# chap10 - David Franz 2012 Chapter 10 Determining How Costs...

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© David Franz, 2012 Chapter 10 – Determining How Costs Behavior and Appendix I. Cost Behavior A. From ACCT 101: Variable costs (VC) change, in total, in direct proportion to changes in activity, e.g. \$100 per textbook, and fixed costs (FC) do not change, in total, within the relevant range. (for additional details see chapter 2) B. Generally assume a linear cost function: y = a + bX where: a is the fixed costs, b is the variable cost per unit y is the total cost and X is the level of activity or volume (cost driver). Total costs = Total Fixed costs + (variable costs per unit times unit volume) C. Other factors 1. Time horizon: the longer the time horizon the more likely a cost will be variable, e.g in the short-run my salary is fixed but in the long-run the school can change the number of faculty. 2. Relevant range: Fixed costs are fixed within a certain range of volume, often related to capacity issues, e.g. the cost of teaching one section of 305 is the same for 15 or 30 students up to the capacity of the room. D. Mixed costs include some variable and some fixed costs (e.g. electric bill). All costs are variable, fixed, or mixed. E. Identifying cost drivers 1. When using a cost driver to predict future costs it is very important to identify a cost driver that actually causes the total cost to change as the volume of the cost driver changes (Cause-and-Effect Criterion), e.g. number of units manufactured drives raw material costs and direct labor costs but does not drive research costs. 2.

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## This note was uploaded on 09/29/2011 for the course ACCT 305 taught by Professor Franz during the Spring '07 term at S.F. State.

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chap10 - David Franz 2012 Chapter 10 Determining How Costs...

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