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Acct%202200%20Chapter%203%20Lecture%20Notes.2012.Students -...

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Acct 2200 Chapter 3 Lecture Notes Cost Behavior (2012) (Cost behavior refers to how a cost will change as the level of activity changes) Learning Objectives: 1. Understand how fixed and variable costs behave and how to use them to predict costs. 2. Use a scattergraph plot to diagnose cost behavior. 3. Analyze a mixed cost using the high-low method. 4. Prepare an income statement using the contribution format. Part I. Overview 1. Variable costs (1) Concept - A variable cost is one whose total dollar amount varies in direct proportion to changes in the activity level. - When expressed on a per unit basis, variable costs are constant. (2) Activity base (cost driver): a measure of the event that causes the incurrence of a variable cost. Examples: direct labor-hours, machine-hours, units produced, units sold, the number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital. (3) Examples of variable costs Types of organizations Costs that are normally variable with respect to the volume of output Merchandisers Manufacturers Both merchandisers and manufacturers Service companies (4) Extent of Variable Costs: The proportion of variable costs differs across organizations. (5) Types of variable costs - True variable costs 1
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McGraw-Hill/Irwin Slide 10 Volume Cost True Variable Costs The amount of a true variable cost used during the period varies in direct proportion to the activity level. The overage charge on a cell phone bill was one example of a true variable cost. Direct material is another example of a cost that behaves in a true variable pattern. - Step-variable costs McGraw-Hill/Irwin Slide 11 Step-Variable Costs A step step- variable cost variable cost is a resource that is obtainable only in large chunks (such as maintenance workers) and whose costs change only in response to fairly wide changes in activity. Volume Cost (5) The linearity assumption McGraw-Hill/Irwin Slide 14 Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost) The relevant range is that range of activity within which the assumptions made about cost behavior are reasonably valid.
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