• Unit 3: Short-Term Decision-Making

    This unit introduces a new way to evaluate costs and make management decisions. Rather than examining direct materials, direct labor, and manufacturing overhead, we rearrange this information as variable costs, fixed costs, and mixed costs (fixed and variable costs combined).

    For example, in the previous unit we classified a factory worker who earns a salary and annual bonus based on company performance as direct labor. In this unit, we allocate salary to fixed costs, and the bonus to variable costs. We also explore how managers make short-term decisions (what needs to occur during the next hour, day, week, or year). Fixed cost restraints, such as plant size, equipment size, and age, often define short-term decisions.

    Understanding how these three types of costs variables behave allows business managers to predict revenue, operating income, and changes in sales volume.

    Completing this unit should take you approximately 6 hours.

    • Upon successful completion of this unit, you will be able to:

      • identify typical cost behavior patterns;
      • estimate costs using account analysis, the high-low method, the scattergraph method, and regression analysis;
      • prepare a contribution margin income statement;
      • describe the assumptions used to estimate costs; and
      • perform regression analysis using Excel.

    • 3.1: Cost Behavior Patterns

    • 3.2: Cost Estimation Methods

    • 3.3: Contribution Margin Income Statement

    • 3.4 The Relevant Range and Nonlinear Costs

    • Unit 3 Assessment

      • Unit 3 Assessment Quiz

        Take this assessment to see how well you understood this unit.

        • This assessment does not count towards your grade. It is just for practice!
        • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
        • You can take this assessment as many times as you want, whenever you want.

    • Unit 3 Conclusion

      In this unit, you identified costs as fixed, variable, or mixed. You then examined the behavior of costs to predict future financial patterns. The production of the contribution margin income statement is an important management decision-making tool. In the next unit, you will see one of the most useful tools in the managerial accounting toolbox: cost-volume-profit analysis, also called break-even analysis. Every manager needs to know how much has to be produced to generate a profit. A well-done break-even analysis will also respond to questions about what happens if one or more cost variables changed because you can estimate how sensitive profit is to any of these variables.