Chapter 19 - Managerial Accounting Cost Behavior Analysis...

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Chapter 19 Author: Anna Rovira Beavers Needles 2008 8/6/07 1 Managerial Accounting Cost Behavior Analysis Chapter 19 I. Cost Behavior Analysis: The way cost responds to changes in volume or activity. The behavior of Variable cost: Variable cost = Cost that changes in direct proportion to volume. Once the purchase of materials has been made the cost per unit is established the variable cost remains the same Example: One unit =$10, Two units = $20, One Hundred units = $1,00, etc. Operating Capacity: The total output capability. It describes how much can it be produced in a given period. Operating capacity can be express in labor hours, total machine hours, and total units of output. Measuring operating capacity: 1. Theoretical (ideal) capacity Maximum number of output units for a given period without interruptions. Does not consider any stoppage. 2. Practical capacity The number of normal or expected work stoppages is subtracted from theoretical capacity. 3. Normal capacity The average annual capacity needed to meet expected sales demand. This measure is adjusted for seasonal changes n industry and economic cycles. Therefore, normal capacity is a realistic measure of what an organization is likely to produce, not what it can produce. Normal capacity is a realistic measure of what an organization is likely to produce, not what it can produce. Importance for selecting an method for measuring variable cost. To simplify cost planning and control
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Chapter 19 - Managerial Accounting Cost Behavior Analysis...

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