Chapter 3

Cost Behaviour: Analysis and Use

Learning Objectives
LO1. Describe how fixed and variable costs behave and how to use them to predict costs.
LO2. Analyze mixed costs using various approaches.
LO3. Prepare an income statement using the contribution format.
LO4. (Online Appendix 3A) Analyze a mixed cost using the least-squares regression
method.

Chapter Overview
Managers who understand how costs behave are better able to predict costs and make decisions
under various circumstances. This chapter explores

 the meaning of three major classifications of costs fixed, variable and mixed costs
 various methods available to estimate fixed and variable cost components

It also introduces a new income statement called the contribution approach.

Service-Related Examples

Company Type of Business Text Reference

Sledding Adventures Dog sled tours Variable Costs

Harvey’s Restaurant chain Extent of Variable
Majestic Ocean Kayaking Excursions In Business
H & R Block Tax preparation and financial services Trend toward fixed
Grand River Hospital Medical Analyzing Mixed Costs
Air Canada Airlines Analyzing Mixed Costs
Pizza Hut Restaurant chain Engineering Approach
Hamilton Hotel Hotel Scattergraph Plots

Managerial Accounting, 11th Canadian edition

 Assignment Topic Grid
Chapter 3
Problem

Topic

LO4: Least-squares regression (App. 3A)

LO3: Contribution format income statement
LO1: Understand fixed and variable costs
LO2: Analysis of mixed costs

Writing component
Service industry

CPA adapted
E3-1 Fixed and Variable Cost Behaviour  
E3-2 Scattergram Analysis  
E3-3 High-Low Method   
E3-4 Contribution Format Income Statement 
E3-5 Cost Behaviour; Contribution Format Income Statement   
E3-6 Account Analysis Method 
E3-7 Cost Behaviour; High-Low Method  
E3-8 High-Low Method; Predicting Cost  
E3-9 Scattergram Analysis; High-Low Method   
E3-10 High-Low Method; Predicting Cost  
P3-11 Contribution Format vs Traditional Income Statement  
P3-12 Traditional and Contribution Format Income Statement 
P3-13 Identifying Cost Behaviour Patterns   CPA
P3-14 High-Low Method; Scattergram Analysis  
P3-15 High-Low Method; Predicting Cost  
P3-16 Cost Behaviour; High-Low Method; Contribution Format Income Statement   
P3-17 High-Low Method; Predicting Cost  
P3-18 Step-Variable Costs; Non-Linear Variable Costs; Cost Prediction    
C3-19 Scattergram Analysis; Selection of an Activity Base; High-Low Method   
C3-20 Mixed Cost Analysis and the Relevant Range  
E3A-1 Least-Squares Regression  
E3A-2 Least-Squares Regression 
E3A-3 Least-Squares Regression 
P3A-4 Scattergram; Cost Behaviour; Least-Squares Regression Method   
P3A-5 Least-Squares Regression Analysis; Pricing Decision  
P3A-6 Least-Squares Regression; Scattergram; Comparison of Activity Bases   

Managerial Accounting, 11th Canadian edition

Video Link
Types of Cost Behaviour Patterns
LO1, LO2

“Managerial Accounting 5.1: Cost Behavior Patterns” found on YouTube.com (https://www.youtube.com/watch?

v=MPFBexSpGLI) (13:15 min.)

This video describes cost behavior patterns including fixed, variable, and mixed costs.

Discussion Question
What is the formula for a mixed cost? Identify the term for variable & fixed costs.
Why does the high-low method use the highest and lowest activity levels instead of the high-low cost levels?
What is a major disadvantage of the high-low method?

Managerial Accounting, 11th Canadian edition