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Lecture

ACC 406 CHAPTER 3 NOTES.docx

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Department
Finance
Course
FNCE 3P93
Professor
Daniel Glenday
Semester
Fall

Description
ACC 406 CHAPTER 3 NOTES Basics of Cost Behaviour Cost Behaviouris the general term for describing whether a cost changes when the level of output changes A cost that does not change in total as output changes is a fixed costA variable cost on the other hand increases in total with an increase in output and decreases in total with a decrease in output Cost driveris a casual measurement that causes costs to change Identifying and managing cost drivers helps measurement that causes costs to change Identifying and managing cost rivers helps managers better predict and control costs An example of a cost driver is a company Blue Denim wants to classify its product cost as either variable or fixed with respect to the number of jeans produced In this case the number of jeans produced is the driver Clearly the use of raw materials denim thread zipper and buttons varies with the number of jeans produced So we could say materials costs are variable with respect to the number of units produced Electricity that runs through sewing machines that produce is also variable because it depends on the number of jean producedFinally the cost of supervision for the sewing department doesnt vary on the number of jeans produced so cost of supervision is unchanged Thus fixed cost is the cost of supervision Relevant Rangeis 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 Looking at Blue Denims cost relationships more carefullyWe said that the salary of the supervisor is strictly fixe But is that true If the company produced just a few pairs of jeans a year it would not even need a supervisorThe owner could handle that task On the other hand supposing Blue Denim increased its current production by two or three times perhaps by adding a second and third shift one manager couldnt possibly do all of those shifts So when we talk about supervision cost we are implicitly talking about it for the range of production that normally occurs Fixed Costsare costs that in total are constant within the relevant range as the level of output increases or decreases For example a fleet of airplanes represents a fixed cost to an airline because within the relevant range the cost does not change as the number of flights or the number of passengers changes Discretionary Fixed Costsare fixed costs that can be changed or avoided relatively easily at management discretion For example advertising is a discretionary fixed costAdvertising cost depends on the decision by management to purchase print radio or video advertisingThis cost might depend on the size of the ad or the number of times it runs but it does not depend on the number of units produced and sold
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