@ 2012, Cengage Learning

Cost Behavior and Cost-Volume-Profit Analysis

LO 1a – Understanding Cost Behavior

Cost Behavior Cost behavior is the manner in which a cost changes

as a related activity changes. Understanding the behavior of a cost depends on: Identifying the activities that cause the cost to change,

called activity bases (or activity drivers). Specifying the range of activity over which the changes in

the cost are of interest. This range of activity is called the relevant range.

LO 1

Variable Costs

Variable costs are costs that vary in proportion to changes in the level of activity.

LO 1

LO 1

Variable Costs

Jason Sound Inc. produces stereo systems. The parts for the stereo systems are purchased from suppliers for $10 per unit (a variable cost) and are assembled by Jason Sound Inc. For Model JS-12, the direct materials costs for the relevant range of 5,000 to 30,000 units of production are shown on the next slide.

LO 1

Variable Costs

Variable Costs

Variable costs are costs that vary in proportion to changes in the level of activity.

LO 1

As shown in the previous slides, the variable costs have the following characteristics: Cost per unit remains the same regardless of

changes in the activity base. Total cost changes in proportion to changes in the

activity base.

LO 1

Variable Costs

To

tal

Dir

ect

Mat

eria

ls C

ost

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

10 20 300

$20

$15

$10

$5

0 10 20 30

Number ofUnits of Model

JS-12 Produced

Units Produced (000)

Units Produced (000)

Direct Materials Cost

per UnitTotal Direct

Materials Cost

5,000 units $10 $ 50,00010,000 10 l00,00015,000 10 150,00020,000 10 200,00025,000 10 250,00030,000 10 300,000

LO 1

Variable Costs

Co

st p

er U

nit

Fixed costs have the following characteristics: Cost per unit changes inversely to changes in the

activity base. Total cost remains the same regardless of changes

in the activity base.

Fixed CostsLO 1

Fixed CostsLO 1

Minton Inc. manufactures, bottles, and distributes perfume. The production supervisor is Jane Sovissi. She is paid $75,000 per year. The plant produces from 50,000 to 300,000 bottles of perfume.

Fixed CostsLO 1

The more units produced, the lower

the fixed cost per unit.

Fixed Costs

Fixed costs are costs that remain the same in total dollar amount as the activity base changes.

LO 1

LO 1

To

tal S

alar

y

$150,000$125,000$100,000

$75,000$50,000

$25,000

100 200 3000Units Produced (000)

Number ofBottles of Perfume

Produced

Sal

ary

per

Un

it

$1.50$1.25$1.00

$.75$.50

$.25

100 200 3000Units Produced (000)

Total Salary for Jane Sovissi

50,000 bottles $75,000 $1.500100,000 75,000 0.750150,000 75,000 0.500200,000 75,000 0.375

Salary per Bottle of Perfume Produced

Fixed Costs

Mixed Costs

Mixed costs have characteristics of both a variable and a fixed cost. Mixed costs are sometimes called semivariable or semifixed costs.

Over one range of activity, the total mixed cost may remain the same. Over another range of activity, the mixed cost may change in proportion to changes in the level of activity.

LO 1

Simpson Inc. manufactures sails, using rented equipment. The rental charges are $15,000 per year, plus $1 for each machine hour used over 10,000 hours.

Mixed CostsLO 1

The rental charges for various hours used within the relevant range of 8,000 hours to 40,000 hours are as follows:

Mixed CostsLO 1

Mixed CostsLO 1