Week 6 - Cost Behaviour and Job-Order Costing I Flashcards
Define cost behaviour
How costs change in relation to volume or activity - some costs will vary with volume or operating activity, others will remain fixed
When do total variable costs change?
When activity changes
How do fixed costs react to a change in activity?
They remain unchanged
What do managers use their knowledge of cost behaviour for?
To estimate future costs and the impact of operational changes on future profitability
Why must managers understand cost behaviour patterns?
To anticipate cost ramifications of alternatives in order to decide correctly
How do we define variable costs?
Total costs that change in direct proportion to changes in productive output
How do variable costs react on a per unit basis?
They remain the same
What are some examples of variable costs?
- direct materials
- direct and indirect labour
- sales commissions
Define fixed costs
Fixed costs are costs that remain constant within a relevant range of volume or activity
How do fixed costs react on a per unit basis?
Fixed costs vary inversely with changes in volume - as volume increases, fixed cost per unit decreases
What are some fixed costs?
- Depreciation
- Rent
- Supervisory salaries
- Auditor’s fees
What is an activity base?
Whatever a variable cost varies with
Give an example of how a cost may be variable with respect to one activity base, but fixed with respect to another
- petrol cost varies with the miles driven
- but, petrol cost is fixed with regards to how many people are in the car
What is the relevant range?
The volume range in which operations are likely to occur
