1 / 10

Identifying Cost Behavior: Relevant Range, Variable and Fixed Costs

This chapter discusses the assumptions, relevant range, and behavior of variable and fixed costs in cost analysis. It also covers discretionary vs. committed fixed costs, step costs, and mixed costs.

geordi
Download Presentation

Identifying Cost Behavior: Relevant Range, Variable and Fixed Costs

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 4 Identifying Cost Behavior Prepared by Diane Tanner University of North Florida

  2. Assumptions 2 To predict cost behavior, we must assume • Production equals sales (in units) • I.e., no change in beginning and ending inventories • Cost behavior is linear • Activity level occurs within a defined activity range • Called relevant range

  3. A range of activity within which cost behavior holds true I. e., Normal range of production that can be expected for a particular product or company Activity outside of this range, forecasts of cost behavior may not be accurate Relevant Range 3 Relevant range Cost Units

  4. Variable Cost Behavior 4 Total Variable Cost Unit Variable Cost $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $20 $15 $10 $5 Cost per Unit Total Costs 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Total Variable Costs Change as volume or activity level changes Unit Variable Costs Same cost per unit at any activity level

  5. Fixed Cost Behavior 5 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 Total Costs 0 10 20 30 0 10 20 30 Units Produced (000) Units Produced (000) Total Fixed Cost Unit Fixed Cost $20 $15 $10 $5 Cost per Unit Total Fixed Costs Same cost at any activity level Unit Fixed Costs Change per unit as volume or activity levels

  6. Discretionary vs. Committed Fixed Costs 6 • Describes behavior of fixed costs in the short run • Discretionary • Can easily change in the short run • Examples: • Advertising • R&D • Repair and maintenance • Committed • Not easily changed in the short run • Examples: • Rent • Depreciation – buildings and equipment • Insurance for buildings and equipment

  7. Step Costs 7 Cost Volume 0-40 classrooms 1 Janitor $22,000 $44,000 2 Janitors 41-80 classrooms 3 Janitors 81-120 classrooms $66,000 • Costs that remain constant within a short relevant range of activity, then adjust to a new level • Example:Cleaning services at UNF

  8. Consist of both a variable cost element and a fixed cost element Often referred to as semi-variable costs Characteristics Costs change in total but not proportionately with changes in the activity level Mixed Costs 8 Total cost Cost Variable cost portion Fixed cost portion Number of minutes over Example: Cell phone 1- Flat monthly charge plus 2- Per-minute cost for excess minutes

  9. Determining Cost Behavior Two-step process Step 1 - Test to determine if the cost if fixed: Compare the total cost at all activity levels. A fixed cost is the same in total at all activity levels. • If the fixed cost test fails, move to step 2. • If the fixed cost test passes, the cost is fixed. Step 2 - Test to determine if the cost if variable: Compare the unit variable cost at all activity levels. • A unit variable cost is the same at all activity levels. • If the variable cost test fails, the cost is a mixed cost. • If the variable cost test passes, the cost is variable.

  10. The End

More Related