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Unformatted text preview: 1 ACCT 2102 ACCT 2102 Topic 3: 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 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. Cost-Volume-Profit ( CVP ) 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: 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 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 Predicting Cost behaviour How a cost will react to changes in the level of business activity/volume? Total variable cost change -Total variable costs change when activity changes. -Total fixed costs remain unchanged when activity changes. 5 Cost Behaviour and Functions 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 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 2 Variable Costs Variable Costs - In Total In Total Total Costs (y) $ Variable Costs Variable Costs : Total cost changes in direct proportion to changes in the level of activity/volume (eg.,production volume). Consumption of these resources can be adjusted to match the demand for them (e.g. direct materials & direct labour) 7 Volume of Activity (x) b = slope Y = b *X; What is the value of b here? 50 $30 120 $72 Fixed Costs Fixed Costs - In Total In Total Total Cost (y) $ Fixed Costs Fixed Costs : Total cost does not change with changes in the level of activity (eg., production volume) over short periods of time. These costs (eg. Factory rent, straight line depreciation) are independent of the level of activity and cannot be purchased in small increments, therefore consumption may differ from the level of resources provided....
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This note was uploaded on 04/09/2010 for the course ACC 2101 taught by Professor Morgan during the Spring '10 term at Accreditation Commission for Acupuncture and Oriental Medicine.
- Spring '10