Chapter6StudentFall18.docx - Chapter 6 \u2013 Cost Behavior 6.1 Cost Behavior\u2014 How costs change as volume changes There are three common cost behaviors 1

# Chapter6StudentFall18.docx - Chapter 6 – Cost Behavior...

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Chapter 6 – Cost Behavior 6.1 Cost Behavior How costs change as volume changes There are three common cost behaviors: 1. Variable costs 2. Fixed Costs 3. Mixed costs Variable Costs: Total variable costs change in direct proportion to changes in volume Variable cost per unit remains constant Total variable cost ( Y) = x or or Y = vx Assume you have a cellphone plan that charges you 5 cents for every text you make. We can graph the relationship between the number of texts in a month and the total monthly cost : The total variable cost line begins at the Origin - zero volume and zero cost The slope of the total variable cost line is the variable cost per unit. However, if we graphed the cost per unit at varying levels of volume, the graph would be as follows: Volume of activity (x) Variable cost per unit of activity (v) 0 100 200 300 400 \$0 \$20 \$40 Number of texts Total cost 0 100 200 300 400 \$0.00 \$0.05 \$0.10 \$0.15 \$0.20 Number of texts Cost per text Fixed Costs: Total fixed costs remain constant with changes in volume Fixed costs per unit of activity vary inversely with changes in volume Y = f where f = total fixed costs Assume your cellphone plan includes unlimited minutes of talk time. The TOTAL COST for voice service would be graphed as follows: However, the COST PER MINUTE talked would decrease as the number of minutes talked increases as follows: Mixed Costs Total mixed costs increase as volume increases (but not proportionately) Total mixed costs can be expressed as a combination of the variable and fixed cost equations: Total mixed cost = + Or Y = vx + f The fixed cost component of \$30 for unlimited minutes of talk is represented by the horizontal line. The variable costs component varies in direct proportion to the volume of texts. Total Variable Cost Total Fixed Cost 0 100 200 300 400 \$0 \$20 \$40 Minutes talked Total cost 50 100 200 300 400 \$0.000 \$0.200 \$0.400 \$0.600 Minutes talked Cost per minute 0 100 200 300 400 \$0 \$20 \$40 \$60 Total texts Total cellphone bill Total mixed costs increase as volume increases because of the variable cost component. Total mixed cost graphs slope upwards, and they intersect at the y-axis at the level of the fixed costs. Identify each cost as variable, fixed, or mixed Step Costs Step costs are fixed for a SMALL range of volume and then jump to a new fixed level with moderate changes in volume. An example is the caregiver-to-child ratio in a day care center. States usually require a limit of students per care giver. Identify the graph that most closely represents the cost behavior pattern described below: 1 2 3 4 5 6 7 8 9 10 11 12 Activity level Cost Behavior 5,000 Units 6,000 units 7,000 units F, V, M 1 Total Cost A \$15,000 \$16,000 \$17,000 M 2 Total Cost B \$5,000 \$6,000 \$7,000 V 3 Total Cost C \$15,000 \$15,000 \$15,000 F 4 Per Unit Cost D \$2.00 \$2.00 \$2.00 V 5 Per Unit Cost E \$3.00 \$2.50 \$2.14 F 8 16 32 40 \$0 \$15,000 \$30,000 \$45,000 \$60,000 Number of Units Total Costs a. Straight line depreciation of equipment 1 b. Monthly electric bill which consists of a flat monthly service charge plus \$.002 per kilowatt hour c. Factory rent of \$3000 per month, which will be forgiven by the City if the company employs 12 disadvantage youth. The x-axis is the number of disadvantaged youth employed by the company.  #### You've reached the end of your free preview.

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