Chapter 4: Cost Behavior Flashcards
Cost behavior
How costs change as output volume changes. Costs can be variable, fixed, of mixed.
Variable costs
Vary in a linear fashion with the production level. Constant on a per-unit-basis within the relevant range.
Fixed costs
Do not vary with the production level - remains the same within the relevant range. Cost-per-unit decreases as production increases.
Relevant range
Range of activity over which given fixed or variable costs are valid. (Some fixed costs may be avoidable below certain production levels or increase above certain levels. Or volume discounts on variable costs could occur.)
Mixed cost
Aka: semi-variable. A cost that is neither fixed nor variable. Fixed cost components with variable rates (electricity). Also step functions (where additional supervisors must be added over certain production levels)
Cost behavior in management accounting vs microeconomics
Microeconomics assumed decreasing marginal costs for additional units produced. (That then start increasing after a specific threshold)
Management accounting assumes straight liners relationships, usually a more accurate description.