Chapter 3 - Cost Behaviour

Question 1

What does Cost Behavior mean?

Answer 1

Cost behaviour is the general term to describe how a cost changes when the level of activity changes.

Question 2

What is a cost driver?

Answer 2

A cost driver is a causal measurement that causes costs to change. Identifying and managing cost drivers helps managers to better predict and control costs.

Question 3

What is an example of a Discretionary fixed cost?

Answer 3

Advertising (Discretionary fixed costs are fixed costs that can be changed or avoided relatively easily at management’s discretion).

Advertising cost depends on the decision by management to purchase print, radio, or video advertising.

Does not depend on the output.

Question 4

What is a committed fixed cost? And an example of that?

Answer 4

Fixed costs that cannot easily be changed.

Often, committed fixed costs are those that involve a long-term contract or the purchase of property, plant, and equipment.

Question 5

How is total variable costs calculated?

Answer 5

Total variable costs = Variable rate per unit * Units of output (linear equation)

Question 6

What are mixed costs?

Answer 6

Costs that have both a fixed and a variable component.

Question 7

How is Total cost calculated?

Answer 7

Total cost = Total fixed cost + Total variable cost

Question 8

What is step cost?

Answer 8

A step cost displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point, where it remains for a similar range of output.

Question 9

What is relevant range?

Answer 9

The range of output over which an assumed cost relationship is valid for the normal operations of a firm. The relevant range limits the cost relationship to the range of operations that the firm normally expects to occur.

If the company intends to operate outside the boundaries of the relevant range, we can no longer assume that the cost assumptions will hold.

Question 10

What is the high-low method?

Answer 10

It is a method of separating mixed costs into fixed and variable components by using just the high and low data points.

Question 11

What are the steps in the High-Low method?

Answer 11

1) Find the high point and low point (activity)

2) Calculate the variable rate

3) Calculate the fixed cost

4) Find the cost formula