Lecture 3 - 4 August - 6 slides per page

# Lecture 3 - 4 August - 6 slides per page - Topic 3 Summary...

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1 1 Topic 3 Topic 3 Cost Behaviour & Cost Volume Profit Analysis 2 Objectives ± Describe a cost function and the 3 different types of linear cost functions ± Consider the different cost estimation approaches including the quantitative methods of cost estimation that can be used to determine Cost Behaviour ± Introduce Cost-Volume-Profit (Breakeven) Analysis and the assumptions ± Describe the three techniques used in C-V-P Analysis to calculate breakeven volume or the required volume for target income levels ± Highlight how the C-V-P techniques are extended for: * changes in some of the variables * to accommodate income taxes, and * when there are multiple products 3 Manufacturing Cost Behaviour From a planning and control point of view, the most useful way to classify costs is by behaviour. How can a manager plan for a cost if s/he does not know how it behaves? 4 Summary of some classifications: Cost Classification Basis for Classification Manufacturing/Non Mfg………. .. functional characteristics of the costs Product or Period…………………. . as above + timing of recognition Direct or Indirect…………………. . traceability Direct Material, Direct Labour and mfg overhead……………. Types of Mfg costs Fixed or Variable…………………. . Depends on the relationship between total cost and activity/volume 5 Predicting Cost behaviour How a cost will react to changes in the level of business activity/volume? ± -Total variable costs change when activity changes. ± -Total fixed costs remain unchanged when activity changes. How a cost will react to changes in the level of business activity/volume? ± -Total variable costs change when activity changes . ± -Total fixed costs remain unchanged when activity changes . 6 Cost Behaviour and Functions ± A Cost Function is a mathematical expression describing how costs change with changes in the level of an activity ± Linear Cost Function: Y = a + bx ± Examples of cost Functions: 1. Variable Cost : y = bx 2. Fixed Cost: Y = a 3. Mixed or Semi-variable cost: y = a + bx

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2 7 Variable Costs - In Total Total Costs \$ (Y) Volume of Activity (x) Variable Costs Variable Costs : Total cost changes in direct proportion to changes in the level of activity/volume (eg.,production volume). Consumption of these resources can be adjusted to match the demand for them (e.g. direct materials & direct labour/wages labour) b = slope Y = b *X; What is the value of here? 0 50 \$30 120 \$72 8 Fixed Costs - In Total Total Cost \$ (Y) Volume of activity (X) a = \$10,000 Fixed Costs : Total cost does not change with changes in the level of activity (eg., production volume) over short periods of time. These costs (eg. Factory rent, straight line depreciation) are independent of the level of activity and cannot be purchased in small increments, therefore “consumption” may differ from the level of resources provided.
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## This note was uploaded on 07/07/2009 for the course ACCT 2102 taught by Professor Unknown during the Three '08 term at Queensland.

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Lecture 3 - 4 August - 6 slides per page - Topic 3 Summary...

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