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Managerial Accounting Chapter Six Notes

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ACCT 2230
Elliot Currie

Chapter 6 Cost Behaviour Analysis and Use y Cost behaviour refers to how a cost will react or change as changes take place in the level of business activityy We have only mentioned variable and fixed costs There is a third behaviour pattern generally known as a mixed or semivariable costy The relative proportion of each type of cost present in a firm is known as the firms cost structurey Type of Cost Behaviour Patterns o Variable CostsA variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level Direct proportion signifies that if the activity level doubles the total dollar amount of the variable costs also doubles A variable cost remains constant if expressed on a per unit basis The idea that a variable cost is constant per unit but varies in total with the activity level is crucial to an understanding of cost behaviour patterns The Activity Base y Activity base is a measure of whatever causes the incurrence of a variable cost For example the total cost of xray film in a hospital will increase as the number of xrays taken increases Therefore the number of xrays is an activity base for explaining the total cost of xray filmy To plan and control variable costs a manager must be well acquainted with the various activity bases within the firmo True Variable Versus Step Variable CostsTrue Variable Costs y Direct Material is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity What isnt used can be carried over to the next period as inventory Step Variable Costs y Unlike direct material the time of maintenance workers is obtainable only in large chucks Any maintenance time more utilized cannot ve stored as inventory and carried forward to the next periody A resource that is obtainable only in large chucks such as maintenance workers and whose cost increases or decreases only in response to fairly wide changes in activity is known as a step variable cost The Linearity Assumption and the Relevant Range y Curvilinear cost is a relationship between cost and activity that is a curve rather than a straight line y Relevant range is the range of activity within which assumptions about variable and fixed cost behaviour are validy Managers should always keep in mind that a particular assumption made about cost behaviour may be invalid if activity falls outside of the relevant range Fixed Costsy Since fixed costs remain constant in total the amount of fixed cost per unit basis becomes progressively smaller as the level of activity increases Types of Fixed Costs y Fixed costs are sometimes referred to as capacity costs since they result from outlays made for buildings equipment skilled professional employees and other items needed
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