ADMN 3021H Chapter 3: Chapter 3

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Business Administration
ADMN 3021H
Malcolm Mac Taggart

Chapter 3 Cost Behaviour: Analysis and Use The Activity Base Units Produced, Machine hours, Miles Driven, Labours A measure of what causes the incurrence of a variable cost Variable cost a cost whose total dollar amount varies in direct proportion to changes in the activity level Total long distance telephone bill is based on how many minutes you talk Remains constant if expressed on a per unit bases o 10 cents per minute Direct materials is a true variable cost because the amount used during a period will vary in direct proportion to the level of production activity Stepvariable cost a resource that is obtainable only in large chunks and whose costs increase or decrease only in response to fairly wide changes in activity Maintenance workers Fixed cost a cost whose total dollar amount remains constant as the activity level changes Monthly basic telephone bill is probably fixed and does not change when you make more local calls Average fixed costs per unit decrease as the activity level increases o The fixed cost per local call decreases as more local calls are made Types of Fixed Costs Committed long term, cannot be significantly reduced in the short term o Ex. Depreciation in equipment and real estate taxes Discretionary may be altered in the shortterm by current managerial decision o Ex. Advertising and research and development Relevant Range The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat o Stepvariable costs can be adjusted more quickly and the width of the activity steps is much wider for the fixed cost Mixed Costs Has both fixed and variable components Y = a + bX Account analysis each account is classified as either variable or fixed based on the analysts knowledge of how the account behaves Engineering approach cost estimates are based on an evaluation of production methods, and material, labour and overhead requirements
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