Cost Behavior Analysis : Cost Management

1740 Words Sep 16th, 2014 7 Pages
Summary of topics studied:
COST BEHAVIOR ANALYSIS is the study of how a cost in a business changes as some correlated activity to the cost changes. Having a good understanding of cost behavior is important for managers for various reasons; the manager can run an evaluation that can estimate the value of a business or company projects to determine if the projects or businesses are worth undertaking or even continuing. Cost behavior analysis can simply give a production manager the information to determine the continuation of either producing a product or to slow/stop production of the product or product option. It enables them to control cost effectively, to forecast profits or loss as production and sales volume changes, etc.
Having a good understanding of analyzing a cost depends on:
1. Identifying and measuring the significant business activities that required the cost to change. These activities can be referred to as activity drivers or activity bases.
2. Identifying the set of activities over which the cost are correlated. This set of activities can also be referred to as the relevant range.
There are three types of cost; these are variable cost, fixed cost, and mixed cost.
Variable Costs are the cost that changes in total in proportion to changes in the activity base (e.g. number of units). If the activity driver is units produced, then direct labor and direct materials are grouped as variable cost. Also variable cost can be identified, if it cost a business more in…
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