Chapter 3 - ACC 200 Spring 2011 Chapter 3 Cost Behavior...

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Click to edit Master subtitle style ACC 200 – Spring 2011 Chapter 3 Cost Behavior Christopher T. McKittrick CPA, MBA, CFE College of Management
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Objectives – Chapter 3 Cost Behavior ¢ Describe and identify variable costs , fixed costs , mixed costs ¢ Describe the cost behavior relationship between activity level and per unit and total fixed and variable costs ¢ Interpret the results of a regression analysis of a mixed cost ¢ Analyze mixed costs using high-low regression analysis ¢ Use a cost equation to predict costs ¢ Determine the impact of taxes on costs, revenue and income
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33 Cost Behavior ¢ Why do we care how costs behave when production or other levels of activity change? l If you know how a cost behaves, you can predict what costs will be in the future and ADJUST your business! ¢ Do costs always go up when we make more products and go down when we make fewer products?
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44 Cost Behavior ¢ We aren't referring to "good" or "bad" behavior! ¢ Cost behavior is nothing more than the sensitivity of costs to changes in production or sales volume. ¢ Important : The range of output or sales over which cost behavior patterns remain unchanged is called the relevant range .
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Variable Costs ¢ Variable Costs l Vary in direct proportion to changes in production volume but are fixed when expressed as per-unit amounts within the relevant range ¢ Examples l Direct Material (DM), Direct Labor (DL), and other unit-level costs like factory supplies Volume $ Total Variable Costs Volume $ Variable Cost Per Unit 25 50 50 10 0 75 15 0 25 50 75 20
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Fixed Costs ¢ Fixed Costs l Remain the same in total but vary per unit when production volume changes within the relevant range ¢ Examples l Rent, Depreciation, Salary of a Plant Manager, Insurance, Property Taxes Volume $ Total Fixed Costs Volume $ Fixed Cost Per Unit 10 25 50 75 4 25 50 2 75 1.3 3
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Step Costs ¢ Fixed cost that increases to a new level in step with significant changes in activity or usage. l Cost that is relatively fixed over a small volume or range of activities but is variable over a large range or volume. l Remain constant within a relevant range of production l Example Janitorial services within a company that manufactures desks
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Relevant Range The relevant range is the normal range of production that can be expected for a particular product and company. The relevant range can also be viewed as the volume of production for which the fixed and variable cost relationships hold true.
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Relevant Range The concept of the relevant range allows managerial accountants to assume a linear cost relationship.
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Cost Behavior ¢ By now you have probably figured out that … l …the relationship between revenues, costs,
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This note was uploaded on 03/10/2011 for the course ACC 200 taught by Professor Buckless during the Spring '08 term at N.C. State.

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Chapter 3 - ACC 200 Spring 2011 Chapter 3 Cost Behavior...

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