CHAPTER 5 - CHAPTER5 COST BEHAVIOR ANALYSIS USE 1...

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    1 CHAPTER 5 COST BEHAVIOR: ANALYSIS & USE
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    2 INTRODUCTION In Chapter 2 we first discussed cost behavior As a manager you need to know how costs behave in order to predict how costs will change under various alternatives This chapter reviews variable & fixed costs in greater depth than Chapter 2 It also introduces the concept of mixed costs It concludes by introducing a new income statement format: the contribution format
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    3 TYPES OF COST BEHAVIOR PATTERNS Variable costs: Total dollar amount varies in direct proportion to changes in the activity level Remains constant on a per unit basis The activity base: For a cost to be variable, it must be variable with respect to something. That something is its activity base An activity base is a measure of whatever causes the incurrence of a variable cost. The activity base is sometimes referred to as a cost driver (Chapter 3) Some examples of the most common activity bases are: Direct labor hours Machine hours Units produced Units sold
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    4 TYPES OF COST BEHAVIOR PATTERNS  (cont) Unless stated otherwise, you can assume that the activity base under consideration is the total volume of goods & services provided by the organization For examples, if we ask whether direct materials at Ford is a variable cost, the answer is yes, since the cost of direct materials is variable with respect to Ford’s total volume of output Some of the more frequently encountered variable costs are: CGS Direct materials Direct labor Indirect materials Lubricants Supplies Power Commissions Clerical costs Shipping costs
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    5 TYPES OF COST BEHAVIOR PATTERNS  (cont) True variable vs. step variable costs True variable costs Direct materials is an example: the amount used during a period will vary in direct proportion to the level of production Step variable costs The wages of maintenance workers are often considered to be a variable cost but this labor doesn’t behave in the same way as the cost of direct materials Unlike direct materials, a maintenance worker’s time can only be obtained in large chunks. Moreover, any maintenance time not utilized cannot be stored as inventory & carried forward to the next period When a resource that is obtainable in large chunks (maintenance workers above) & whose costs increase or decrease only in response to fairly wide changes in activity is known as step variable
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    6 TYPES OF COST BEHAVIOR PATTERNS  (cont) In dealing with variable costs we assume a strictly linear relationship between cost & volume, except in the case of step variable costs Economists point out that many costs that the accountant classifies as variable actually behave in a curvilinear fashion (see bottom of page 189) Although many costs are not strictly linear when plotted as a
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This note was uploaded on 06/04/2011 for the course ACCOUNTING 2156 taught by Professor Cheryl during the Spring '09 term at Central Community College.

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CHAPTER 5 - CHAPTER5 COST BEHAVIOR ANALYSIS USE 1...

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