Cost Behavior Analysis and Income Statements: ACC 502 Assignment – Module 5

Summary

Cost behavior analysis and income statements are studied. Students get practice in identifying and separating different types of costs. They also get to prepare an income statement using the contribution format.

Identifying types of costs

Expenses are classified as variable, fixed or mixed. Examples of each type are given. The high-low method is used to separate mixed expenses into variable and fixed elements.

Preparing an income statement

An income statement is prepared using the contribution format. This format shows how sales revenue covers variable expenses and contributes to fixed expenses.

Analyzing overhead costs

Overhead costs are analyzed to estimate maintenance costs. The high-low method is used to estimate a cost formula for maintenance. The company's total overhead cost is expressed in a linear equation form.

Predicting total overhead cost

The total overhead cost is predicted for a given operating activity level. This is done using the linear equation form of the total overhead cost.

Key terms

Variable costs

Costs that change with the level of activity.

Fixed costs

Costs that do not change with the level of activity.

Mixed costs

Costs that have both variable and fixed elements.

High-low method

A method used to separate mixed costs into variable and fixed elements.

Contribution format

A format of income statement that shows contribution margin.

Overhead costs

Indirect costs of production.

Questions this document helps with

• How do you identify variable, fixed and mixed costs?
• What is the contribution format of an income statement?
• How do you predict total overhead cost for a given activity level?

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