Presentation on theme: "Types of Cost Behavior Patterns"— Presentation transcript:
1Types of Cost Behavior Patterns Next PageClick HereTypes of Cost Behavior Patterns
2Total Variable Cost Example Next PageClick HereTotal Variable Cost ExampleYour total long distance telephone bill is based on how many minutes you talk (the more you talk, the higher the bill).Minutes TalkedTotal Long Distance Telephone Bill
3Variable Cost Per Unit Example Next PageClick HereVariable Cost Per Unit ExampleThe cost per minute talked is constant (for example, 10 cents per minute).Minutes TalkedPer Minute Telephone Charge
4Total Fixed Cost Example Next PageClick HereTotal Fixed Cost ExampleYour monthly basic telephone bill is probably fixed and does not change when you make more local calls.Number of Local CallsMonthly Basic Telephone Bill
5Fixed Cost Per Unit Example Next PageClick HereFixed Cost Per Unit ExampleThe fixed cost per local call decreases as more local calls are made.Number of Local CallsMonthly Basic Telephone Bill per Local Call
6Fixed Costs and Relevant Range Next PageClick HereFixed Costs and Relevant RangeThe company’s normal operating range90Total cost doesn’t change for a wide range of activity. It then jumps to a new higher cost for the next higher range of activity.Relevant Range60Rent Cost in Thousands of Dollars30, , , Rented Area (Square Feet)
7Fixed Costs and Step-Variable (or Step-Wise) Costs Next PageClick HereFixed Costs and Step-Variable (or Step-Wise) CostsHow does this type of fixed cost differ from a step-variable (or step-wise) cost?Step-variable (or step-wise) costs can be adjusted more quickly and . . .The width of the activity steps is much wider for the fixed cost.
8Step-Variable (or Step-Wise) Costs Next PageClick HereStep-Variable (or Step-Wise) CostsTotal cost increases to a new higher cost for the next higher range of activity.CostTotal cost remains constant within a narrow range of activity.Activity
9A mixed cost has both fixed and variable components. Next PageClick HereMixed CostsA mixed cost has both fixed and variable components.Consider the following electric utility example.
11Next PageClick HereThe High-Low MethodWiseCo recorded the following production activity and maintenance costs for two months:To break down the mixed cost, these two levels of activity are used to:compute the variable cost per unit;compute the fixed cost; and thenexpress the costs in equation form Y = a + bX.
12Changein cost Change in units Next PageClick HereThe High-Low MethodUnit variable cost =Changein cost Change in unitsUnit variable cost = $3,600 ÷ 4,000 units = $0.90/unit
13The High-Low Method Fixed cost = Total cost – Total variable cost Next PageClick HereThe High-Low MethodUnit variable cost = $3,600 ÷ 4,000 units = $0.90/unitFixed cost = Total cost – Total variable costFixed cost = $9,700 – ($0.90 per unit × 9,000 units)Fixed cost = $9,700 – $8,100 = $1,600
14Next PageClick HereThe High-Low MethodUnit variable cost = $3,600 ÷ 4,000 units = $0.90/unitFixed cost = $9,700 – ($0.90 per unit × 9,000 units)Fixed cost = $9,700 – $8,100 = $1,600Total cost = Fixed Cost + Total variable cost Y = a + bX Y = $1,600 + $0.90X