100%(3)3 out of 3 people found this document helpful
This preview shows page 2 - 4 out of 6 pages.
inventoriable costs.●Period Costs: Period costs are all the costs that are not product costs. All selling and administrative expenses are treated as period costs.For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs●Prime Cost and Conversion Cost: Two more cost categories are often usedin discussions of manufacturing costs—prime costand conversion cost.○Prime cost is the sum of direct materials cost and direct labor cost. ○Conversion cost is the sum of direct labor cost and manufacturing overhead cost. 2.4 Cost Classifications for Predicting Cost BehaviorIt is often necessary to predict how a certain cost will behave in response to a change in activity. For example, a manager at Under Armour may want to estimate the impact a 5 percent increase in sales would have on the company’s total direct materials cost. Cost behaviorrefers to how a cost reacts to changes in the level of activity.Variable Cost ●A variable costvaries, in total, in direct proportion to changes in the level of activity.
●For a cost to be variable, it must be variable with respect to something.That “something” is its activity base.An activity baseis a measure of whatever causes the incur-rence of a variable cost. ○An activity base is sometimes referred to as a cost driver.Fixed Cost●A fixed costis a cost that remains constant, in total, regardless of changes in the level of activity.○For planning purposes, fixed costs can be viewed as either committedor discretionary.Committed fixed costsrepresent organizational investments with a multiyearplanning horizon that can’t be significantly reduced even for short periods of time without making fundamental changes. ○Discretionary fixed costs(often referred to as managed fixed costs) usually arise from annualdecisions by management to spend on certain fixed cost items. Examples of discretionary fixed costs include advertising, The Linearity Assumption and the Relevant Range Nevertheless, even if a cost is not strictly linear, it can be approximated within a narrow band of activity known asthe relevant rangeby a straight line. The relevantrangeis the range of activity within which theassumption that cost behavior is strictly linear isreasonably valid. Outside of the relevant range, afixed cost may no longer be strictly fixed or avariable cost may not be strictly variableMixed Cost A mixed costcontains both variable and fixed cost elements. Mixed costs are also known as semivariable costs.●Y = a + bX○Y = Mixed cost○a = Fixed cost○b = Variable cost per unit○X = Level of activity 2.8 The Analysis of Mixed Cost ●In making decisions, it is essential to have a firm grasp of the concepts differential cost, opportunity cost, and sunk costDifferential Cost and Revenue Decisions involve choosing between alternatives. In business decisions, each alternative will have costs and benefits that must be compared to the costs and benefits of the other available alternatives.