Managerial Accounting Chapter 2

Chapter

2

Managerial Accounting and Cost Concepts

Understanding Costs Aids the Growth of a Billion Dollar Company

In 1986, Women’s World of Fitness went bankrupt despite having 14 locations and 50,000 members. The company’s owner, Gary Heavin, says the fitness centers contained too many costly amenities such as swimming pools, tanning beds, cardio machines, kid’s programs, juice bars, personal trainers, and aerobics classes. As costs escalated, he attempted to increase revenues by offering memberships to men, which alienated his female members. What did Heavin learn from his experience? In 1992, Heavin founded a new brand of women’s fitness centers called Curves. Rather than investing in every conceivable piece of fitness equipment and amenity, Heavin focused on simplicity. He created a simple fitness circuit that uses minimal equipment and is quick and easy for members to complete. Instead of operating almost 24 hours a day, he decided to close his gyms early. Even showers were deemed unnecessary. In short, Heavin eliminated numerous costs that did not provide benefits in the eyes of his customers. With dramatically lower costs, he has been able to maintain his “women only” approach while building a billion dollar company with nearly 10,000 locations worldwide. ■

Source: Alison Stein Wellner, “Gary Heavin Is on a Mission from God,” Inc. magazine, October 2006, pp. 116–123.

LEARNING OBJECTIVES

After studying Chapter 2, you should be able to: LO1

Identify and give examples of each of the three basic manufacturing cost categories. Distinguish between product costs and period costs and give examples of each. Understand cost behavior patterns including variable costs, fixed costs, and mixed costs. Analyze a mixed cost using a scattergraph plot and the highlow method. Prepare income statements for a merchandising company using the traditional and contribution formats. Understand the differences between direct and indirect costs. Understand cost...