Ch 19 Cost Behavior

# Ch 19 Cost Behavior - ACCTG 1B 19 Cost Behavior and...

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ACCTG 1B 19 Cost Behavior and Cost-Volume Profit Analysis Ver109E COST BEHAVIOR - FIXED, VARIABLE, & MIXED Introduction This Chapter is foundational to the rest of the course. This chapter gives you the tools. The future chapters will be “the using of those tools”. Compare to being taught a spreadsheet program. As a tool it may seem kind of dry, but the first time you have a real-life application for it you realize what a fantastic tool it is. Prior to this chapter we were doing Product Costs v Period Costs. Now we shift to Variable Cost v Fixed Cost Example: You are going to sell bouquets of roses on the corner. You purchase an annual permit for \$100. The selling price of a bouquet is \$10. Your cost per bouquet is \$6. Profit per bouquet is \$4; Number of bouquet sales to break even? 25 (100/4) Sales 25 x \$10 250 Less: Variable Cost 25 x \$6 150 Contribution Margin 100 Less: Fixed Cost Permit 100 Operating Income 0 Note that for every unit over 25 we sell, the contribution Margin will be higher than break even and therefore produce Operating Income (profit) Fixed Costs: No matter how many units you produce the cost remains the same. It is not activity related. Example: Rent, Straight-line Depreciation, Supervisors salary Variable Cost : You only incur the cost if an activity occurs. Example: If I produce a unit I incur the direct materials and direct labor cost of that unit. If I produce 10 of those units I incur 10 times the cost than if I only produced 1. If I sell a unit I incur a sales commission. The activity is selling. Mixed Cost: Has a portion that is fixed and a portion that is activity related. Example: I rent a truck and have to pay \$30 plus a charge per mile. The \$30 is fixed whether I drive the truck or not, the charge per mile is dependent on the miles driven ( variable ). I pay my sales persons a base salary of \$20,000 per year plus they receive 5% of what they sell. It costs me \$30 for the base phone service and a charge for every toll or long distance call I make. 1 Do you think you could make 25 sales to achieve BE? What if the Permit cost was \$1,000, requiring 250 sales to BE, are you still as confident?

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ACCTG 1B 19 Cost Behavior and Cost-Volume Profit Analysis Ver109E Activity Base: The activities that create costs. Example: An airline's fuel expense will be related to the air miles flown. Exhibit 1, 2, & 3 in the text. Review graphs of Unit and Total Variable and Fixed Cost . E1, E2, P1A (partial), E4 MIXED COST: HIGH LOW METHOD Total Cost = Fixed Cost + Variable Cost Mixed Costs must be separated into their fixed and variable components.
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