Variable and Fixed Costs.docx - Variable and Fixed Costs...

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Variable and Fixed Costs Introduction Cost Classifications Costs can be classified based on any one or combination of the five classifications listed below. Classification by Behavior At a basic level, a cost can be classified as fixed, variable or mixed. 1. Fixed cost: cost does not change with changes in the volume of an activity (within a certain range of activity known as an activity's relevant range). 2. Variable cost: cost changes in proportion to changes in the volume of activity. 3. Mixed: combination of fixed and variable costs Classification by Traceability Cost is traced to a cost object (a product, process, department or customer). Cost is classified as either a direct or indirect cost. To classify, must identify the cost object. 1. Direct Costs: traceable to a single cost object. 2. Indirect Costs: not traceable to a single cost object. Classification by Controllability Costs can be defined as controllable or not controllable. Classification is dependent on employee’s responsibilities to the hierarchical levels in
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management. Classification by Controllability Costs can be defined as controllable or not controllable. Classification is dependent on employee’s responsibilities to the hierarchical levels in management. 1. Sunk cost: already incurred and cannot be avoided or changed. Irrelevant to future decisions. 2. Out-of-pocket cost: requires a future outlay of cash and is relevant for decision-making. 3.Opportunity cost: is the potential benefit lost by choosing a specific action from two or more alternatives. Classification by Function Costs classified as capitalized inventory (product) or expensed (period) as incurred. Learning Material Cost Classifications to Describe Cost Behavior
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Managerial accountant should be able to predict how costs will change in response to changes in activity. The activity might be the output of goods or services or it might be some measure of activity internal to the company such as the number of purchase orders processed during a period. While there are other ways to classify costs according to how they react to changes in activity, cost can be classified as variable and fixed classifications. Variable Costs A variable cost does change per unit of activity but changes in total as the activity level rises and falls. A fixed cost is constant in total for changes in activity within the relevant range. (Just about any cost will change if there is a big enough change in activity. Fixed Costs
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A fixed cost is fixed in total dollar amount within the relevant range. Since fixed costs remain constant in total, the amount of cost computed on a per unit basis becomes smaller as the number of units produced increases. Care must be exercised in interpreting fixed costs that have been expressed on a per unit basis; they should not be misinterpreted as variable costs.
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  • Spring '12
  • JamesKeating
  • Accountant, CBS Corporation

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