ACCT1022 Chapter Notes - Chapter 6: Cost Estimate, Fixed Cost, Marginal Cost

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8 Feb 2017
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Chapter Six: Activity Analysis, Cost Behavior, and Cost Estimation
Cost Behavior Patterns
Cost behavior: relationship between cost and activity
Cost prediction: a forecast of cost at a particular level of activity
Cost estimation: determination of cost
Variable Cost
Changes in total in direct proportion to a change in the activity level
o Variable cost per unit remains the same as activity changes
Step Variable Cost
Usually include inputs that are purchased and used in relatively small increments
Fixed Cost
Remains unchanged in total as the activity level (or cost drivers) varies
o Fixed cost per unit does change with changing levels of production
Unit fixed cost declines as production increases
Step Fixed Cost
Some costs remain fixed over a wide range of activity but jump to a different
amount for activity levels outside that range
Semi-Variable Cost
Has both a fixed and variable component
Curvilinear Cost
Has a curved graph of all the cost behavior patterns
o For low levels of activity this cost is decreasing marginal cost
o For high levels of activity this cost is increasing marginal cost
Relevant range: the range of activity within which management expects the
company to operate
Using Cost Behavior Patterns to Predict Costs
Sales forecast is made for each month during the budget year
Next a cost prediction is made for each of the firm’s cost items
Engineered, Committed, and Discretionary Costs
Engineered cost: bears a definitive physical relationship to the activity measure
Committed cost: results from an organization’s ownership or use of facilities and
its basic organization structure
Discretionary cost: arises as a result of a management decision to spend a
particular amount of money for some purpose
o Distinction between committed and discretionary costs is that for
committed cost, managers can only change costs for big decisions (long
run)
o Discretionary costs can be changed in the short run and not have a huge
impact
Cost Estimation
Cost estimation is the process of determining how a particular cost behaves
Account Classification Method
Also known as account analysis
Involves a careful examination of the organization’s ledger account
o Classifies each cost as fixed, variable, or semi variable
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