Chapter 5 - Cost behavior: Analysis and use. After studying Chapter 5, you should be able to: Understand how fixed and variable costs behave and how to use them to predict costs, analyze a mixed cost using the high-low method, analyze a mixed cost using the scattergraph method, prepare an income statement using the contribution format. | Cost Behavior: Analysis and Use Chapter5 Types of Cost Behavior Patterns Recall the summary of our cost behavior discussion from Chapter 1. Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked Total Long Distance Telephone Bill Variable Cost Per Unit Example Minutes Talked Per Minute Telephone Charge The cost per minute talked is constant. For example, 10 cents per minute. Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Number of Local Calls Monthly Basic Telephone Bill Fixed Cost Per Unit Example Number of Local Calls Monthly Basic Telephone Bill per Local Call The fixed cost per local call decreases as more local calls are made. Cost Behavior Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers Sales commissions and shipping costs Service Organizations Supplies and travel Examples of normally variable costs Examples of normally fixed costs Merchandisers, manufacturers, and service organizations Real estate taxes, Insurance, Sales salaries Depreciation, Advertising The Activity Base Machine hours Labor hours Miles driven A measure of the event causing the incurrence of a variable cost – a cost driver Units produced Step-Variable Costs Activity Cost Total cost remains constant within a narrow range of activity. Step-Variable Costs Activity Cost Total cost increases to a new higher cost for the next higher range of activity. Activity Total Cost Economist’s Curvilinear Cost Function The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost) Activity Total Cost Relevant Range The Linearity Assumption and the Relevant Range Accountant’s Straight-Line Approximation (constant unit variable cost) Economist’s Curvilinear Cost Function A straight line closely approximates a | Cost Behavior: Analysis and Use Chapter5 Types of Cost Behavior Patterns Recall the summary of our cost behavior discussion from Chapter 1. Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk. Minutes Talked Total Long Distance Telephone Bill Variable Cost Per Unit Example Minutes Talked Per Minute Telephone Charge The cost per minute talked is constant. For example, 10 cents per minute. Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Number of Local Calls Monthly Basic Telephone Bill Fixed Cost Per Unit Example Number of Local Calls Monthly Basic Telephone Bill per Local Call The fixed cost per local call decreases as more local calls are made. Cost Behavior Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers Sales commissions and shipping costs Service .
