Chapter 2BB_2011

Chapter 2BB_2011 - CHAPTER 02 2-1 Chapter Overview I. Cost...

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CHAPTER 02 2-1
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Chapter Overview I. Cost Behavior Classification I. Variable vs. Fixed Cost II. Mixed Cost II. Analysis of Cost Behavior I. Methods to estimate Cost III. Operating Leverage and Profitability
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Cost Behavior It is how the activities of an organization affect its costs. Cost Behavior? Cost behavior means how a cost will react to changes in the level of business activity. Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.
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Fixed Cost Behavior Increases Decreases Total Fixed Cost Remains constant Remains Constant Fixed Cost Per Unit Decreases Increases When activity . . . . Consider the following concert example where the band will be paid $48,000 regardless of the number of tickets sold.
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Fixed Cost Behavior Tickets sold 2,700 3,000 3,300 Total cost of band 48,000 $ 48,000 $ 48,000 $ Per ticket cost of band 17.78 $ 16.00 $ 14.55 $ $48,000 ÷ 3,000 Tickets = $16.00 per Ticket
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Variable Cost Behavior Total variable cost increases in direct proportion to the number of units sold. The behavior of variable cost per unit is contradictory to the word variable, because variable cost per unit remains constant regardless of how many units are sold. 2-6 Increases Decreases Total Variable Cost Increases Proportionately Decreases Proportionately Variable Cost Per Unit Remains Constant Remains Constant When activity . . .
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The total variable cost increases in direct proportion to the number of tickets sold. Variable unit cost per ticket remains at $16 regardless of the number of tickets sold. Variable Cost Behavior
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Cost Behavior Summarized Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Total variable cost changes Variable cost per unit Variable in direct proportion as remains the same over activity level changes. wide ranges of activity. Total fixed cost remains Fixed cost per unit Fixed the same even when the changes inversely activity level changes. with activity level Context Sensitive Same cost in different contexts behaves differently It Depends on the Activity Measure
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Context Sensitive Definitions of Fixed and Variable Recall the earlier concert example, where the band was paid $48,000 regardless of the number of tickets sold. The cost of the band is fixed relative to the number of tickets sold for a specific concert. The cost of the band is variable relative to the number of concerts produced.
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Example: Office space is available at a fixed rental rate of $30,000 per year in increments of 1,000 square feet. As the business grows more space is rented, increasing the total cost. Continue
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This note was uploaded on 02/22/2012 for the course BUAD 2050 taught by Professor Nicholasw.schroeder during the Spring '09 term at Toledo.

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Chapter 2BB_2011 - CHAPTER 02 2-1 Chapter Overview I. Cost...

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