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Chapter 2

chapter 2 notes

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ACC 410
Maurizio Di Maio

Chapter 2 Chapter Overview Managers who understand how costs behave are better able to predict costs and make decisions under various circumstances. This chapter explores the meaning of three major classifications of costs fixed, variable and mixed costs various methods available to estimate fixed and variable cost components . Types of Cost Behaviour Patterns At least three types of cost behaviour patternsvariable, fixed, and mixedare found in most organizations. There are many other types of cost behaviour patterns but these three patterns are fairly common and the mixed cost model can be used to provide approximations to more complex cost behaviour patterns within a relevant range. It is important for managers to understand the behaviour of each type of cost. 1. Variable Costs. A variable cost is one whose total dollar amount varies in direct proportion to changes in the activity level. When expressed on a per unit basis, variable costs are constant. a. Activity base (cost driver). For a cost to be variable, it must vary with some activity base. An activity base is a measure of whatever causes the incurrence of a cost. Some of the most common activity bases are machine-hours, units produced, and units sold. A measure of activity should be used to allocate a cost for decision-making purposes only if it actually causes the cost to be incurred. b. True variable and step-variable costs. Some variable c
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