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Chapter 3

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ACC 406
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CHAPTER 3: COST BEHAVIOR Basic Cost Behavior Cost Driver is a casual measurement that causes costs to change Relevant Range is the range of output over which the assumed cost relationship is valid for the normal operations of a firm  In the long-term all costs are variable  Limits the cost relationship to a range of operations that is expected to occur Fixed Costs costs that in total are constant within the relevant range as the level of output increases or decreases  When dealing with units fixed costs varies inversely with changes in activity throughout the relevant range Discretionary Fixed Costs are fixed costs that can be changed or avoided relatively easily at management discretion, such as advertisement Committed Fixed Costs are costs that cannot be easily changed as they usually involve long-term contracts or the purchase of property, plant and equipment. Variable Costs Defined as total costs that vary in direct portion to changes in output within the relevant range  When dealing with unit costs variable costs are fixed throughout the relevant range Total Variable Cost = Variable Rate (or 'Unit Cost') x Amount of Output 800,000 = 40 x 20,000 Semi-Variable When economies of scale are present, the true total cost function is increasing at a decreasing rate Mixed Costs Costs that have both a fixed and variable component, such as a salary plus commission on sales Total Cost = Total Fixed Cost + Total Variable Cost Total Cost = 30,000 + (25 x Number of Computers Sold) Step Costs Behavior Constant level of costs
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