COST BEHAVIOUR[cvp]

# COST BEHAVIOUR[cvp] - CVP ANALYSIS AND COST BEHAVIOUR...

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CVP ANALYSIS AND COST BEHAVIOUR

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Behavior of Costs Cost-volume relationships. Fixed and variable costs. Step-function costs.
Relation of costs to volume Higher volume causes higher costs. Variable costs = items of cost that vary, in total, directly and proportionately with volume. Fixed costs = non-variable costs = items of cost that, in total, do not vary with volume Semivariable costs = semifixed costs = partly variable costs = mixed costs = costs that include a combination of variable and fixed cost items.

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Variable Costs Items of cost that vary, in total, directly and proportionately with volume. Volume refers to activity level. Examples: Material costs varies with units sold. Electricity costs varies with production hours. Stationery and postage costs varies with number of letters written.
Fixed costs Non-variable costs = items of cost that, in total, do not vary with volume. Examples: Building rent, property taxes, management salaries. Fixed cost per unit of activity decreases as the level of activity increases. Fixed costs are fixed for a range of activity and a limited period of time. Fixed costs may change for reasons such as a deliberate management decision to change them.

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Cost-volume (C-V) diagram Illustrations 16-1 and 16-2. Y or vertical axis reflects total cost. X or horizontal axis reflects volume. y = mx + b. y is the cost at a volume of x; m is the rate of cost change per unit of volume change, or the slope (variable costs). b is the vertical intercept, which represents the fixed cost component.
TC = TFC +(UVC*X) TC = total cost; TFC = total fixed cost (per time period), UVC = Unit variable cost (per unit of volume), X = volume. Equations for: Variable cost line: TC = UVC*X Fixed cost line: TC = TFC Semivariable cost: TC = TFC + (UVC*X).

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Average costs = total cost/volume. Average cost behaves differently than total cost. As volume goes up Total fixed cost remains constant, total variable costs goes up, per unit variable costs stays the same, per unit fixed cost goes down, per unit total cost goes down. As volume increases without limit, unit cost
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COST BEHAVIOUR[cvp] - CVP ANALYSIS AND COST BEHAVIOUR...

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