Basic Managerial Accounting Concepts Cost Behavior: Fixed Costs Fixed vs. Variable Relevant range: normal production levels Behavior of fixed costs as production increases Implications for pricing of products?

Basic Managerial Accounting Concepts Cost Behavior: Variable Costs Vary directly with output Linear relationship Reasonable assumption? Quantity discounts?

Basic Managerial Accounting Concepts Cost Behavior: Step Costs Step costs: fixed for small ranges of output Adding sections of class So overall variable, but not linear

Basic Managerial Accounting Concepts Cost Formula: Total Costs = Fixed Costs + VCU x Units Total Costs = Dependent variable Fixed Costs = Intercept Variable Costs = Slope; independent variable

Basic Managerial Accounting Concepts Cost Behavior: Mixed Costs Partially variable and partially fixed Separating mixed costs into variable and fixed High low method Variable Cost Per Unit= (High Cost – Low Cost) / (High Output – Low Output) Fixed Cost= Total Cost – (Output x Variable Cost) Can use output/costs at high or low outputs

Basic Managerial Accounting Concepts Cost Behavior: Mixed Costs Separating mixed costs into variable and fixed Least squares Best fit line of observation points Intercept: fixed costs INTERCEPT FUNCTION X Variable: variable costs per unit SLOPE FUNCTION