Chapter 5 - Cost Behavior Costs are separated by whether...

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Cost Behavior Costs are separated by whether they substantially change as production is likely to change. The range of production (the amount production is likely to change up or down) is called the “relevant range.” If a cost increases IN TOTAL as production increases, then that cost is a variable cost.
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Variable & Fixed Costs If a cost increases IN TOTAL as production increases, then that cost is a variable cost. If a cost stays the same as production increases, then that cost is a fixed cost. *BUT* this means that variable costs have a constant cost per unit, and the fixed cost per unit will change with production.
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Cost Behavior Example A sub sandwich roll costs $0.25 each. If I make 1 sandwich, my direct materials (roll costs) = $0.25; if I make 10 sandwiches, the TOTAL COST rises to $2.50 (but cost per roll remains the same). To make these sandwiches, I rent building space at $500/month. If I make 1 sandwich, the TOTAL COST is $500; if I make 10 sandwiches, the TOTAL COST remains the same (but rent cost per sandwich drops from $500 to $50).
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Chapter 5 - Cost Behavior Costs are separated by whether...

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