Chapter5 Lecture Notes_student

Chapter5 Lecture Notes_student - Introduction to Accounting...

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Introduction to Accounting II: Managerial Accounting Accounting 220 Chapter 5 Cost Behavior: Analysis and Use Types of Cost Behavior Patterns Cost behavior refers to how a cost will react or respond to changes in the level of activity- go up? go down? remain constant? Variable Costs A variable cost changes in total in proportion to changes in activity; a variable cost is constant on a per-unit basis. EXAMPLE: Each bicycle requires one bicycle chain costing $8. Number of Bicycles Produced Total Variable Cost---Bicycle Chains Cost per Bicycle Chain 1 $8 $8 2 $16 $8 50 $400 $8 100 $800 $8 Total Cost of Bicycle Chains Number of Bicycles Produced 100 $800 $8 per bicycle chain 0 0 1
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The activity base : An activity base is a measure of whatever causes the incurrence of a variable cost---a cost driver. Some of the most common activity bases are machine-hours, units produced, and units sold. In this class, you can always assume that the activity base under consideration is the total volume of goods and services provided by the organization, unless stated otherwise. True variable costs: Some variable costs, such as direct materials, vary in direct proportion to the level of activity. These costs are called true variable costs. Step-variable costs : A cost that is obtainable only in large chunks and that increases or decreases in response to fairly wide changes in the activity level is known as a step-variable cost. For example, direct labor may be a step-variable cost when workers are only hired on a full-time basis. 2
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Fixed Costs A fixed cost remained constant in total throughout wide ranges of activity; a fixed cost varies inversely with activity if expressed on a per unit basis. EXAMPLE: Fashion photographer Lori Yang rents studio spaces in a prestige location for $50,000 a year. She measures her company’s activity in terms of the number of photo sessions. Number of Photo Sessions Rent per Year Rent Cost per Photo Session 1 $50,000 $50,000 2 $50,000 $25,000 500 $50,000 $100 1,000 $50,000 $50 Cost Number of Photo Sessions Cost of Studio Rental $50,000 500 1,000 3
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For planning purposes, fixed costs can be viewed as either committed or discretionary: T The relevant range for a fixed cost: the range of activity over which total fixed cost does not change. Trend toward fixed costs: The trend in many industries is toward greater fixed costs relative to variable costs. The reasons include increase in automation in business process and shift from laborer paid by the hour to salaried knowledge workers. 4 Examples Advertising Research and Development Public Relations Internships for Students Examples Depreciation on Buildings and Equipment Taxes on Real Estate Insurance Salaries of Top Management Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be reduced in the short term.
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Mixed Costs A mixed cost is one that contains both variable and fixed cost elements. Mixed costs are also
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Chapter5 Lecture Notes_student - Introduction to Accounting...

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