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ACCT2102 - Lecture 3 (6 slides per page)

# ACCT2102 - Lecture 3 (6 slides per page) - ACCT 2102 Topic...

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1 ACCT 2102 Topic 3: Cost Behaviour & Cost –Volume – Profit (CVP) Analysis 1 Reading: Reading: Lecture notes & Horngren et al Chapter 3 and Chapter 10 (pp. 336-351) Learning Objectives 1. Review of manufacturing cost behaviour. 2. Consider the different cost estimation approaches including the quantitative methods of cost estimation that can be used to determine Cost Behaviour. 3 Cost-Volume-Profit ( CVP ) Analysis assumptions and methods to 3. ) Analysis, assumptions and methods to calculate breakeven volume or required volume for target income levels. 4. Effect of income tax. 5. Introduce multiple products. 6. Operating Leverage. 2 1. Review of Manufacturing 1. Review of Manufacturing Cost Behaviour Cost Behaviour From a planning and control point of view, the most useful way to classify costs is by behaviour. 3 Knowing how and why costs behave will help managers to perform planning and control activities effectively. Summary of some classifications: Cost Classification Basis for Classification Manufacturing/Non Mfg Functional characteristics of the costs Product or Period As above + timing of recognition Direct or Indirect Traceability Direct Material, Direct Labour and mfg overhead Types of Mfg costs Fixed or Variable Depends on the relationship between total cost and activity/volume 4 Predicting Cost behaviour How a cost will react to changes in the level of business activity/volume? Total variable costs change -Total when activity changes. -Total fixed costs remain unchanged when activity changes. 5 Cost Behaviour and Functions y A Cost Function is a mathematical expression describing how costs change with changes in the level of an activity y Linear Cost Function: y = a + bx y Examples of cost Functions: 1. Variable Cost : y = bx 2. Fixed Cost: y = a 3. Mixed or Semi-variable cost: y = a + bx 6

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