3. Cost Behaviour

Question 1

What is cost behaviour?

Answer 1

The way in which a cost changes as volume of output changes.

Question 2

What is a stepped cost?

Answer 2

A cost which is fixed in nature but only within certain levels of activity.

Question 3

What is the relevant range of an organisation?

Answer 3

The activity levels which an organisation has experience of operating at in the past and for which cost information is available.

Question 4

What is the linear assumption?

Answer 4

It states that total fixed costs remain constant and variable costs are constant per unit.

Question 5

How can we estimate fixed and variable costs if we only know total cost? (3 methods)

Answer 5

High low method
Line of best fit method
Linear regression

Question 6

What is the formula for High-Low total cost?

Answer 6

Total cost = fixed cost + (VC/unit x Output)

Question 7

What is the correlation co-efficient? What is the formula?

Answer 7

Indicates the strength of the linear relationship between variables, it must lie between -1 and 1.

r= nExy - ExEy / sqrt ( nEx^2 - (Ex^2)