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Notes_Chapter_05 - CHAPTER 5 COST BEHAVIOR Analysis and Use...

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CHAPTER 5: COST BEHAVIOR: Analysis and Use I. Cost Behavior Analysis A. Definition: Cost Behavior Analysis the study of how specific costs respond to changes in the level of business activity. B. Why analyze cost behavior? C. Terminology i. Relevant Range Definition: The relevant range is the operating range over which a firm finds it practical to operate in the short-run--the range of activity in which a company expects to operate during a year. Range over which cost relationships are valid. For management decisions, the behavior of costs is ASSUMED to be linear (straight-line) throughout the relevant range. 2. Activity Base (or Cost Driver) – activity which causes costs to change within relevant range 3. Cost Structure the relative proportion of each type of cost in an organization. 1
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D. Types of Costs 1. Variable costs are costs that vary in total directly and proportionately with changes in the activity level. A variable cost remains the same per unit at every level of activity within the relevant range. Examples: 2. Fixed costs are costs that remain the same in total regardless of changes in the activity level; (note: will change on a per unit basis) Examples: Two types of fixed costs (depending on management’s ability to influence) Committed FC Managed (discretionary) FC 2
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