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Chapter 3

COMM 112 Chapter Notes - Chapter 3: Cost Driver, Fixed Cost, Variable Cost

Course Code
COMM 112
Teri Shearer

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Cost behaviour: the general tern for describing whether cost changes when the level of output changes
A cost that doesn’t change as total output changes is a FIXED COST
A cost that changes as output changes is a VARIABLE COST
Fixed and variable cost only exist when related to some output measure or drive
Cost driver measurement of the cause of the change in cost
o Predicting cost driver helps control costs better
The relevant range: the range of output over which the assumed cost relatoionship is valid for the normal
operations of a firm
o It limites the cost relationship to the range of operations that they firm normally expects to occur
Costs that in total are constant within the relevant range as the level of output increases/decreases
EX: a fleet of airplanes are fixed costs for the airlines becayse the cost doesn’t change as the number of flight
EX: the rental cost per month is fixed it doesn’t change depending on how many sales are made
Higher output means that the fixed costs are spread over a wider range and therefore the cost is smaller per
Two types of fixed costs:
1. Discretionary fixed costs: costs that can be changes or avoided relatively easily
o EX: advertising it depends on the decision by mangerment to purchase print, radio, or video
o BUT, it does NOT depend on how many units are sold
o Management can easily decide to change how much they invest in advertising
2. Committed fixed costs: fixed costs that cannot be easily changed
o Usually involve long-term contract or purchase of property, plant and equipment
Costs that change as output changes
Total variable costs = variable rate X amount of output
Variable costs can be fixed over the relevant range AKA semi-variable
o Economies of scale present this because there is so much being produced
Costs that have both fixed and variable components
EX: sales rep who gets paid salary plus commission
o Total costs = fixed salary + (commission X units sold)
Cost functions aren't all continuous they can be discontinuous
o AKA semi-fixed
They display a constant level of cost for a range of output and then jumps to a higher level at some point
The width of the step defines the range of the output
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