AC202 Week 6 Lecture

# AC202 Week 6 Lecture - Week 6 Lecture Chapter 22 Outline I...

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Week 6 Lecture

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Chapter 22 Outline I. Identifying Cost Behavior (CVP analysis) Cost-volume-profit analysis is a tool to predict how changes in costs and sales levels affect income; conventional CVP analysis requires that all costs must be classified as either fixed or variable with respect to production or sales volume before CVP analysis can be used. A. Fixed Costs 1. A fixed cost incurred each period remains unchanged in amount when volume of activity varies from period to period within a relevant range. 2. On a per unit basis the fixed cost per unit of output decreases as volume increases (and vice versa). 3. When production volume and cost are graphed, units of product are usually plotted on the horizontal axis and dollars of cost are plotted on the vertical axis. (Exhibit 22.1) a. Fixed cost is represented by a horizontal line with no slope (cost remains constant at all levels of volume within the relevant range). b. Intersection point of line on cost (vertical) axis is at fixed cost amount. 4. Likely that amount of fixed cost will change when outside of relevant range. B. Variable Costs 1. A variable cost changes in proportion to changes in volume of activity. 2. On a per unit basis, a variable cost per unit remains constant but the total amount of variable cost changes with the level of production. 3. When production volume and cost are graphed, (Exhibit 22.1) a. Variable cost is represented by a straight line starting at the zero cost level. b. The straight line is upward (positive) sloping. The line rises as volume increases. C. Mixed Costs 1. Include both fixed and variable cost components. 2. When volume and cost are graphed, a. Mixed cost is represented by a straight line with an upward (positive) slope. b. Start of line is at fixed cost point (or amount of total cost when volume is zero) on cost (vertical) axis. As activity level increases, mixed cost line increases at an Notes
Chapter Outline D. Step-wise Costs 1. Fixed within a relevant range of the current production volume. If production volume expands significantly, total costs go up by a lump-sum amount (stair-step cost). 2. Treated as either fixed or variable cost in conventional CVP analysis; depends on width of range, and requires judgment. E. Curvilinear (or Nonlinear) Costs 1. Increase at a non-constant rate as volume increases. 2. When volume and costs are graphed, curvilinear costs appear as a curved line that starts at intersection point of cost axis and volume axis (total cost is zero when volume is zero) and increases at different rates. II. Measuring Cost Behavior After establishing that cost data are reliable and useful in predicting future costs, three methods are commonly used to analyze past cost behavior. A.

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AC202 Week 6 Lecture - Week 6 Lecture Chapter 22 Outline I...

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