Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo

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.
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
Citation information

© Dec 13, 2023 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.