Mowen3e Ch03--Revised

Mowen3e - Chapter Three Cost Behavior OBJECTIVE 1 Explain the meaning of cost and behavior and define and describe fixed and variable costs Cost

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Chapter Three Cost Behavior
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OBJECTIVE 1 Explain the meaning of cost and behavior, and define and describe fixed and variable costs.
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Cost Behavior The way costs change as the related activity changes. 3 A cost that does not change in total as output changes Fixed Cost =
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Cost Behavior The way costs change as the related activity changes. 4 Increases in total with an increase in output and decreases in total with a decrease in output Variable Cost =
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Measures of Output To determine if a cost is fixed or variable, we must first determine the underlying business activity and ask ourselves… 5 “What causes the cost of this particular activity to go up (or down)?” In other words, we are trying to identify its driver.
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Relevant Range The range of output over which the assumed cost relationship is valid for the normal operations of a firm. 6 Let’s take a closer look at fixed, variable, and mixed costs, in light of the relevant range. Avoids extremely high levels of activity Avoids extremely low levels of activity
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Fixed Costs 7 Cost that in total are constant within the relevant range as the level of output increases or decreases.
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Example It process up to 50,000 computers per year. The production-line manager (supervisor) is paid $32,000 per year. The company was established 5 years ago. Currently the factory produces 40,000 – 50,000 computers per year. Production has never fallen below 20,000 computers in a year. 8 Colley Computers Inc. wants to look at the cost relationship between supervision cost and the number of computers processed. Let’s look at the cost of supervision at several production levels.
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We know the total cost of supervision, but what about per computer? Example 9 # of Computers Produced 20,000 30,000 40,000 50,000 Total Cost of Supervision $32,000 $32,000 $32,000 $32,000 Unit Cost
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Example 10 # of Computers Produced 20,000 30,000 40,000 50,000 Total Cost of Supervision $32,000 $32,000 $32,000 $32,000 Unit Cost $1.60 1.07 0.80 0.64 Unit cost changes! As production increases, the per unit amount of a fixed cost decreases.
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Discretionary Fixed Costs 11 Fixed costs that can be changed relatively easily at management discretion.
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Committed Fixed Costs 12 A fixed costs that can not be easily changed. Often these involve a long-term contract.
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Variable Costs 13 Costs that in total vary in direct proportion to changes in output within the relevant range.
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Variable Cost Behavior Example 14 Each computer requires one DVD-ROM drive costing $40. The cost of DVD-ROM drives for various levels of production is as follows: Expanding our Colley Computers example…. Let’s look at the cost of DVD-ROM’s at several production levels.
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We know the total cost increases as production increases. But what about the cost per computer? Variable Cost Behavior Example 15 # of Computers Produced 20,000 30,000 40,000 50,000 Total Cost of DVD-ROM Drives $800,000 $1,200,000 $1,600,000 $2,000,000 Unit Cost
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Variable Cost Behavior Example 16 # of Computers Produced 20,000 30,000 40,000 50,000 Total Cost of DVD-ROM Drives $800,000 $1,200,000 $1,600,000 $2,000,000 Unit Cost $40 40 40 40 Unit cost stays the same! The per unit variable cost of DVD-ROM drives is always $40 per computer.
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Variable Cost Relationship Total Variable Cost = Variable Rate Amount of output x 17 Let’s look at the DVD-ROM costs for 50,000 computers.
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This note was uploaded on 05/04/2011 for the course ACCOUNTING 2102 taught by Professor Wurst during the Spring '11 term at Temple.

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Mowen3e - Chapter Three Cost Behavior OBJECTIVE 1 Explain the meaning of cost and behavior and define and describe fixed and variable costs Cost

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