CHAPTER_6_-_B - 51 TheActivityBase Units produced Machine...

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The Activity Base A measure of what causes the incurrence of a variable cost. Units Units produced produced Miles driven Machine hours Labor hours 5-1
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Minutes Talked Total Long Distance Telephone Bill True Variable Cost Example A 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. 5-2
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Minutes Talked Per Minute Telephone Charge Variable Cost Per Unit Example A 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. 5-3
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Extent of Variable Costs The proportion of variable costs differs across organizations. For example . . . A public utility with A public utility with large investments in large investments in equipment will tend equipment will tend to have to have fewer fewer variable costs. variable costs. A manufacturing company A manufacturing company will often have will often have many many variable costs. variable costs. A merchandising company A merchandising company usually will have a usually will have a high high proportion proportion of variable costs of variable costs like cost of sales. like cost of sales. A service company A service company will normally have a will normally have a high high proportion proportion of variable costs. of variable costs. 5-4
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Examples of Variable Costs 1. 1. Merchandising companies Merchandising companies – cost of goods sold. – cost of goods sold. 2. 2. Manufacturing companies Manufacturing companies – direct materials, – direct materials, direct labor, and variable overhead. direct labor, and variable overhead. 3. 3. Merchandising and manufacturing companies Merchandising and manufacturing companies commissions, shipping costs, and clerical costs commissions, shipping costs, and clerical costs such as invoicing. such as invoicing. 4. 4. Service companies Service companies – supplies, travel, and – supplies, travel, and clerical. clerical. 5-5
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Volume Cost True Variable Cost Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity. 5-6
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Step-Variable Costs A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease only in response to fairly wide changes in activity. Volume Cost 5-7
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Step-Variable Costs Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed. Volume Cost 5-8
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Step-Variable Costs Only fairly wide changes in the activity level will cause a change in the number of maintenance workers employed.
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This note was uploaded on 08/10/2011 for the course ECON 123 taught by Professor Other during the Spring '11 term at Pontificia Universidad Catolica Madre y Maestra.

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CHAPTER_6_-_B - 51 TheActivityBase Units produced Machine...

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