Chapter 6 Managerial Accounting

Account Classification Method (Account Analysis)

• Def: examinatioin of ledger accounts to classify costs as mixed variable or fixed
• Assets= Liabilities +Owner's Equity

Coefficient of Determination, R^2

• percentage of variability of the dependent variable about its mean
• Confidence of predictability from Independent to dependent variable
• higher r^2 is a better fit
• 

Cost Behavior Patterns

• measures how costs change in response to business process
• high-low method/ regression
• fixed costs-remain constant over a relevant range
• variable costs- change in proportion to producton
• 

Discretionary Costs

• management decision to allocate funds to a specific purpose
• research and development, advertising
• non-essential and can be reduced or eliminated to without immediately impacting profitability
• 

Engineered Cost

• bears definitive relationship to activity measure on direct material
• Raw materials, Direct labor, Maintenance and depreciation of machinery, and Utilities
• 

Engineering Method

• The industrial engineering method and the account analysis method are judgment-based methods of determining cost behavior. In the realm of managerial accounting and cost accounting, understanding how costs change in relation to different levels of activity is crucial for planning, control, and decision-making
• 

Experience Curve

• more experienced a company the lower the cost of produciton

Fixed and Variable Costs

• Fixed: constant in a relevant range no matter the level of productivity
• Variable: Varies in accordance to production
• Fixed: rent, non-commission salaries, insurance
• Variable: Raw materials, Direct Labor (hourly wages), utillities
• MIxed Costs: costs with both a fixed and variable compenent
• cell phone bills, commission + base salary, certain utilities

Overhead

• indirect costs of running a business, not directlyy tied to production
• can be fixed or variable while DL and DM are variable
• 

Goodness of Fit

• how closely observed data mirrors predictive data
• relationship between cost driver and cost
• 

High-Low Method

• way to separate fixed and variable costs with limited data
• based on independent variable
• https://www.youtube.com/watch?v=PLMcLKUgq_I
• High-Low Method

Learning Curve

• As workers gain experience the product is made faster

Least Squares Regression Method

• a statistical technique used to analyze cost behavior by identifying the fixed and variable components of a mixed cost
• utilizes all data points
• https://www.youtube.com/watch?v=Z4Wg9OLHzKU
• 

Relevant Range

• the range of activity where the assumption that cost behavior is a straight line (linear) is reasonably valid.

Simple Versus Multiple Regression

• Simple uses one independent variable while multiple incorporates multiple
• https://www.youtube.com/watch?v=ekwkOO8_s5Y

Step-Fixed and Step-Variable Costs

• Step-fixed: a cost that remains the same within a certain production level, but changes when production reaches a threshold
• company may hire additional supervisors as producton increases
• Step-Variable: costs that remain constant over a range of production, but increase or decrease in response to wide changes in activity level
• If one employee can make 10,000 pencils, then their wage is constant over that range.
• If you produce 11,000 pencils, you'll need another employee, so your cost doubles.
• If you make 25,000 pencils, your cost triples because you need three employees.

Visual Fit Method

• VISUAL-FIT METHOD is a cost estimation method where an analyst examines a cost by plotting points on a graph (called a scatter diagram) and places a line through the points to yield a cost function
• https://www.youtube.com/watch?v=bVbUBMFsmfo