C 5 -
COST BEHAVIOR: ANALYSIS AND USE
Written by Professor Gregory M. Burbage, MBA, CPA, CMA, CFM
CHAPTER LEARNING OBJECTIVES:
- Use the High-Low method to determine and calculate the structure of a cost.
- Define, explain and use variable, fixed and mixed costs in problems.
- Use regression line cost formula to determine total and per unit cost.
- Prepare a Contribution Margin income statement.
- Explain the Scatter graph and Least Squares methods – Appendix 5A.
- Memorize least squares formula – Appendix 5A.
ACTIVITY OR ACTIVITY BASE is that thing which we are comparing to a cost to see if that cost changes
as the activity changes.
activity base in this class is production or sales.
RELEVANT RANGE is that range of activity (production/sales) within which assumptions relative to cost
behavior are valid.
COST BEHAVIOR (variable or fixed) is how costs change or don't change as activity changes.
FIXED COSTs remain constant in total dollar amount but varies inversely on a per unit basis as activity
E.g., IDL, factory insurance, depreciation (SL method).
remain constant on a per unit basis but varies directly in total as activity changes.
E.g., DM, DL, factory utilities & freight-out
STEP VARIABLE costs can only be obtained in large chunks and increase/decrease only in response to
wide changes in activity.
E.g., IDL (supervision).
CURVILINEAR COST is a cost that is not linear, i.e., does not graph as a straight line.
use a straight line in place of the true line in the area of the relevant range, so as to treat the cost as either
fixed, variable or mixed.
COMMITTED FIXED COST - related to the basic organizational structure, and plant and equipment (very
long-term planning) and can't be reduced substantially, even for a short period of time, without great harm
to the company.
DISCRETIONARY FIXED COST (Managed Fixed Cost) are determined annually (usually) by
E.g., advertising, R&D, training, etc.
These can be reduced substantially, even to zero, for
short periods of time without great harm to the company.