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Notes Ch 5 - Jorge Rossello Busi 101 Ch 5 Notes...

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Jorge Rossello Busi 101 Ch 5 Notes Cost-Volume-Profit I. Cost Behavior Analysis a. Cost behavior analysis: The study of how specific costs respond to changes in the level of business activity. b. Activity Index: The activity level selected; Identifies the activity that causes changes in the behavior of costs. c. Variable Costs : Costs that vary in total directly and proportionately with changes in the activity level. (If activity level increases 10%, total variable costs increase 10%) i. Examples : DM, DL, COGS ii. Is a cost that remains the same per unit at every level of activity. d. Fixed Costs: Costs that remain the same in total regardless of changes in activity level. i. Examples: Property taxes, insurance, rent, depreciation on building/eq. ii. Fixed costs per unit vary inversely with activity; as volume increases, unit cost declines. e. Relevant Range: The range of the activity index over which a company expects to operate during a year. i. As long as level of activity remains within the relevant range, an assumption that total costs are linear still produces useful data for CVP anaylsis. f. Mixed Costs: Costs that contain both a variable element and a fixed element.
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