Inventoriable costs period costs period costs are all

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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 used in discussions of manufacturing costs— prime cost and 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 Behavior It 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 behavior refers to how a cost reacts to changes in the level of activity. Variable Cost A variable cost varies, 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 base is 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 cost is 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 committed or discretionary. Committed fixed costs represent organizational investments with a multiyear planning 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 annual decisions 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 as the relevant range by a straight line. The relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable Mixed Cost A mixed cost contains 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 cost Differential 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.

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