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Chapter 3

Chapter 3 - Cost Behaviour

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Ryerson University
ACC 406
Vincent Cappelli

thWednesday January 25 2012 Chapter 3 Cost Behaviour Basics of Cost Behaviour cost behaviour is the way costs change as the related activity changes it represents the foundation on which managerial accounting is built much like the critical role played by the theoretical pyramid in financial accountingcosts can be variable fixed or mixed knowing how cost change as output changes is essential to planning controlling and decision makingEX suppose a company expects demand for its jeans product to increase by 10 next year how will that affect the total cost for the factory Clearly the company will need 10 more raw materials denim thread zippers etc also it will need more cutting and sewing labour because someone will need to make the additional jeans therefore costs are variable in nature however factory building will probably not need to be expanded neither will the factory need an additional receptionist or plant managerMeasure of Output and the Relevant Range cost driver is a causal measurement that causes cost to change identifying and managing cost drivers help managers better predict and control costsEX jeans company wants to classify its product cost as either variable or fixed number of jeans produced is the driver use of raw material denim thread buttons zippers varies with the number of jeans produced therefore material costs are variable with respect to the number of units produced how about electricity Some situation variable because the more jeans produced the more electricity it takes also the cost of supervision whether the company produces more jeans or few jeans cost of supervision is unchanged supervision is fixed with respect to the number of jeans produced with in a relevant range relevant range is a range of output over which the assumed cost relationship is valid for the normal operations of a firmLimits the cost relationship to the range of operations that the firm normally expects to occurEX looking back at the companys pervious example if the company were to increase its current production 2 or 3 times perhaps by adding a second or third shift one supervisor could notpossibly handle all 3 shifts Fixed Costs are costs that in total are constant within the relevant rage as the level of output increases or decreasesEX fleet of airplanes represent a fixed costs to an airline because within the relevant range cost does not change as the number of flights or the number of passengers changeEXof computers produced total supervisionUnit Cost 20 000 32000 16030 000 32000 10740 000 32000 08050 000 32000 064 cost relationship considered is between supervision cost and the number of computers processed is called output measure or driver total cost of supervision remains constant within this range company pays 32000 for supervision regardless of whether it process 20000 30000 40000 or 50000 computers
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