Cost Behaviour Flashcards
What three components are costs classified by behaviour?
Variable costs
Fixed costs
Mixed costs
What are variable costs?
Costs that vary in direct proportion to output levels.
What are fixed costs?
Costs that remain constant regardless of activity level.
Can fixed cost change for reasons aside from level of activity?
Yes. E.g renting a new factory increases fixed cost of rent.
What are mixed costs?
Have components of both fixed and variable costs.
Give an example of how a delivery truck could be a mixed cost.
Fixed cost = constant rental price of van.
Variable = $0.10 per km driven.
Thus both fixed and variable = mixed.
What is the mixed cost equation?
TC = F + VX
What are “step fixed costs”?
Fixed until a certain point until maximum capacity reached. Then change in fixed cost to allow for greater capacity and remained fixed until capacity reached again. Repeats.
What is a ‘learning curve’ cost?
Labour hours - start will take longer time to produce units as new skill being learnt. Labour cost will decrease over time as labourers become faster and more efficient.
What is the ‘economies of scale’?
More production allows cost to be more spread out over units.
What is ‘diseconomies of sale’?
When business becomes too large that bureaucratic and communication issues slow down production and increase costs.
What is the ‘relevant range’?
The range of activity levels over which the assumed cost relationship is valid (the cost at average current production level).
What is the high-low method process 5 steps?
Solving using TC = F + VC:
- Find highest and lowest activity levels.
- Find their corresponding total costs.
- Calculate for V using following:
V = (total cost high — total cost low) / (activity level high — activity level low) - Calculate F using:
F = TC — VXH - Find TC using:
TC = F + V x cost driver hours
