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COMM 112 (20)
Chapter 3

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Queen's University
COMM 112
Teri Shearer

BASICS OF COST BEHAVIOUR  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 FIXED COSTS:  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 changes 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 unit  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 advertising 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 VARIABLE COSTS:  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 MIXED COSTS:  Costs that have both fixed and variable components  EX: sales rep who gets paid salary plus commission o Total costs = f
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