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CACC406 CH02

CACC406 CH02 - CACC406 CH02 Cost Influenced by many...

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CACC406 CH02 Cost Influenced by many activities/cost drivers Volume driven cost are easier to identify with or trace to products or service o Ex: Volume-driven cost for a text book – the costs of printing labour, paper, ink, and binding Activities driven cost often have multiple cost drivers and are not easy to identify with or trace to outputs Cost Drivers Activities that affect (drive) costs Use to determine a business’s cost behaviour and how well cost are controlled There are many cost drivers across a value chain Could be a direct/indirect measure of the volume of output of goods and services Ex: Volume Chapter focus – Volume-related cost drivers, includes the number of: orders processed items billed in a billing department admissions to a theatre kilograms handled in a warehouse hours of labour worked in an assembly department rides in an amusement park seat-miles on an airline dollar sales in a retail business PAGE 43 EXHIBIT 2-1 – The Value Chain, Costs, and Cost Drivers Costs are classified as variable/fixed costs depending on how much they change as the level of a particular cost driver changes Variable Cost A cost that changes in direct proportion to changes in the level (volume) of economic activity The same per unit, but the total fluctuates in direct proportion to the cost driver activity Fixed Cost Remains the same, it is not affected by the change in the cost driver The total cost is the same, but cost per unit decreases as the volume increases May change from budget year to budget year solely because of changes in insurance and property tax rates, executive salary levels, or rent levels Maintenance Cost = Fixed Cost + Variable Cost Relevant Range (applies to both fixed and variable costs) The Range of activity over which we operate in which the cost behaviour is linear Within the relevant range, fixed cost remains linear over a given period – usually the budget period FIXED VARIABLE RELEVANT RANGE Why is it difficult to classify cost?
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CACC406 CH02 It may simultaneously effect more than one cost driver Ex: shipping labour costs may be affected by both the weight and the number of units handled A cost that appears fixed in relation to one cost driver could, in fact, be variable in relation to another Often hard to classify a cost as exactly variable or exactly fixed These factors should be considered: 1. Time Span/Activity Level More costs are fixed when decisions involve very short time spans and very small
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CACC406 CH02 - CACC406 CH02 Cost Influenced by many...

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