Cost Behaviors Module 1 A Cost Behavior How costs change react to changes in the volume of activity a Three types of Costs in Costs Behavior i Variable Costs ii Fixed Costs iii Mixed Costs b Variable Costs IN TOTAL dollar amount change in direct to proportion to changes in volume of activity i As activity goes up 15 total variable costs go up 15 ii Variable costs PER UNIT are constant meaning they do not change when the volume of activity changes iii Examples direct raw materials and direct labor c Fixed Costs IN TOTAL are constant meaning they do not change when the volume of activity changes i Fixed costs PER UNIT change inversely with the changes in the ii Examples Rent Depreciation and advertising USUALLY not volume of activity always d Mixed Costs Contain both a variable and a fixed element i Neither the total cost nor the unit cost is constant in MIXED costs ii Examples Utilities and overhead USUALLY not always e Assumptions i The cost behaviors are assumed to exist over a relevant range 1 Range of activity between which the assumptions made about cost behaviors are valid ii Cost behavior patters are assumed to be linear within the relative range 1 Graph all would be straight line Module 2 components B High Low Method Used to separate a mixed cost into its Fixed and Variable a Step 1 From a set of data choose 2 data points the high and the low activity level b Step 2 Calculate the variable cost per unit i Variable cost per unit Change in cost for 2 data points change in activity level for 2 data points c Step 3 Calculate the total fixed cost Module 3 C Traditional Income Statement Format Classifies expenses as function a Sales Revenue Costs of Goods Sold Gross Profit Other Expenses Net Income D Contribution Income Statement Managers would rather classify expenses by cost behavior pattern a Sales Revenue Variable Costs Contribution Margin Fixed costs Net Income b Contribution Margin Represents the amount of revenue that is available to 1 Pay fixed costs 2 Contribute toward profit ii Revenues increase as a result of selling more variable costs increase proportionately and so will contribution margin E Flexible Budget a To prepare we need to know that Total Variable costs change in direct proportion to changes in activity b Total Fixed costs remain unchanged within the relevant range
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