Ch05 - 5-1Chapter 5Cost Behavior:Analysis and UseLearning...

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Unformatted text preview: 5-1Chapter 5Cost Behavior:Analysis and UseLearning Objective 1Understand how fixed andvariable costs behave and howto use them to predict costs.Summary of Variable and Fixed Cost BehaviorCostIn TotalPer UnitVariableTotal variable cost isVariable cost per unit remainsproportional to the activitythe same over wide rangeslevel within the relevant range.of activity.Total fixed cost remains thesame even when the activityFixed cost per unit goesFixedlevel changes within thedown as activity level goes up. relevant range.Recall the summary of our costRecall the summary of our costbehavior discussion from Chapter 1.behavior discussion from Chapter 1.Types of Cost Behavior Patterns5-2The Activity BaseA measure of what causes the incurrence of a variable cost.A measure of what causes the incurrence of a variable cost.UnitsproducedUnitsUnitsproducedproducedMiles drivenMiles drivenLabor hoursLabor hoursMachine hoursMachine hoursMinutes TalkedTotal Long DistanceTelephone BillTrue Variable Cost ExampleA variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.Summary of Variable and Fixed Cost BehaviorCostIn TotalPer UnitVariableTotal variable cost isVariable cost per unit remainsproportional to the activitythe same over wide rangeslevel within the relevant range.of activity.Total fixed cost remains thesame even when the activityFixed cost per unit goesFixedlevel changes within thedown as activity level goes up. relevant range.Types of Cost Behavior PatternsRecall the summary of our costRecall the summary of our costbehavior discussion from Chapter 1.behavior discussion from Chapter 1.5-3Minutes TalkedPer MinuteTelephone ChargeVariable Cost Per Unit ExampleA variable cost remains constant if expressed on a per unit basis.The per minute cost of long distance calls is constant, for example, 10¢ per minute.Extent of Variable CostsThe proportion of variable costs differsacross organizations. For example . . . A public utility withlarge investments inequipment will tendto have fewervariable costs.A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tendto have to have fewerfewervariable costs.variable costs.A manufacturing companywill often have manyvariable costs.A manufacturing companyA manufacturing companywill often have will often have manymanyvariable costs.variable costs.A merchandising companyusually will have a highproportionof variable costslike cost of sales.A merchandising companyA merchandising companyusually will have a usually will have a highhighproportionproportionof variable costsof variable costslike cost of sales....
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Ch05 - 5-1Chapter 5Cost Behavior:Analysis and UseLearning...

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