that remain the same in total when production volume increases or decreases but that vary per unit. $ CHAPTER 5 W I L S O N , © Henner Frankenfeld/Bloomberg via Getty Images ACCT J A M I E Understanding how costs behave with changes in production is crucial for managers of an organization. 5 0 5 Rent is a good example. If the cost to rent a factory building is $10,000 per year and 5,000 1 is $2.00 ($10,000 ÷ 5,000). If production units of product are produced, the rent per unit volume decreases to 2,500 units per year, the cost B per unit will increase to $4.00 ($10,000 ÷ 2,500). If production volume increases to 7,500 units, the cost per unit decreases to $1.33 U ($10,000 ÷ 7,500). However, the total rent remains $10,000 per year (see Exhibit 5-1). On the other hand, variable costs vary in direct proportion to changes in production volume but are constant when expressed as per-unit amounts. As production increases, variable costs increase in direct proportion to the change in volume; as production decreases, variable costs decrease in direct proportion to the change in volume. Examples include direct material, Variable costs Costs that stay direct labor (if paid per unit of output), and other unitthe same per unit, but change in total, as level costs, such as factory supplies, energy costs to run production volume increases or decreases. factory machinery, and so on. Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 93 Consider the behavior of direct material costs as production increases and decreases. If the production of a standard classroom desk requires $20 of direct materials (wood, hardware, and so on), the total direct material costs incurred will increase or decrease proportionately with increases and decreases in production volume. If 5,000 desks are produced, the total direct material cost will be $100,000 (5,000 × $20). If production volume is increased to 7,500 units (a 50 percent increase), direct material costs will also increase 50 percent, to $150,000 (7,500 × $20). However, the cost per unit is still $20. Likewise, if production volume is decreased to 2,500 desks, direct material costs will decrease by 50 percent, to $50,000. But once again, the cost per unit remains $20 (see Exhibit 5-2). Within the relevant range, fixed costs are constant in total and vary per unit, and variable costs vary in total and are constant per unit. Relevant range The normal range of production that can be expected for a particular product and company. 94 Volume Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. © Cengage Learning 2013 Cost © Cengage Learning 2013 as production increases. For example, utility costs per kilowatt-hour may decrease at higher levels of electricity use (and production). Managerial accountants typically get around this problem by assuming that the relationship between cost and volume is linear within the relExhibit 5-2 The Behavior of Variable Costs W evant range of production. In other words, the cost per unit I $ $ is assumed to remain constant L $150,000 over the relevant range. The S relevant range is the normal $100,000 range of production that can be O $20.00 expected for a particular prodN $50,000 uct and company. The relevant , range can also be viewed as 0 0 the volume of production for 2,500 5,000 7,500 2,500 5,000 7,500 Volume Volume which the fixed and variable J Variable Cost per Unit Variable Cost in Total cost relationships hold true. As you can see in Exhibit 5-3, A within this narrower range of M A current trend in manufacturing is to automate— production, a curvilinear cost can be approximated by to replace direct factory labor with robotics and otherI a linear relationship between the cost and volume. automated machinery and equipment. This trend has theE effect of increasing fixed costs (depreciation) and decreasing variable costs (direct labor). Exhibit 5 5-3 Curvilinear Costs and the Relevant Range Although there are many advantages to automation, the impact of automation on the employee 0 work force and on day-to-day decisions made 5 by managers must not be ignored. 1 Strictly speaking, a cost that varies in diRelevant Curvilinear rect proportion to changes in volume requires B Range Function a linear (straight-line) relationship between U the cost and volume. However, in reality, costs may behave in a curvilinear fashion. Average Straight-Line Approximation costs or cost per unit may increase or decrease MAKING IT REAL Direct Labor as a Fixed Cost F W I L Step Costs S The classification of costs is not always a simpleO process. Some costs vary but only with relatively largeNchanges in production volume. Batch-level costs related to mov, ing materials may vary with the number of batches of © Jessica Rinaldi/Reuters/Landov or years, U.S. car manufacturers have had contracts with their workers’ unions that require the companies to pay their assembly-line workers even when they are not on the assembly line. These contracts essentially transform direct labor costs into fixed costs. More recently, as the recession has resulted in idle assembly lines, Toyota has done likewise. However, unlike the U.S. companies, which often send their workers home, at Toyota the workers might attend training classes, repair and maintain equipment, or brainstorm in an effort to identify new cost-savings or qualityimprovement initiatives. Source: “Toyota Keeps Idled Workers Busy Honing Their Skills,” by Kate Linebaugh, The Wall Street Journal, October 13, 2008. product produced but not with every unit of product. Product-level costs associated with quality control J inspections may vary when new products are introduced. A costs. Costs like these are sometimes referred to as step In practice, step costs may look like and be treated M as either variable costs or fixed costs. Although step costs are I technically not fixed costs, they may be treated as such E range if they remain constant within a relatively wide of production. Consider the costs of janitorial services within a company. As long as production is below 7,500 5 desks, the company will hire one janitor with salary and fringe benefits totaling $25,000. The cost0is fixed as long as production remains below 7,500 units. 5 But if desk production exceeds 7,500, increasing the amount 1 of waste and cleanup needed, it may be necessary to hire B a second janitor at a cost of another $25,000. However, within a relevant range of production between U 7,501 and 15,000 units, the cost is essentially fixed ($50,000). costs are relevant in production decisions because they vary with the level of production. Likewise, fixed costs are generally not relevant, because they typically do not change as production changes. However, variable costs can remain the same between two alternatives, and fixed costs can vary between alternatives. For example, if the direct material cost of a product is the same for two competing designs, the material cost is not a relevant factor in choosing a design. However, other qualitative factors relating to the material, such as durability, may still be relevant. Likewise, fixed costs can be relevant if they vary between alternatives. Consider rent paid for a facility to store inventory. Although the rent is a fixed cost, it is relevant to a decision to reduce inventory storage costs through just-in-time production techniques if the cost of the rent can be avoided (by subleasing the space, for example) by choosing one alternative over another. The Cost Equation Expressing the link between costs and production volume as an algebraic equation is useful. The equation for a straight line is y = a + bx Relevant Costs and Cost Behavior As mentioned in Chapter 1, relevant costs are those which are avoidable or can be eliminated by choosing one alternative over another. Relevant costs are also known as differential, or incremental, costs. In general, variable Step costs Costs that vary with activity in steps and may look like and be treated as either variable costs or fixed costs; step costs are technically not fixed costs but may be treated as such if they remain constant within a relevant range of production. Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 95 The a in the equation is the point where the line intersects the vertical (y) axis (the y-intercept), and b is the slope of the line. In Exhibit 5-4, if y = total direct material costs and x = units produced, then y = $0 + $20x. The y-intercept is zero and the slope of the line is 20. For It can be misleading to always view variable costs as relevant and fixed costs as irrelevant. Exhibit 5-4 Fixed and Variable Costs Y $100,000 Costs Variable costs (direct material) $50,000 $10,000 0 0 2,500 5,000 Volume W Fixed costs (rent) I L S OX 7,500 N , every one-unit increase (decrease) in production (x), J direct material costs increase (decrease) by $20. You can see that direct material costs are variable becauseA they stay the same on a per-unit basis but increase inM total as production increases. Likewise, we can express I the fixed-cost line as an equation. If y = cost of rent and x = units produced, then y = $10,000 + $0x. In thisE case, the y-intercept is $10,000 and the slope is zero. In other words, fixed costs are $10,000 at any level of 5 production within the relevant range. 0 5 1 LO2 Mixed Costs B he presence of mixed costs presents a unique chal-U T lenge because they include both a fixed and a variable component. Consequently, it is difficult to predict Mixed costs Costs that include both a fixed and a variable component, making it difficult to predict the behavior of a mixed cost as production changes, unless the cost is first separated into its fixed and variable components. 96 © Cengage Learning 2013 $150,000 the behavior of a mixed cost as production changes, unless the cost is first separated into its fixed and variable components. A good example of a mixed cost is the overhead costs of KenCor Pizza Emporium. Overhead typically has both a fixed and a variable component. For example, rent and insurance paid by KenCor would be fixed components of overhead, whereas utilities and supplies would likely be variable costs. In the first seven weeks of operations, KenCor incurred the following overhead costs: Week 1 (Start-up) Total Overhead Cost Pizzas Costs per Unit 0 $ 679 N/A 2 423 1,842 $4.35 3 601 2,350 3.91 4 347 1,546 4.46 5 559 2,250 4.03 6 398 1,769 4.44 7 251 1,288 5.13 Is the overhead cost a fixed, variable, or mixed cost? Clearly, the cost is not fixed, because it changes each week. However, is it a variable cost? Although the cost changes each week, it does not vary in direct proportion to changes in production. In addition, remember that variable costs remain constant when expressed per unit. In this case, the amount of overhead cost per pizza changes from week to week. A cost that changes in total and also changes per unit is a mixed cost. As you can see in Exhibit 5-5, a mixed cost looks somewhat like a variable cost. However, the cost does not vary in direct proportion to changes in the level of production (you can’t draw a straight line through all the data points), and if Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. Exhibit 5-5 Mixed Costs 2,000 1,500 1,000 0 Overhead 0 100 200 300 400 500 600 700 Pizzas Wto the a line were drawn through the data points back and the number of pizzas produced in the next 12 months y-axis, we would still incur overhead cost at aI produc(see Exhibit 5-6). As you can see, because the overhead tion volume of zero. Like a fixed cost, a mixed cost has cost varies in total and on a per-unit basis, it must be a L a component that is constant regardless of production mixed cost. A graph of the data is shown in Exhibit 5-7. S volume. Once we know that a cost is mixed, we areO Exhibit 5-6 Overhead Costs per Pizza left with the task of separating the mixed cost N into its fixed and variable components. However, Month Pizzas Overhead Per Pizza it is not clear how much of the overhead cost, 1 2,100 $ 8,400 $4.00 is fixed and how much is variable. In the next 2 2,600 10,100 3.88 section, we will demonstrate the use of a statistiJ 3 2,300 8,800 3.83 cal tool called regression analysis to estimate the 4 2,450 9,250 3.78 fixed and variable components of a mixed cost. A A variety of tools can be used to estimate theM 5 2,100 8,050 3.83 fixed and variable components of a mixed cost. 6 2,175 8,200 3.77 When we separate a mixed cost into its variableI 7 1,450 6,950 4.79 and fixed components, what we are really doingE 8 1,200 6,750 5.63 is generating the equation for a straight line, with 9 1,350 7,250 5.37 the y-intercept estimating the fixed cost and the 10 1,750 7,300 4.17 5 slope estimating the variable cost per unit. 11 1,550 7,250 4.68 Continuing our example of KenCor Pizza0 12 2,050 7,950 3.88 Emporium, we see that after the initial seven5 week start-up period, the company’s accountant compiles data regarding the total overhead cost1 B U Regression Analysis © iStockphoto.com/Todd Smith A statistical technique used to estimate the fixed and variable components of a mixed cost is called least squares regression. Regression analysis uses statistical Regression analysis The procedure that uses statistical methods (least squares regression) to fit a cost line (called a regression line) through a number of data points. Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 97 © Cengage Learning 2013 500 © Cengage Learning 2013 Overhead Costs $2,500 Exhibit 5-7 Overhead Costs for KenCor Pizza $11,000 10,000 9,000 8,000 Costs 7,000 6,000 5,000 4,000 2,000 1,000 0 0 200 400 600 800 W I L S 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 O Pizzas N , methods to fit a cost line (called a regression line) through a number of data points. Note that althoughJ the data points in our example do not lie along a A straight line, regression analysis statistically finds the line that minimizes the sum of the squared distancesM from each data point to the line (hence the name leastI squares regression). E Using a Spreadsheet Program to Perform Regression Analysis Using a spreadsheet program to produce re- gression results is a relatively simple process. We are5 going to use Microsoft Excel in this example, but all0 spreadsheet programs are similar. The first step is to 5 enter the actual values for our mixed cost (called the dependent variable in regression analysis because1 the amount of cost is dependent on production) and theB related volume of production (called the independent U variable because it drives the cost of the dependent Dependent variable The variable in regression analysis that is dependent on changes in the independent variable. Independent variable The variable in regression analysis that drives changes in the dependent variable. 98 2,800 © Cengage Learning 2013 3,000 variable) into a spreadsheet, using one column for each variable. Employing data from KenCor Pizza Emporium for overhead costs incurred and pizzas produced for the first 12 months of operations, we see the data shown in the Excel spreadsheet in Exhibit 5-8. The next step in Excel (see Exhibit 5-9) is to click on the Data tab and choose data analysis from the Analysis ribbon. From the data analysis screen, scroll down, highlight regression, and either double-click or choose OK. The regression screen will prompt you to choose a number of options. The first step is to input the y range. The y range will be used to identify the dependent variable (overhead costs), found in column C of your spreadsheet. You can either type in the range of cells or simply highlight the cells in the spreadsheet (be sure not to include the column heading), and click on the icon in the y-range box. The next step is to select the x range for the independent variable (volume of pizzas). Once again, you can enter the cells directly or highlight the cells in the second column of your spreadsheet. After inputting the appropriate y and x ranges, your Excel spreadsheet should look like the example shown in Exhibit 5-10. Click OK, and the regression model summary output appears as shown in Exhibit 5-11. Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. Exhibit 5-8 Regression Analysis—Step 1 5 0 5 1 B U Regression Analysis—Step 2 © Cengage Learning 2013 J Exhibit 5-9 A M I E © Cengage Learning 2013 W I L S O N , Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 99 W I L S O N , © Cengage Learning 2013 Exhibit 5-10 Regression Analysis—Step 2 (continued) Exhibit 5-11 Regression Analysis—Summary Output 5 0 5 1 B U 100 © Cengage Learning 2013 J A M I E Chapter 5: Cost Behavior 9781305323339, Managerial ACCT2, Second Edition, Sawyers/Jackson/Jenkins - © Cengage Learning. All rights reserved. No distribution allowed without express authorization. Total overhead cost = Fixed cost + (Variable cost/unit ...
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Running head: PRINCIPLES OF MANAGERIAL ACCOUNTING

Principles of Managerial Accounting

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The statement of cash flows contains information which can be used to help the company
predicts its performance and its future cash in/outflows. This is attained through examining the
relationships that exists in the different i...

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