Cost Behavior and Cost-Volume-Profit Analysis

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Cost Behavior and Cost-Volume-Profit Analysis
LO 1a Understanding Cost Behavior
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Cost Behavior
LO 1

• Cost behavior is the manner in which a cost
  changes as a related activity changes.
  Understanding the behavior of a cost depends on
• Identifying the activities that cause the cost to
  change, called activity bases (or activity
  drivers).
• Specifying the range of activity over which the
  changes in the cost are of interest. This range
  of activity is called the relevant range.

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Variable Costs
LO 1

• Variable costs are costs that vary in proportion
  to changes in the level of activity.

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LO 1
Variable Costs
Jason Sound Inc. produces stereo systems. The
parts for the stereo systems are purchased from
suppliers for 10 per unit (a variable cost) and
are assembled by Jason Sound Inc. For Model
JS-12, the direct materials costs for the
relevant range of 5,000 to 30,000 units of
production are shown on the next slide.
5
LO 1
Variable Costs
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Variable Costs
LO 1

• Variable costs are costs that vary in proportion
  to changes in the level of activity.

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LO 1
Variable Costs

• As shown in the previous slides, the variable
  costs have the following characteristics
• Cost per unit remains the same regardless of
  changes in the activity base.
• Total cost changes in proportion to changes in
  the activity base.

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LO 1
Variable Costs
300,000 250,000 200,000 150,000 100,000
50,000
20 15 10 5
Cost per Unit
Total Direct Materials Cost
0
10 20 30
Units Produced (000)
0
10 20 30
Units Produced (000)
Number of Units of Model JS-12 Produced
Direct Materials Cost per Unit
Total Direct Materials Cost
5,000 units 10 50,000 10,000 10 l00,000
15,000 10 150,000 20,000 10 200,000 25,000 1
0 250,000 30,000 10 300,000
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LO 1
Fixed Costs

• Fixed costs have the following characteristics
• Cost per unit changes inversely to changes in the
  activity base.
• Total cost remains the same regardless of changes
  in the activity base.

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LO 1
Fixed Costs
Minton Inc. manufactures, bottles, and
distributes perfume. The production supervisor is
Jane Sovissi. She is paid 75,000 per year. The
plant produces from 50,000 to 300,000 bottles of
perfume.
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LO 1
Fixed Costs
The more units produced, the lower the fixed cost
per unit.
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Fixed Costs
LO 1

• Fixed costs are costs that remain the same in
  total dollar amount as the activity base changes.

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LO 1
Fixed Costs
1.50 1.25 1.00 .75 .50 .25
150,000 125,000 100,000 75,000 50,000
25,000
Total Salary
Salary per Unit
100 200 300
0
100 200 300
0
Units Produced (000)
Units Produced (000)
Salary per Bottle of Perfume Produced
Total Salary for Jane Sovissi
Number of Bottles of Perfume Produced
50,000 bottles 75,000 1.500 100,000 75,000 0
.750 150,000 75,000 0.500 200,000 75,000 0.375
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Mixed Costs
LO 1

• Mixed costs have characteristics of both a
  variable and a fixed cost. Mixed costs are
  sometimes called semivariable or semifixed costs.
• Over one range of activity, the total mixed cost
  may remain the same. Over another range of
  activity, the mixed cost may change in proportion
  to changes in the level of activity.

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LO 1
Mixed Costs
Simpson Inc. manufactures sails, using rented
equipment. The rental charges are 15,000 per
year, plus 1 for each machine hour used over
10,000 hours.
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LO 1
Mixed Costs
The rental charges for various hours used within
the relevant range of 8,000 hours to 40,000 hours
are as follows
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LO 1
Mixed Costs