Chapter 5

Chapter 5 - Chapter Five Cost Behavior: Analysis and Use...

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Chapter Five Cost Behavior: Analysis and Use Cost Behavior refers to how a cost will change as the level of activity changes. Contribution Format Income Statement – costs are organized by behavior rather than by the traditional functions of production, sales, and administration. Types of Cost Behavior Patterns o Cost Structure – the relative proportion of each type of cost present in an organization. o Variable Cost – cost whose total dollar amount varies in direct proportion to changes in the activity level. It is constant per unit. o Activity Base - measure of whatever causes the incurrence of variable cost. Also referred to as a cost driver. Some examples are: Direct Labor Hours Machine Hours Units Produced o The number and type of variable costs within an organization depends on the organization’s structure and purpose. o True Variable Versus Step-Variable Costs True Variable Costs – amount used in production will vary in direct proportion to the level of production activity. Step - Variable Costs – the cost of a resource that is obtainable only in large chunks and increases or decreases only in response to fairly wide changes in activity. o The Linearity Assumption and the Relevant Range Curvilinear Cost Relevant Range – range of activity within which the assumptions made about cost behavior are valid. o Fixed Costs – should be expressed in total rather than on a per unit basis to avoid confusion in internal reporting and decision making situations. Committed – relate to the investment in facilities, equipment, and the basic organizational structure of a company. Long term in nature. Can’t be reduced to zero even for short periods of time without seriously impairing the profitability or long run goals of the organization. Should be approached with particular care.
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Chapter 5 - Chapter Five Cost Behavior: Analysis and Use...

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