@ 2012, Cengage Learning Cost Behavior and Cost-Volume-Profit Analysis LO 1a – Understanding Cost Behavior

Cost Behavior  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. LO 1

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

LO 1 Variable Costs

 Variable costs are costs that vary in proportion to changes in the level of activity. LO 1

 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. LO 1 Variable Costs

Total Direct Materials Cost $300,000 $250,000 $200,000 $150,000 $100,000 $50, $20 $15 $10 $ Number of Units of Model JS-12 Produced Units Produced (000) Direct Materials Cost per Unit Total Direct Materials Cost 5,000 units$10$ 50,000 10,00010l00,000 15, ,000 20, ,000 25, ,000 30, ,000 LO 1 Variable Costs Cost per Unit

 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. Fixed Costs LO 1

Fixed Costs LO 1 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.

Fixed Costs LO 1 The more units produced, the lower the fixed cost per unit.

Fixed Costs  Fixed costs are costs that remain the same in total dollar amount as the activity base changes. LO 1

Total Salary $150,000 $125,000 $100,000 $75,000 $50,000 $25, Units Produced (000) Number of Bottles of Perfume Produced Salary per Unit $1.50 $1.25 $1.00 $.75 $.50 $ Units Produced (000) Total Salary for Jane Sovissi 50,000 bottles$75,000$ ,00075, ,00075, ,00075, Salary per Bottle of Perfume Produced Fixed Costs

Mixed Costs  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. LO 1

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. Mixed Costs LO 1

The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows: Mixed Costs LO 1

Mixed Costs LO 1