Chapter 4

# Chapter 4 - Chapter 4 Systems Design Job-Order Costing...

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Chapter 4 Systems Design: Job-Order Costing Suggested Homework: E4-1 thru E4-4, E4-6, P4-16, P4-17

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Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Types of Cost Behavior Patterns
The Activity Base A measure of what causes the incurrence of a variable cost Units produced Miles driven Labor hours Machine hours

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Minutes Talked Total Long Distance Telephone Bill True Variable Cost Example A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.
Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Variable Total variable cost is Variable cost per unit remains proportional to the activity the same over wide ranges level within the relevant range. of activity. Total fixed cost remains the same even when the activity Fixed cost per unit goes Fixed level changes within the down as activity level goes up. relevant range. Types of Cost Behavior Patterns

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Minutes Talked Per Minute Telephone Charge Variable Cost Per Unit Example A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute.
Extent of Variable Costs The proportion of variable costs differs across organizations. For example . . . A public utility with large investments in equipment will tend to have fewer variable costs. A manufacturing company will often have many variable costs. A merchandising company usually will have a high proportion of variable costs, like cost of sales. A service company will normally have a high proportion of variable costs.

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Examples of Variable Costs 1. Merchandising companies – cost of goods sold. 2. Manufacturing companies – direct materials, direct labor, and variable overhead. 3. Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs, such as invoicing. 4. Service companies – supplies, travel, and clerical.
Volume Cost True Variable Cost Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity.

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Step-Variable Costs A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease only in response to fairly wide changes in activity is known as a step-variable cost .
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Chapter 4 - Chapter 4 Systems Design Job-Order Costing...

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