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Types of Cost Behavior Patterns Next Page Click Here.

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Presentation on theme: "Types of Cost Behavior Patterns Next Page Click Here."— Presentation transcript:

1 Types of Cost Behavior Patterns Next Page Click Here

2 Total Variable Cost Example Your total long distance telephone bill is based on how many minutes you talk (the more you talk, the higher the bill). Minutes Talked Total Long Distance Telephone Bill Next Page Click Here

3 Variable Cost Per Unit Example Minutes Talked Per Minute Telephone Charge The cost per minute talked is constant (for example, 10 cents per minute). Next Page Click Here

4 Total Fixed Cost Example Your monthly basic telephone bill is probably fixed and does not change when you make more local calls. Number of Local Calls Monthly Basic Telephone Bill Next Page Click Here

5 Fixed Cost Per Unit Example Number of Local Calls Monthly Basic Telephone Bill per Local Call The fixed cost per local call decreases as more local calls are made. Next Page Click Here

6 Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) Fixed Costs and Relevant Range 90 Relevant Range Total cost doesnt change for a wide range of activity. It then jumps to a new higher cost for the next higher range of activity. Next Page Click Here The companys normal operating range

7 How 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. Fixed Costs and Step-Variable (or Step-Wise) Costs Next Page Click Here

8 Step-Variable (or Step-Wise) Costs Activity Cost Total cost remains constant within a narrow range of activity. Total cost increases to a new higher cost for the next higher range of activity. Next Page Click Here

9 A mixed cost has both fixed and variable components. Mixed Costs Consider the following electric utility example. Next Page Click Here

10 Fixed Monthly Utility Charge Variable Utility Charge Activity (Kilowatt Hours) Total Utility Cost Mixed Costs X Y Total mixed cost Next Page Click Here

11 WiseCo recorded the following production activity and maintenance costs for two months: The High-Low Method 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 then express the costs in equation form Y = a + bX. Next Page Click Here

12 Unit variable cost = Change in cost Change in units The High-Low Method Unit variable cost = $3,600 ÷ 4,000 units = $0.90/unit Next Page Click Here

13 The High-Low Method Fixed cost = Total cost – Total variable cost Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600 Next Page Click Here U nit variable cost = $3,600 ÷ 4,000 units = $0.90/unit

14 The High-Low Method Fixed cost = $9,700 – ($0.90 per unit × 9,000 units) Fixed cost = $9,700 – $8,100 = $1,600 Next Page Click Here U nit variable cost = $3,600 ÷ 4,000 units = $0.90/unit Total cost = Fixed Cost + Total variable cost Y = a + bX Y = $1,600 + $0.90X


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