Ch. 3 outline

Ch. 3 outline - Ch 3 Cost Behavior Basics of Cost Behavior...

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Ch. 3 - Cost Behavior Basics of Cost Behavior Cost behavior is the term used to describe whether a cost changes when the level of output changes A cost that does not change as output changes is a fixed cost Variable cost increases as production increases Measures of Activity Output Fixed cost and variable cost only have meaning when related to some output measure/driver. We must first determine the underlying activities and associated drivers that measure the capacity of an activity and its output Activity drivers explain changes in activity costs by measuring changes in activity output (usage) Unit-level drivers explain changes in cost as units produced change Ex: lbs. of direct materials, direct labor hours Non-unit-level drivers explain how costs change as factors other than # of units produced changes Ex: # of setups, inspection hours, material moves Fixed Costs Costs that in total are constant within the relevant range as the level of the activity driver varies Relevant range – range over which assumed cost relationship is valid Variable Costs Costs that, in total, vary in direct proportion to changes in an activity driver Linearity Assumption Variable costs increase at a decreasing rate up to a certain volume, and then increase at an increasing rate Error increases as # of units increases Mixed Costs Costs that have both a fixed and variable component
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Ch. 3 outline - Ch 3 Cost Behavior Basics of Cost Behavior...

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