Managerial: Accounting

2

COST BEHAVIOR AND COST ESTIMATION

After studying this chapter, you should be able to meet the following learning objectives (LO).

1. Identify basic cost behavior patterns and explain how changes in activity level affect total cost and unit cost. (Unit 2.1)
2. Estimate a cost equation from a set of cost data and predict future total cost from that equation. (Unit 2.2)
3. Prepare a contribution format income statement. (Unit 2.3)

The Pitch

Martin Keck, vice president for sales at Universal Sports Exchange, one of C&C Sports' customers, was reviewing the latest corporate income statement prior to meeting with Judy Elmore, the company's chief financial officer.

“I don't understand these numbers,” Martin thought. “We fell short of our projected sales volume of jerseys by 10%, so I was anticipating net income to be 10% lower than expected as well. But that's not what the numbers are showing. How can I use this information to help me plan for the coming year? I just placed an order for jerseys with C&C Sports last week thinking I knew what we needed, and now I'm not so sure I did the right thing.&

Martin's thoughts were interrupted by the telephone's ringing. He answered, and heard Jonathan Smith, C&C Sports' vice president of marketing, on the other end.

“Hi Martin,” Jonathan said. “I'm ...