Total Variable Cost Example

1
Total Variable Cost Example

• Your total long distance telephone bill is
  based on how many minutes you talk.

Total Long DistanceTelephone Bill
Minutes Talked
2
Variable Cost Per Unit Example

• The cost per minute talked is constant. For
  example, 10 cents per minute.

Per MinuteTelephone Charge
Minutes Talked
3
Total Fixed Cost Example

• Your monthly basic telephone bill is probably
  fixed and does not change when you make more
  local calls.

Monthly Basic Telephone Bill
Number of Local Calls
4
Fixed Cost Per Unit Example

• The fixed cost per local call decreases as more
  local calls are made.

Monthly Basic Telephone Bill per Local Call
Number of Local Calls
5
Types of Cost Behavior Patterns
6
Cost Behavior
Examples of normally variable costs
Service Organizations Supplies and travel
Merchandisers Cost of Goods Sold
Merchandisers and Manufacturers Sales commissions
and shipping costs
Manufacturers Direct Material, Direct Labor, and
Variable Manufacturing Overhead
Examples of normally fixed costs
Merchandisers, manufacturers, and service
organizations Real estate taxes, Insurance, Sales
salariesDepreciation, Advertising
7
The Linearity Assumption and the Relevant Range
EconomistsCurvilinear Cost Function
Total Cost
Activity
8
The Linearity Assumption and the Relevant Range
EconomistsCurvilinear Cost Function
Total Cost
Accountants Straight-Line Approximation
(constant unit variable cost)
Activity
9
The Linearity Assumption and the Relevant Range
A straight line closely approximates a
curvilinear variable cost line within the
relevant range.
EconomistsCurvilinear Cost Function
RelevantRange
Total Cost
Accountants Straight-Line Approximation
(constant unit variable cost)
Activity