Managerial Accounting and Cost ConceptsContribution FormatHigh Low MethodLeast Squares Method

2-2

Let’s put our knowledge of cost

behavior to work by preparing a

contribution format income statement.

The Contribution Format

2-3

The Contribution FormatTotal Unit

Sales Revenue 100,000$ 50$ Less: Variable costs 60,000 30 Contribution margin 40,000$ 20$ Less: Fixed costs 30,000 Net operating income 10,000$

The contribution margin format emphasizes The contribution margin format emphasizes cost behavior. Contribution margin covers fixed cost behavior. Contribution margin covers fixed

costs and provides for income.costs and provides for income.

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The Contribution Format

Used primarily forUsed primarily forexternal reporting.external reporting.

Used primarily byUsed primarily bymanagement.management.

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Mixed Costs

Fixed MonthlyUtility Charge

Variable Cost per KW

Activity (Kilowatt Hours)

Tota

l Util

ity C

ost

X

Y

Total mixed cost

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The Scattergraph MethodUse one data point to estimate the total level of activity

and the total cost.

Intercept = Fixed cost: $10,000

0 1 2 3 4

*

Mai

nten

ance

Cos

t1,

000’

s of

Dol

lars

10

20

0

***

**

* **

*

Patient-days in 1,000’s

X

Y

Patient days = 800

Total maintenance cost = $11,000

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2-7

The High-Low MethodThe The variable cost variable cost

per hourper hour of of maintenance is maintenance is

equal to the change equal to the change in cost divided by in cost divided by

the change in hours.the change in hours.

= $6.00/hour$6.00/hour$2,400 400

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The High-Low Method

Total Fixed Cost = Total Cost – Total Variable CostTotal Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour Total Fixed Cost = $9,800 – ($6/hour × 850 hours)× 850 hours)

Total Fixed Cost = $9,800 – $5,100Total Fixed Cost = $9,800 – $5,100

Total Fixed Cost = Total Fixed Cost = $4,700$4,7005-8

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The High-Low Method – An Example

YY = $4,700 + $6.00 = $4,700 + $6.00XXThe Cost Equation for Maintenance

5-9

2-10

Least-Squares Regression MethodA method used to analyze mixed costs if a

scattergraph plot reveals an approximately linear relationship between the X and Y variables.

This method uses This method uses allall of the of thedata points to estimatedata points to estimatethe fixed and variablethe fixed and variablecost components of acost components of a

mixed cost.mixed cost.The goal of this method isThe goal of this method isto fit a straight line to theto fit a straight line to thedata that data that minimizes theminimizes the

sum of the squared errorssum of the squared errors..

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Least-Squares Regression Method

•Software can be used to fit a regression line through the data points.

•The cost analysis objective is the same: Y = a + bX

Least-squares regression also provides a statistic, called

the R2, which is a measure of the goodnessof fit of the regression line to the data points.

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End of Chapter 02