Chapter 5 COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS

How many peanut butter cookie dough blast shakes do I sell? - How many shakes do I sell to make a profit?

Types of Costs  All costs must be classified as either “fixed ” or “variable” with respect to production or sales volume  Fixed costs – costs that do not change based on volume of activity  Variable costs – costs that change in proportion to changes in volume

Number of Calls Monthly Basic Cell Bill Total fixed costs remain unchanged when activity changes . Your monthly basic cell bill probably does not change when you make more calls (unlimited plan) Total Fixed Cost $

Number of Calls Monthly Basic Cell Bill per Call Fixed costs per unit decline as activity increases. Your average cost per call decreases as more calls are made. Fixed Cost per Unit $

Minutes Talked Total Cell Phone Bill Total variable costs change when activity changes. Your total long distance telephone bill is based on how many minutes you talk. Total Variable Cost $ #

Minutes Talked Per Minute Telephone Charge Variable costs per unit do not change as activity increases. The cost per minute talked is constant. For example, 7 cents per minute. Variable Cost per Unit $

Cost Behavior Summary Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Changes as activity level changes. Remains the same over wide ranges of activity. Fixed Remains the same even when activity level changes. Dereases as activity level increases.

Mixed costs contain a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage. Example: Verizon Plan ◦ Fixed service fee (ex. Medium 3GB/ $45) ◦ Variable charge per overage of $15 per GB Mixed Costs

Activity Cost Total cost remains constant within a narrow range of activity. Step-Wise Costs 5-11

Identifying and Measuring Cost Behavior 5-12

Measuring Cost Behavior 3 Methods used to Measure/Analyze Past Cost Behavior ◦ Scatter Diagrams ◦ High-Low Method ◦ Least Squares-Regression Objective of all 3 methods: determine total fixed costs & the variable unit cost

Vertical distance is the change in cost. Horizontal distance is the change in activity . Unit variable cost = Slope = Change in cost Change in units 0 1 2 3 4 * Total Cost in 1,000’s of Dollars 10 20 0 * * * * * * * * * Activity, 1,000’s of Units Produced Scatter Diagram