Ch 14 Cost Behavior

8/12/2019 Ch 14 Cost Behavior

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Learning Objectives

1. Explain the meaning of cost behavior, and define and describe

fixedand variable costs.

2. Define and describe mixed and step costs.


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Basics of Cost Behavior

Cost behavior is the foundation upon which managerial accountingis built.

Cost behavior is the general term for describing whether a costchanges when the level of output changes.

Costs can be variable, fixed, or mixed.

A cost that does not change in total as output changes is a fixedcost.

A variable cost, on the other hand, increases in total with anincrease in output and decreases in total with a decrease inoutput.

Knowing how costs change as output changes is essential toplanning, controlling, and decision making.


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Measures of Output and the Relevant

Range Fixed and variable costs have meaning

only when related to some outputmeasure.

A cost driver is a causal factor thatmeasures the output of the activitythat leads (or causes) costs to change.

Identifying and managing drivers helps

managers better predictand controlcosts.

For example, weather is a significantdriver in the airline industry.


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Relevant Range and Cost Relationships

The relevant range is the range of output over which the

assumed cost relationship is valid for the normal operations

of a firm.

The relevant range limits the cost relationship to the range of

operations that the firm normally expects to occur.

As this graph

shows, the

concept of the

relevant range

allows

managerial

accountants to

assume a

linear costrelationship.


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Fixed Costs

Fixed costs are costs that in total are constant within the relevant range as

the level of output increases or decreases.

In this example of Colley Computers, notice while the total fixed cost of

supervision remains the same, the unit cost decreases as more computers

are produced.


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Discretionary Fixed Costs and Committed

Fixed Costs Two types of fixed costs are commonly recognized:discretionary fixed costs and committed fixed costs.

Discretionary fixed costs are fixed costs that can be changed

or avoided relatively easily at management discretion.

Committed fixed costs, on the other hand, are fixed costs

that cannot be easily changed.

Advertisingis a discretionary fixed

cost, because it

depends on a

management decision.

Lease costis a committed fixed

cost because it

involves a long-term

contract.


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Variable Costs

Variable costs are costs that in total vary in direct proportion to changes

in output within the relevant range.

Variable costs can also be represented by a linear equation.

Total variable costs depend on the level of output.

This relationship can be described by the following equation or graphs:

Total variable costs = Variable rate x Amount of output


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Mixed Costs

Mixed costs are costs that have both a fixed and a variable

component. For example, overhead for a company may consist of a

fixed supervisor salary plus the cost of supplies that vary with the

quantity of output produced.


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Cornerstone 14-1

Creating and Using A Cost Formula


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Cornerstone 14-1

Creating and Using A Cost Formula(continued)

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Ch 14 Cost Behavior