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ACCT 2102
Topic 3:
Cost Behaviour &
Cost –Volume – Profit (CVP) Analysis
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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.
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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.
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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
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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.
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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
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