Managerial Accounting - Chapter 3.docx - MANAGERIAL ACCOUNTING CHAPTER 3 Cost Behavior Basics of Cost Behavior o Cost Behavior The foundation upon which

Managerial Accounting - Chapter 3.docx - MANAGERIAL...

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MANAGERIAL ACCOUNTING – CHAPTER 3Cost BehaviorBasics of Cost BehavioroCost BehaviorThe foundation upon which managerial accounting is builtoDescribes whether a cost changes when the level of output changes.oCosts can be variable, fixed, or mixed.oFixed CostA cost that does not change in total as output changesoVariable CostIncreases in total with an increase in output and decreases in total with a decrease in output.oKnowing how costs change as output changes is essential to planning, controlling,and decision making.Measures of Output and the Relevant RangeoFixed and variable costs have meaning only when related to some output measure.oCost DriverA casual factor that measures the output of the activity that leads (or causes) costs to change.oIdentifying and managing drivers helps managers better predict and control costs.Example: weather is a significant driver in the airline industry.Relevant Range and Cost RelationshipsoRelevant rangeThe range of output over which the assumed cost relationship is valid for the normal operations of a firm.oLimits the cost relationship to the range of operations that the firm normally expects to occur.Fixed CostsoCosts that in total are constant within the relevant range as the level of output increases or decreases.oThe higher the product volume, the lower amount of fixed cost that will be allocated per unit.oThe number of computers produced is called the output measure, or driver.oEven though fixed costs may change, this does not make them variable.oThey are fixed at a new higher (or lower) rate.Discretionary Fixed Costs and Committed Fixed CostsoTwo types of fixed costs:oDiscretionary fixed costsFixed costs that can be changed or avoided easily at management discretion.oCommitted fixed costsAre fixed costs that cannot be easily changed.
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oExample:Advertising is a discretionary fixed cost, because it depends on a management decision.Lease cost is a committed fixed cost because it involves a long-term contract.Variable CostsoCosts that vary in direct proportion to changes in output within the relevant range.oVariable costs can also be represented by a linear equation.oTotal variable costs depend on the level of output.
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