This unit examines four cost behavior types variable, fixed, mixed, and step.

Cost Behavior and Cost Estimation Unit Summaries

Unit 2.1 – Cost Behavior Patterns This unit examines four cost behavior types – variable, fixed, mixed, and step.

Unit 2.2 – Cost Estimation This unit focuses on using knowledge of cost behaviors to develop cost functions and estimate total costs. The high-low method and the EXCEL functions for regression are illustrated as means for analyzing mixed costs.

Unit 2.3 – Contribution Margin Analysis The contribution margin and the contribution format income statement are introduced.Continuing Case Recap This is the first chapter in the text that uses the running case. In this chapter students are introduced to Universal Sports Exchange, one of C&C Sports’ customers.Motivating the Chapter with The Business Decision and Context Martin Keck, Universal Sports’ vice president of sales, wonders why a 10% decrease in sales volume did not result in a 10% decrease in net income. The 10% decrease in sales volume also resulted in a larger than expected ending inventory of baseball jerseys. Martin needs to know how to predict the changes in income when sales volume changes.Assignment Classification by Learning Objective

Learning Objective Exercises Problems Cases

• Identify basic cost behavior patterns and explain how changes in

activity level affect total cost and unit cost. (Unit 2.1)

1, 2, 3, 4, 5, 6,

7

19, 24 27, 29

• Estimate a cost equation from a set of cost data and predict

future total cost from that equation. (Unit 2.2)

8, 9, 10, 11, 12 20, 21, 22,

23, 25

28

• Prepare a contribution format income statement. (Unit 2.3) 13, 14, 15, 16,

17, 18

24, 26 28

photo: © Tischenko

Irina/Shutterstock

2

CHAPTER

Managerial Accounting 2nd Edition Davis Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Davis and Davis, Managerial Accounting Instructor’s Manual, 2 nd ed.2-2 Assignment Characteristics

Item

Description

• O.

Difficulty Level Minutes to Complete Bloom’s Taxonomy

AACSB AICPA FN AICPA PC

IMA Ethics Coverage

EXERCISES

2-1 Identify cost behaviors 1 M 12 C AN R C CM 2-2 Identify cost behaviors 1 D 15 C AN R C CM 2-3 Identify cost behaviors 1 M 12 AP AN M PS CM 2-4 Identify cost behaviors 1 M 15-20 AP, C AN M PS CM 2-5 Identify cost behaviors 1 M 10 AP, AN AN M PS CM 2-6 Explain use of fixed costs in calculating unit cost

1 D 5-7 AN AN M PS CM

2-7 Understand the effect of changes in volume on costs

1 D 8 AP, AN AN M PS CM

2-8 Use a scattergraph to estimate a cost function

2 M 15-20 AP, AN AN M PS CM

2-9 Use the high-low method to estimate a cost function

2 M 20 AP, AN AN M PS CM

2-10 Use the high-low method to estimate a cost function

2 M 12 AP, AN AN M PS CM

2-11 Develop cost functions 2 D 20 AP AN M PS CM 2-12 Develop cost function and estimate total cost

2 D 10-15 AP AN M PS CM

2-13 Prepare a contribution format income statement

3 M 10-15 AP AN M PS CM

2-14 Find missing amounts in a contribution format income statement

3 E 10-15 AN AN M PS CM

2-15 Prepare a contribution format income statement

3 D 10-15 AP AN M PS CM

2-16 Prepare a contribution format income statement

3 M 15 AP AN M PS CM

2-17 Prepare a contribution format income statement

3 E 20-25 AP AN M PS CM

2-18 Interpret contribution format income statement

3 M 10 AP, AN AN M PS CM

PROBLEMS

2-19 Identify cost behavior using unit cost information

1 E 20-25 AP AN M PS CM

Chapter 2 – Cost Behavior and Cost Estimation

2-3

Item

Description

• O.

Difficulty Level Minutes to Complete Bloom’s Taxonomy

AACSB AICPA FN AICPA PC

IMA Ethics Coverage 2-20 Develop cost function using scattergraph and high-low method, estimate total cost

2 M 20-25 AP, AN AN M PS CM

2-21 Develop cost function using high-low method, estimate total cost

2 D 15-20 AP, AN AN M PS CM

2-22 Develop cost function using high-low method, identify cost outliers

2 M 20-25 AP, AN AN M PS CM

2-23 Develop and evaluate cost function using high-low method

2 D 30-35 AP, AN AN M PS CM

2-24 Identify cost behavior, prepare contribution format income statement

1, 3 D 20-25 AP AN M PS CM

2-25 Prepare a contribution format income statement, estimate total cost

2, 3 D 20 AP AN M PS CM

2-26 Prepare a contribution format income statement, evaluate changes in cost behavior

3 D 20-25 AP AN M PS CM,

DA

C&C CONTINUING CASE 2-27 Identify cost behavior 1 E 5-7 C AN M PS CM 2-28 Determine operating profit equation, prepare contribution format income statement

2, 3 M 10 AP, AN AN M PS CM

CASES 2-29 Identify cost behavior, estimate total cost

1 D 20-25 AP AN M PS CM

2-30 Evaluate ethical issues M 10-15 AN AN, E R C BA 

Difficulty: E = Easy, M = Moderate, D = Difficult

Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation

AACSB: A = Analytic, C = Communication, E = Ethics

AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management, PS = Problem Solving and Decision Making, T = Technology IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis, PM = Performance Measurement, R = Reporting, SP = Strategic Planning

Davis and Davis, Managerial Accounting Instructor’s Manual, 2 nd ed.2-4 Chapter Summary Unit 2.1

LO 1 Identify basic cost behavior patterns and explain how changes in activity level affect total cost and unit cost.The two basic cost behavior patterns are variable and fixed. Costs that are a combination of these two basic patterns are referred to as mixed. The following table shows how these costs change with changes in

activity:

AS ACTIVITY INCREASES AS ACTIVITY DECREASES

Cost Behavior Total Cost Cost per Unit Total Cost Cost per unit Variable increases remains constant decreases remains constant Fixed remains constant decreases remains constant increases Mixed increases decreases decreases increases

Unit 2.2

LO 2 Estimate a cost equation from a set of cost data and predict future total cost from that equation.Total cost can be expressed in the form y = mx + b, where y is the total cost, m is the variable cost per unit, x is the number of units, and b is the total fixed cost. Given a set of costs and activity levels, you can estimate a cost equation using one of the following methods: scattergraph, high-low, or regression.Unit 2.3

LO 3 Prepare a contribution format income statement.A contribution format income statement is an income statement that categorizes expenses by their behavior.

It follows the structure:

Sales Revenue

• Variable expenses

= Contribution margin

• Fixed expenses

= Operating income

Besides showing total sales revenue and expenses, the contribution format statement should also show per unit amounts for sales revenue, variable expenses, and contribution margin.Related Reading James Fantus, “Understanding Cost Behavior in the Lab: The Key to Financial Success,” Medical Laboratory Observer, July 1997.This article discusses fixed and variable costs in a medical laboratory setting. It can provide the basis for discussing cost behavior in a service setting. Available online at http://www.thefreelibrary.com/Understanding+cost+behavior+in+the+lab%3A+the+key+to+financial+succes s.-a021145718.Douglas MacMillan, “Turning Smartphones Into Cash Registers,” Bloomburg Businessweek, February 14 – February 20, 2011, 44-45.This article provides information about the costs incurred to use Square, a mobile payment system that plugs into smartphones. The cost information in the article provides an example of a mixed cost, with a fixed monthly base charge and a variable charge per transaction. One interesting twist on this mixed cost is that