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Chapter 3

ACC 406 Chapter 3

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Department
Accounting
Course Code
ACC 406
Professor
Anthony Chan

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CHAPTER 3 – COST BEHAVIOUR 1. Explain the meaning of cost behaviour, and define and describe fixed and variable costs.  Cost behaviour is the way a cost changes in relation to changes in activity output  Time horizon is important because costs can change from fixed to variable depending on whether the decision takes place over the short run or the long run  Variable costs change in total as the driver, or output measure, changes. Usually, we assume that variable costs increase in direct proportion to increases in activity output  Fixed costs do not change in total as activity output changes 2. Define and describe mixed and step costs.  Mixed costs have both a variable and a fixed component  Step costs remain at a constant level of cost for a range of output and then jump to a higher level of cost at some point, where it remains for a similar range of output.  Cost objectives that display a step cost behaviour must be purchased in chunks  The width of the step defines the range of output for which a particular amount of the resource applies 3. Separate mixed costs into their fixed and variable components using the high-low method, the scatter graph method, and the method of least squares.  In the high-low method, only two data points are used – the high point and the low
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