10201 common types of cost behavior fixed costs

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¶10,201 Common Types of Cost Behavior Fixed costs fundamentally are not driven by changes in the volume of activity. Variable costs change directly and proportionately with the volume of activity. Mixed (or semivariable ) costs are costs or cost pools that contain both a fi xed and a variable component. Semivariable costs change with the volume of activity, but not proportionately with activity changes. Costs of this nature are often called learning curve costs because they increase at a decreasing rate with the volume of activity. Semi fi xed costs increase in steps or jumps. Some argue that all fi xed costs are really semi fi xed costs at various levels of activities. ¶10,211 Cost Behavior Assumptions Basis of Cost Behavior Estimates. Two basic assumptions underlie the concept of cost behavior. They are the relevant range assumptions and the time assumption. Although it is convenient to think of costs as being fi xed, variable, mixed, or something else, few costs exhibit the same cost behavior pattern for all levels of activity. Instead, costs exhibit a particular cost pattern for a speci fi ed range of activity called the relevant range. Cost behavior estimates are usually based on historical cost observations and analyses. A second important cost behavior assumption is the time assumption , which means that as time passes, the business environment changes, and cost behavior may change as well. Many factors can cause a cost to change patterns over time. Ways of Estimating Cost Behavior. There are several ways of estimating cost behavior: account analysis method, high-low method, regression analysis, and engineering or work-measurement method. Account Analysis Method. The account analysis method classi fi es the cost accounts in the subsidiary ledger as fi xed, variable, etc., based upon experience and judgment. This method is cheap, but subjective. High-Low Method. The high-low method is the simplest quantitative analysis based upon the basic formula y = a + bx , where b is the unit variable cost per measure of activity.
124 Forensic and Investigative Accounting Chapter 10 © 2009 CCH. All Rights Reserved. Regression Analysis. Regression analysis takes all available data and estimates the cost function. That is, this statistical analysis determines the average amount of the change in the dependent variable by using all available data. Engineering (Work-Measurement) Method. The engineering or work-measurement method uses industrial engineering, which can be expensive. ¶10,221 Damages Period and Discount Rate Because the largest component of a plaintiff’s dispute is the future years’ lost sales and pro fi ts, the future damages period is important (e.g., after trial). The longer the damages period, the more dif fi cult to establish that any lost pro fi ts relate to the harmful event. Besides, a plaintiff must take whatever steps or actions necessary to overcome or mitigate any damages. The longer the recovery period, the more likely the lost pro fi ts result from the plaintiff’s failure to mitigate the damages or some other irrelevant factor.

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