Cost Behavior: Analysis and Use Learning Objectives Show 1. Explain the effect of a change in activity on both total variable costs and per unit variable costs. Lecture Notes A. Types of Cost Behavior Patterns. Three cost behavior patterns-variable, fixed, and mixed-are found in most organizations. Of course, there are many other types of cost behavior patterns but these three patterns are fairly common and the mixed cost model can be used to provide approximations to more complex cost behavior patterns within a relevant range. It is important for managers to understand the behavior of each type of cost. 1. Variable Costs. A variable cost is one whose total dollar amount varies in direct proportion to changes in the activity level. When expressed on a per unit basis, variable costs are constant. Examples of costs that are normally variable with respect to output volume are listed in Exhibit 5-2. Be careful to point out to students that some of these costs may be fixed in some organizations. This is particularly true of direct labor and other employee wages and salaries that may be effectively fixed due to labor laws in a country, custom, labor contracts, or the organization's personnel policies. Exhibit 5-8 in the text points out that there is wide variation in practice in how some of these costs are classified by individual firms.a. Activity base (cost driver). For a cost to be variable, it must be variable with some activity base. An activity base is a measure of whatever causes the incurrence of a variable cost. Some of the most common activity bases are machine-hours, units produced, and units sold. A measure of activity should be used to allocate a cost for decision-making purposes only if it actually causes the cost. B. Analysis of Mixed Costs. For planning and control purposes, mixed costs should be broken down into variable and fixed components. A number of methods can be used to analyze mixed costs. Account analysis and the engineering approach are mentioned briefly in this chapter and are covered in more detail in later chapters. This chapter discusses in more depth three techniques for analyzing past records of cost and activity-the high-low method, the scattergraph method, and least-squares regression. We are going to focus on the High-Low method only. 1. The High-Low Method. The high-low method of analyzing mixed costs focuses exclusively on the high and low levels of activity. The difference in cost observed at these two extremes is divided by the change in activity in order to determine the amount of variable cost involved. C. The Contribution Format. There are two major approaches to preparing an income statement. The difference between these two approaches centers on the way in which costs are organized. 1. The Traditional Approach. The traditional approach to the income statement organizes data in a functional format, based on the functions of production, administration, and sales. No attempt is made to identify the behavior of costs included under each functional heading. This approach is used to prepare income statements for external reporting purposes. What type of cost changes in total in direct proportion to changes in the level of activity?Variable Costs. A variable cost is one whose total dollar amount varies in direct proportion to changes in the activity level. When expressed on a per unit basis, variable costs are constant. Examples of costs that are normally variable with respect to output volume are listed in Exhibit 5-2.
Which costs are in direct proportion to the level of production activity?Variable costs are directly proportional to the level of production. If zero output is being produced then these costs do not have to be incurred.
Which costs changes in direct proportion to a change in volume?Answer and Explanation: A cost that changes in proportion to changes in volume of activity is called c) a variable cost. Variable costs are those tied directly to production and rise and fall depending on what work a business does.
What type of cost change is proportion to company?A variable cost is a corporate expense that changes in proportion to how much a company produces or sells. Variable costs increase or decrease depending on a company's production or sales volume—they rise as production increases and fall as production decreases.
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