COMM 112 Chapter Notes - Chapter 3: Lincoln Near-Earth Asteroid Research, Industrial Engineering, Scatter Plot
26 Jun 2018
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(CHAPTER 3) Cost Behaviour: Analysis and Use
TEXTBOOK SUMMATIVE
COST BEHAVIOUR refers to how a cost will react or change as changes take place in the level of business
activity.
●By understanding this concept, managers are better equipped to predict what costs will be under
various operating circumstances.
●Introduces the description and analytical techniques needed for many areas of managerial accounting,
including planning, controlling, and decision making.
MIXED/ SEMI-VARIABLE COST is a third type of cost behaviour pattern (variable, fixed, mixed).
COST STRUCTURE is the relative proportion of each of three cost types within a given firm
CONTRIBUTION FORMAT organizes costs based on behaviour format rather than by tradition functions of
production, sales, and administration.
TYPES OF COST BEHAVIOUR
VARIABLE COSTS is one whose total dollar amount varies in direct proportion to changes in the activity level.
Meaning that if the activity level doubles, the total dollar amount of the variable costs also doubles.
●It remains constant if expressed in a per unit basis
●ACTIVITY BASE is a measure of whatever causes a variable cost to be incurred. For example, the total
cost of direct material in a bicycle manufacturing company will increase as the number of bicycles
produced increases. Therefore, the number of bicycles produced is an activity based for explaining the
total cost of direct materials. Other examples of activity bases include: direct labour hours,
machine-hours, units produced, units sold, etc.
●NOTE: that not all variable costs will vary with production or with sales, as VCs only need to be caused
by the activity under consideration.
●The extent/number of VCs depend on the organization’s structure and purpose
○Public utility companies tend to have very low VCs, whereas manufacturing and merchandising
companies tend to have a lot of VCs.
○Service industries tend to vary.
●TRUE VARIABLE COSTS is directly proportional to the production activity. A good example of this is
direct materials due to the fact that the amount used during a period of time varies in direct proportion
to the level of production activity.
●STEP-VARIABLE COSTS is a cost (such as a cost of a maintenance worker) that is obtainable only in
large amounts and only varies in response to fairly wide changes in the activity level.
○In dealing with step variable costs, one must seek to obtain the fullest use of services possible
for each separate step
Document Summary
Cost behaviour refers to how a cost will react or change as changes take place in the level of business activity. By understanding this concept, managers are better equipped to predict what costs will be under various operating circumstances. Introduces the description and analytical techniques needed for many areas of managerial accounting, including planning, controlling, and decision making. Mixed/ semi-variable cost is a third type of cost behaviour pattern (variable, fixed, mixed). Cost structure is the relative proportion of each of three cost types within a given firm. Contribution format organizes costs based on behaviour format rather than by tradition functions of production, sales, and administration. Variable costs is one whose total dollar amount varies in direct proportion to changes in the activity level. Meaning that if the activity level doubles, the total dollar amount of the variable costs also doubles. It remains constant if expressed in a per unit basis.
