Cost Behavior and CostVolumeProfit Analysis LO 1 a
Cost Behavior and Cost-Volume-Profit Analysis LO 1 a – Understanding Cost Behavior @ 2012, Cengage Learning
LO 1 Cost Behavior è Cost behavior is the manner in which a cost changes as a related activity changes. Understanding the behavior of a cost depends on: § Identifying the activities that cause the cost to change, called activity bases (or activity drivers). § Specifying the range of activity over which the changes in the cost are of interest. This range of activity is called the relevant range.
LO 1 Variable Costs è Variable costs are costs that vary in proportion to changes in the level of activity.
LO 1 Variable Costs Jason Sound Inc. produces stereo systems. The parts for the stereo systems are purchased from suppliers for $10 per unit (a variable cost) and are assembled by Jason Sound Inc. For Model JS-12, the direct materials costs for the relevant range of 5, 000 to 30, 000 units of production are shown on the next slide.
LO 1 Variable Costs
LO 1 Variable Costs è Variable costs are costs that vary in proportion to changes in the level of activity.
LO 1 Variable Costs è As shown in the previous slides, the variable costs have the following characteristics: § Cost per unit remains the same regardless of changes in the activity base. § Total cost changes in proportion to changes in the activity base.
LO 1 $300, 000 $250, 000 $200, 000 $150, 000 $100, 000 $50, 000 Cost per Unit Total Direct Materials Cost Variable Costs $20 $15 $10 $5 0 10 20 30 Units Produced (000) Number of Units of Model JS-12 Produced 5, 000 units 10, 000 15, 000 20, 000 25, 000 30, 000 Direct Materials Cost per Unit $10 10 10 Total Direct Materials Cost $ 50, 000 l 00, 000 150, 000 200, 000 250, 000 300, 000
LO 1 Fixed Costs è Fixed costs have the following characteristics: § Cost per unit changes inversely to changes in the activity base. § Total cost remains the same regardless of changes in the activity base.
LO 1 Fixed Costs Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75, 000 per year. The plant produces from 50, 000 to 300, 000 bottles of perfume.
LO 1 Fixed Costs The more units produced, the lower the fixed cost per unit.
LO 1 Fixed Costs è Fixed costs are costs that remain the same in total dollar amount as the activity base changes.
LO 1 $150, 000 $125, 000 $100, 000 $75, 000 $50, 000 $25, 000 Salary per Unit Total Salary Fixed Costs 100 200 300 0 Units Produced (000) $1. 50 $1. 25 $1. 00 $. 75 $. 50 $. 25 0 100 200 300 Units Produced (000) Number of Bottles of Perfume Produced Total Salary for Jane Sovissi Salary per Bottle of Perfume Produced 50, 000 bottles 100, 000 150, 000 200, 000 $75, 000 $1. 500 0. 750 0. 500 0. 375
LO 1 Mixed Costs è Mixed costs have characteristics of both a variable and a fixed cost. Mixed costs are sometimes called semivariable or semifixed costs. è Over one range of activity, the total mixed cost may remain the same. Over another range of activity, the mixed cost may change in proportion to changes in the level of activity.
LO 1 Mixed Costs Simpson Inc. manufactures sails, using rented equipment. The rental charges are $15, 000 per year, plus $1 for each machine hour used over 10, 000 hours.
LO 1 Mixed Costs The rental charges for various hours used within the relevant range of 8, 000 hours to 40, 000 hours are as follows:
LO 1 Mixed Costs
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