High Low

Garrison−Noreen−Brewer: Managerial Accounting, 11th Edition

5. Cost Behavior: Analysis and Use

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© The McGraw−Hill Companies, 2006

C h a p t e r

5

Cost Behavior: Analysis and Use

LEARNING OBJECTIVES

After studying Chapter 5, you should be able to:

LO1

Understand how fixed and variable costs behave and how to use them to predict costs. Use a scattergraph plot to diagnose cost behavior. Analyze a mixed cost using the high-low method. Prepare an income statement using the contribution format. (Appendix 5A) Analyze a mixed cost using the least-squares regression method.

LO2 LO3 LO4 LO5

Garrison−Noreen−Brewer: Managerial Accounting, 11th Edition

5. Cost Behavior: Analysis and Use

Text

© The McGraw−Hill Companies, 2006

A Costly Mistake

A

fter spending countless hours tracking down the hardware and fixtures he needed to restore his Queen Anne-style Victorian house, Stephen Gordon recognized an opportunity. He opened Restoration Hardware, Inc., a specialty store carrying antique hardware and fixtures. The company’s products are described by some as nostalgic, old-fashioned, and obscure. Customers can shop at one of the many Restoration Hardware stores, by catalog, or online at the company’s website www.restorationhardware.com. 1998 was a year of phenomenal growth and change for Restoration Hardware. Twenty-four new stores were opened, increasing the total number in the chain to 65. The company’s newly launched catalog business was an instant success. Net sales approached $200 million, an increase of almost 114% from the prior year. Gordon, chairman and CEO, took the company public. The success enjoyed by the company in 1998 did not recur in 1999. Gordon believes his biggest mistake was a failure to consider cost behavior when making decisions to promote the company’s products. The most popular furniture items in the store were discounted during the first quarter to encourage customer interest. The company spent $1...