Description
This is a PPT describing cost behavior of variable cost analysis.
Cost Behavior: Analysis and Use
Chapter Five
True Variable Cost Example
A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.
Total Long Distance Telephone Bill
Minutes Talked
Variable Cost Per Unit Example
A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge
Minutes Talked
Step-Variable Costs
A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease only in response to fairly wide changes in activity is known as a step-variable cost.
Cost
Volume
Total Fixed Cost Example
A fixed cost is a cost whose total dollar amount remains constant as the activity level changes. Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls
Types of Cost Behavior Patterns
Recall the summary of our cost behavior discussion from an earlier chapter.
Summary of Variable and Fixed Cost Behavior
Cost Variable In Total Total variable cost is proportional to the activity level within the relevant range. Total fixed cost remains the same even when the activity level changes within the relevant range. Per Unit Variable cost per unit remains the same over wide ranges of activity. Fixed cost per unit goes down as activity level goes up.
Fixed
Fixed Cost Per Unit Example
Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
Mixed Costs
A mixed cost has both fixed and variable components. Consider the example of utility cost.
Y Total Utility Cost
Variable Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
Mixed Costs
The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y = the total mixed cost a = the total fixed cost (the vertical intercept of the line) b = the variable cost per unit of activity (the slope of the line) X = the level of activity
Y Total Utility Cost
Variable Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
The High-Low Method
The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours. $2,400 = $8.00/hour 300
The High-Low Method
Total Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = $9,800 – ($8/hour × 800 hours) Total Fixed Cost = $9,800 – $6,400 Total Fixed Cost = $3,400
The Contribution Format
Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
The Contribution Format
Used primarily for external reporting.
Used primarily by management.
doc_987189561.ppt
This is a PPT describing cost behavior of variable cost analysis.
Cost Behavior: Analysis and Use
Chapter Five
True Variable Cost Example
A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your total long distance telephone bill is based on how many minutes you talk.
Total Long Distance Telephone Bill
Minutes Talked
Variable Cost Per Unit Example
A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example, 10 cents per minute.
Per Minute Telephone Charge
Minutes Talked
Step-Variable Costs
A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease only in response to fairly wide changes in activity is known as a step-variable cost.
Cost
Volume
Total Fixed Cost Example
A fixed cost is a cost whose total dollar amount remains constant as the activity level changes. Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls
Types of Cost Behavior Patterns
Recall the summary of our cost behavior discussion from an earlier chapter.
Summary of Variable and Fixed Cost Behavior
Cost Variable In Total Total variable cost is proportional to the activity level within the relevant range. Total fixed cost remains the same even when the activity level changes within the relevant range. Per Unit Variable cost per unit remains the same over wide ranges of activity. Fixed cost per unit goes down as activity level goes up.
Fixed
Fixed Cost Per Unit Example
Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls
Mixed Costs
A mixed cost has both fixed and variable components. Consider the example of utility cost.
Y Total Utility Cost
Variable Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
Mixed Costs
The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y = the total mixed cost a = the total fixed cost (the vertical intercept of the line) b = the variable cost per unit of activity (the slope of the line) X = the level of activity
Y Total Utility Cost
Variable Cost per KW
X
Activity (Kilowatt Hours)
Fixed Monthly Utility Charge
The High-Low Method
The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours. $2,400 = $8.00/hour 300
The High-Low Method
Total Fixed Cost = Total Cost – Total Variable Cost Total Fixed Cost = $9,800 – ($8/hour × 800 hours) Total Fixed Cost = $9,800 – $6,400 Total Fixed Cost = $3,400
The Contribution Format
Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net operating income Total $ 100,000 60,000 $ 40,000 30,000 $ 10,000 Unit $ 50 30 $ 20
The contribution margin format emphasizes cost behavior. Contribution margin covers fixed costs and provides for income.
The Contribution Format
Used primarily for external reporting.
Used primarily by management.
doc_987189561.ppt