COST BEHAVIOR PATTERNS Chapter 2

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COST BEHAVIOR PATTERNSChapter 2

• Accounting Principles II
• AC 2102 - Fall Semester, 1999

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Basic Cost Behavior Patterns

• Variable Costs
• Fixed Costs
• Mixed Costs

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Variable Costs

• Variable costs move in total in direct proportion
  to the change in activity output
• Thus for a variable cost, a linear relationship
  between the activity cost and the associated
  driver is assumed
• Thus, the increase in the total variable cost
  the increase in the associated driver is
  assumed the same
• Formula TVC 50 x No. of Units of Driver
• Important to determine the relevant range
• relevant range is the range over which the
  assumed cost relationship is valid

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Fixed Cost

• A cost which remains constant over the relevant
  range
• It is a cost which whose magnitude is unaffected
  by changes in the level of activity
• Formula TFC 80,000
• It should be noted that fixed cost per unit
  varies with changes in the level of activity,
  while the variable costs per unit do not change
  as the activity level changes

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Step-Cost Behavior

• A step cost has the property of displaying a
  constant level of cost for a range of activity
  usage (output) and then jumping to a higher level
  of cost at some point
• Step-Variable Costs
• Costs that follow a step-cost behavior with
  narrow steps
• Usually approximated with a strictly variable
  cost assumption
• Step-Fixed Costs
• Costs that follow a step-cost behavior with wide
  steps before a jump to a higher level

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The Need For Cost Separation

• Generally, the only information the accounting
  system provides is the total cost of an activity
  and a measure of activity usage
• Example for maintenance accounting data is
  generated which indicates the total cost of
  maintenance and the number of maintenance hours
  worked. But the system does not reveal the
  amount of the cost that was variable and the
  amount that was fixed.
• It is therefore necessary to separate the total
  costs into its fixed and variable components
• There are various methods for doing this,
  including the high-low method, the scatterplot
  method, and the method of least squares
• They will not be covered in this course

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Additional Cost Classifications

• Controllable vs. Uncontrollable
• Historical vs. Future
• Differential or Incremental
• Opportunity and Imputed

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