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Chapter 4-MA - Chapter 4Cost Behavior Analysis and Use...

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Chapter 4—Cost Behavior: Analysis and Use Types of Cost Behavior Patterns 3 rd cost called mixed or semivariable cost Variable, fixed, and mixed are found in most organizations Cost Structure: the relative proportion of each type of cost in an organization Example would be having many variable and little fixed and mixed or vice versa Variable Costs is a cost whose total dollar amount varies in direct proportion to changes in the activity level if the level doubles, the total variable cost also doubles variable costs remain constant if expressed on a per unit basis The Activity Base for a cost to be variable, it must be variable with respect to something. That “something” is its activity base Activity base: is a measure of whatever causes the incurrence of variable cost Most common activity bases are direct labor- hours, machine -hours, units produces, and units sold Costs are caused by many different activities within an organization, from called handled by tech support or number of pounds of laundry cleaned by a hotel, etc. INSERT PICTURE OF GRAPHS Extent of Variable Costs Number and type of variable cost in an organization will depend in larg part on the organization’s structure and purpose Places like wal-mart will have high variable costs b/c it’s a merchandising store, merchandise purchased for resale is a variable cost and is a very large component to total cost True Variable versus Step-Variable Costs True Variable Costs: direct materials is a true or proportionately variable cost b/c the amount used during a period will vary in direct proportion to the level of production activitly Any amounts purchased but no used can be stored and carried forward to the next period as inventory Step-Variable Costs: the cost of a resource that is obtainable only in large chunks and that increases or decreases only in response to fairly wide changes in activity Example would be wages of skilled repair tech b/c his time can only be obtained in large chunks Any amount of “time” not used cannot be transferred to the next period The Linearity Assumption and the Relevant Range Except in the case of step variable costs, we ordinarily assume a strictly linear relationship between cost and volume The relation between cost and activity is a curve (curvilinear) A curvilinear cost can be satisfactorily approximated with a straight line within a narrow band of activity known as the relevant Range . Relevant Range: is that range of activity within which the assumptions made about cost behavior are reasonably valid. TAKE PICTURE Exhibit 4-4 Fixed Costs
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total fixed costs remain constant within the relevant range of activity TAKE PICTURE Exhibit 4-5 Cost is fixed no matter the customers Per unit fixed cost per customer is a negative curve graph Per unit becomes progressively smaller as the level of activity increases
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