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2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations

  • Merchandising, manufacturing, and service organizations differ in what they provide to consumers; however, all three types of firms must control costs in order to remain profitable. The type of costs they incur is primarily determined by the product/good, or service they provide.
  • As the type of organization differs, so does the way they account for costs. Some of these differences are reflected in the income statement.

2.2 Identify and Apply Basic Cost Behavior Patterns

  • Costs can be broadly classified as either fixed or variable costs. However, in order for managers to manage effectively, these two cost classifications are often further expanded to include mixed, step, prime, and conversion costs.
  • For manufacturing firms, it is essential that they differentiate among direct materials, direct labor, and manufacturing overhead in order to identify and manage their total product costs.
  • For planning purposes, managers must be careful to consider the relevant range because it is only within this relevant range that total fixed costs remain constant.

2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs

  • In order to make business decisions, managers can utilize past cost data to predict future costs employing three methods: scatter graphs, the high-low method, and least-squares regression analysis.
  • Scatter graphs are used as a diagnostic tool to determine if the relationship between activity and cost is a linear relationship.
  • Both the high-low method and the least-squares regression method separate mixed costs into their fixed and variable components to allow managers to predict future costs from historical costs.
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