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chap 3

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ACC 406
George Gekas

LECTURE 3: Cost volume Profit relationships OVERVIEW Dr. George Andrew Gekas These notes are posted on blackboard to high light and complement certain aspects of the topic, facilitate those students who may have missed my lecture, balance traditional with internet based learning and overall enhance studentearning. The notes are not meant to suggest what may be in the exams, replace coming to class, textbook studying andor problem solving. This chapter examines cost volume Profit relationships or the cost behaviour impact on company profitability. Cost Behaviour How an organizations activities affect its costs. Cost Drivers - Output measures of resources and activities. Organizations can have many cost drivers. In this chapter, volume-based cost drivers are used in order to examine cost behaviour. Cause and Effect Relationships: What may cause a student to perform poorlywell on an examination? There may be multiple causes. Comparing Variable and Fixed Costs Variable and fixed costs refer to how cost behaves with respect to changes in a particular cost driver. Variable Cost - a cost that changes in direct proportion to changes in the cost driver (i.e., costs per unit do not change, total costs do change). Examples include the costs of materials, merchandise, parts, supplies, commissions, and many types of labour. Fixed Cost - a cost that is not immediately affected by changes in the cost driver (i.e., costs per unit do change, total costs do not change within the relevant range). Examples include real estate taxes, real estate insurance, many executive salaries, and space rentals. Fixed Costs and Time Period - All costs become variable as the time period is expanded.
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