chapter 5

chapter 5 - Cost-Volume Profit COST BEHAVIOR ANALYSIS 1....

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Cost-Volume Profit COST BEHAVIOR ANALYSIS 1. Cost behavior analysis - study of how specific costs respond to changes in the level of business activity a. Can be constant or change a lot , all types of entities b. Helps management plan operations and decide between alternative courses of actions 2. First, measure key business activities, many different measurement bases 3. Changes in level or volume of activity should be correlated with change in cost a. Activity index - identifies activity that cause changes in behavior of costs, when appropriate companies can classify behavior of costs in response to changes in activity levels into three categories: variable, fixed and mixed VARIABLE COSTS o Variable costs - costs that vary in total directly and proportionally which changes in activity level ex. DM, DL, COGS, Sales--- companies that rely a lot on labor have higher manufacturing costs that machine usage companies Cost that remains the same per unit at every level of activity o TVC UVC $ $ Q Q FIXED COSTS o Fixed costs- costs that remain the same in total regardless of changes in activity level, ex. Property tax, insurance, rent, supervisor salaries, depreciation Costs per unit vary inversely with activity, as volume increases, unit costs declines, and vice versa Manufacturers- more fixed costs, fewer variable costs because of automation o TFC UFC $ $ Q Q RELEVANT RANGE o Linear- straight line, changes in activity level result in direct proportional change in variable cost, this is assumption This actually usually doesn’t exist throughout all activities At low levels, impossible to be cost efficient and at high, labor costs may increase sharply with overtime pay and spoilage because of worker fatigue o Curvilinear - in the real world, this is usually the relationship between variable and activity level, not direct changes With TFC- not straight line over whole range, some will not change but some might
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chapter 5 - Cost-Volume Profit COST BEHAVIOR ANALYSIS 1....

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