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ADMS 1500 Lecture Notes - Activity-Based Costing, Contribution Margin, Fixed Cost

Administrative Studies
Course Code
ADMS 1500
Marcela Porporato

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Chapter 9: Cost Behaviour, Break-Even, and Product Costing
Cost Behaviour: describes the relationship between cost & different activity levels variable,
fixed, and mixed.
- Variable costs: one that is positively correlated with activity (raw materials used in
manufacturing plant, wages of production workers, & production overhead for example)
o Variable cost relationship: more activity that is planned, the greater the amount of
variable costs planned; cost per unit is constant, but as # of units increases, total cost
increases as well
- Fixed costs: constant at all predetermined activities (eg: rent, heating, property tax, &
management salaries); are still incurred as expense
- Mixed costs: costs that do not fall into either category because they are made up of a fixed
element and a variable element (electricity, cars)
The Break-Even Model: relationship between costs & revenues to determine the operating
income at any level of activity; useful planning & decision support tool
- Contribution margin: difference between selling price & variable cost; measures how much
better off the company is as a result of the sale of one additional unit
- Break-Even Point: contribution used to pay for business’s fixed costs; fixed cost for a given
period of time divided by contribution margin per unit; indicates how many units need to be
sold in that period to reach the break-even point
- Activity Above Break-Even Point: every unit sold above break-even point, contribution
margin is pure profit; the greater the number sold, higher the profit becomes
- Using the Break-Even Model to Analyze Changes: used to evaluate wide range of decisions
Product Costing:
- Unit-variable costs: change with the number of units sold or produced
- Business-sustaining costs: cost of head-office operations, expenses of the board of directors,
and the other sales/production activities
- Cost behaviour and cost allocation fail results to products to cost too much or too little
- Activity based costing: batch level costs & product-sustaining costs
o Batch-level costs: number of times that a batch is run; may be a production run or
may be the ordering of raw materials or dispatch of finished goods
o Product-sustaining costs: costs associated with having the product in existence
(engineering design & redesign, cataloguing, advertising, and sales education)
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