Cost Behaviour

7598 WordsJan 4, 201331 Pages
CHAPTER 3 ACTIVITY COST BEHAVIOR LEARNING OBJECTIVES AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: 1. Define and describe fixed, variable, and mixed costs. 2. Explain the use of the resources and activities and their relationship to cost behavior. 3. Separate mixed costs into their fixed and variable components using the high-low method, the scatterplot method, and the method of least squares. 4. Evaluate the reliability of the cost formula. 5. Explain how multiple regression can be used to assess cost behavior. 6. Define the learning curve, and discuss its impact on cost behavior. 7. Discuss the use of managerial judgment in determining cost behavior. CHAPTER SUMMARY THIS CHAPTER INTRODUCES COST BEHAVIOR AS…show more content…
■ Purchasing a long-lived asset or entering a long-term contract (buildings and equipment, either purchased or leased). 2. Discretionary fixed expenses are the costs incurred for the acquisition of short-term activity capacity. They are independent of actual activity usage, but the levels of usage can be changed quickly. Example: ■ Salaries of employees, because workers may not be laid off if there is a short-term drop in production. D. Implications for Control and Decision Making 1. Operational control information systems encourage managers to pay more attention to controlling resource usage and spending and to eliminate excess capacity. 2. Managers need to calculate and evaluate the changes in supply and demand of resources resulting from different decisions. E. Step-Cost Behavior A step-cost function displays a constant level of cost for a range of activity output and then jumps to a higher level of cost at some point, where it remains for a similar range of activity. 1. Step-variable costs are costs that follow a step-cost behavior with narrow steps (resources must be purchased in small chunks). ■ Step-variable costs can be approximated with a strictly variable cost assumption. 2. Step-fixed costs are costs that follow a step-cost behavior with wide steps (resources are acquired at large
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