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# ch03 - 3-1 CHAPTER Activity Cost Behavior Behavior 3-2...

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3 -1 Activity Cost Activity Cost Behavior Behavior CHAPTER CHAPTER

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3 -2 1. Define cost behavior for fixed, variable, and mixed costs. 2. Explain the role of the resource usage model in understanding cost behavior. 3. Separate mixed costs into their fixed and variable components using the high-low method, the scatterplot method, and the method of least squares. Objectives Objectives After studying this After studying this chapter, you should chapter, you should be able to: be able to: continued continued
3 -3 4. Evaluate the reliability of a cost equation. 5. Discuss the role of multiple regression in assessing cost behavior. 6. Describe the use of managerial judgment in determining cost behavior. Objectives Objectives

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3 -4 Fixed Costs Fixed Costs A cost that stays the same as output changes is a fixed cost.
3 -5 Cutting machines are leased for \$60,000 per year and have the capacity to produce up to 240,000 units a year. Fixed Costs Fixed Costs

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3 -6 Lease of Machines Number of Units \$60,000 0 N/A 60,000 60,000 \$1.00 60,000 120,000 0.50 60,000 180,000 0.33 60,000 240,000 0.25 Units Cost Fixed Costs Fixed Costs Total Fixed Cost Graph Total Fixed Cost Graph Total Costs \$120,000 \$100,000 \$80,000 \$60,000 \$40,000 \$20,000 60 120 180 240 0 Units Produced (000) F = \$60,000
3 -7 Lease of Machines Number of Units \$60,000 0 N/A 60,000 60,000 \$1.00 60,000 120,000 0.50 60,000 180,000 0.33 60,000 240,000 0.25 Units Cost Fixed Costs Fixed Costs Unit Fixed Cost Graph Unit Fixed Cost Graph Cost per Unit \$1.00 \$0.50 \$0.33 \$0.25 60 120 180 240 0 Units Produced (000)

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3 -8 Variable Variable Cost Cost A variable cost is a cost that, in total, varies in direct proportion to changes in output .
3 -9 As the cutting machines cut each unit, they use 0.1 kilowatt-hour at \$2.00 per kilowatt hour. Thus, the cost of each unit is \$0.20 (\$2 x 0.1). Variable Cost Variable Cost

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3 -10 Total Variable Cost Graph Total Variable Cost Graph Cost of Power Number of Units \$ 0 0 \$ 0 12,000 60,000 0.20 24,000 120,000 0.20 36,000 180,000 0.20 48,000 240,000 0.20 Units Cost Total Costs 0 Units Produced (000) \$48,000 \$36,000 \$24,000 \$12,000 60 120 180 240 Variable Cost Variable Cost Y v = .20x
3 -11 Cost of Power Number of Units \$ 0 0 \$ 0 12,000 60,000 0.20 24,000 120,000 0.20 36,000 180,000 0.20 48,000 240,000 0.20 Units Cost Variable Cost Variable Cost Unit Variable Cost Graph Unit Variable Cost Graph 60 120 180 240 Units Produced (000) \$0.40 \$0.30 \$0.20 \$0.10 0 Cost per Unit

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3 -12 A mixed cost is a cost that has both a fixed and a variable component.
3 -13 Sales representatives often are paid a salary plus a commission on sales.

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