RSM222H1 Lecture 2: Lecture 2 Cost Behaviour—Analysis and Use
Document Summary
Fixed portion represents basic minimum cost of having activity ready and available for use. Variable portion represents cost incurred for actual consumption. Account analysis: method for analyzing cost behaviour where each account is classified as either variable or fixed based on analyst"s prior knowledge of how cost in account behaves. Engineering approach: analysis of cost behavior based on industrial engineer"s evaluation of the inputs required to carry out particular activity and the prices of those outputs. Inputs such as production methods, materials specifications, labor, equipment, efficiency of production. Used when no past experience is available on activity and costs. Cost behavior can be diagnosed by plotting data on scatter plot. High low method: also called least-squares regression method; separates mixed costs into fixed and variable costs by analyzing changes in cost between highest and lowest levels of activity. Find slope to find variable cost per unit. Contribution approach: income statement where costs are separated into fixed and variable.
