Cost Measurement - Cost Behavior Patterns

Question 1

Costs

Answer 1

By analyzing how costs behave when production and/or sales volume changes, we can predict total costs and estimate profit. Very dew costs behave consistently across a wide range of production or sales volume (economies or diseconomies). All cost behavior must take place within a relevant range

Question 2

Relevant range

Answer 2

Range of production where:

1) Range of activity for which assumptions of cost behavior reasonably hold true
2) Range of a activity over whichh the company plans to operate

All cost behavior patterns are valid only within a relevant range.

Question 3

Fixed vs Variable Costs

Answer 3

Fixed Costs - Remain constant in total regardless of production volume. Because of this, fixed costs per unit vary - increasing when production decreases and decreasing when production increases

2) variable costs - vary in total, in direct proportion to change in production volume. Variable costs per unit remain constant regardless of production volume

Question 4

Total cost

Answer 4

Sum of fixed and variable: total costs per unit vary with changes in production because fixed costs per unit vary with changes in production; total costs in total vary with changes in production because variable costs vary in total with changes in production

Question 5

Other cost classification

Answer 5

1) Step-variable cost - Remain constant in total over a small range of production levels, but vary with larger changes in production volume
2) mixed costs (semi-variable) - Have a fixed component and a variable component. Variable component changes in total with changes in volume. Fixed component prevents them from varying in direct proportion to change in volume

Question 6

Predicting Costs with High-low method

Answer 6

When predicting the behavior of a total cost or a mixed cost, the high-low method provides a rough estimate of the fixed cost and the variable cost components.

The basic concept underlying this method is that when total manufacturing costs change in response to changes in production volume, the changes are, by definition, caused by variable costs.

1. From the range of production volumes presented, select the period with the highest production and the period with the lowest production.
2. Note – Do not use highest and lowest costs. Always use production volume.