ACIS 2116 Chapter 4 Slides

ACIS 2116 Chapter 4 Slides - ACIS 2116 Chapter Four Cost...

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ACIS 2116 Chapter Four Cost Behavior and Relevant Costs

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2 Cost Behavior What happens to certain costs as the number of units produced changes? Variable Costs Fixed Costs Step Costs Mixed Costs
3 Variable Cost Total dollar amount varies in direct proportion to changes in the activity level. Remains constant on a per unit basis.

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4 Number of Hokie Bird Suits Produced Total Cost of Hokie Bird Suits True Variable Cost Example
5 Number of Hokie Bird Suits Produced Cost of a Hokie Bird Suit Variable Cost Per Unit Example Variable cost remains constant on a per unit basis.

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6 Examples of Variable Costs 1. Merchandising companies – cost of goods sold. 2. Manufacturing companies – direct materials, direct labor, and variable overhead.
7 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost)

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8 Relevant Range Relevant range of production for particular product and company
9 Total dollar amount remains constant as the activity level changes within the relevant range. Fixed Cost

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10 Number of Hokie Bird Suits Manufactured Rent paid for Factory Building Total Fixed Cost Example
11 Number of Hokie Bird Suits Manufactured Rental Cost per Hokie Bird Suit Fixed Cost Per Unit Example Average fixed costs per unit decreases as the activity level increases.

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12 Fixed Costs and Relevant Range The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.
13 Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 Fixed Costs and Relevant Range 90 Relevant Range Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.

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14 The Trend Toward Fixed Costs The trend in many industries is toward greater fixed costs relative to variable costs. Why? Increased automation. Shift from laborers paid by the hour to salaried knowledge workers.
15 Is Labor a Variable or a Fixed Cost?

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• Spring '08
• CMEasterwood
• Accounting, Curvilinear Cost

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