ACC 406 Chapter Notes - Chapter 3: Scatter Plot, Fixed Cost, Cost Driver
28 Jun 2018
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ACC – Chapter 3 – Cost Behaviour
Cost behaviour – describing whether a cost changes when the level of output changes
A cost that does not change in total as output changes is a fixed cost
A variable cost increases in total with an increase in output
A cost driver – is a causal measurement that causes costs to change
The relevant range – is the range of output over which the assumed cost relationship is valid
for the normal operations of a firm
Fixed costs – are costs that in total are constant within the relevant range as the level of output
increases or decreases
Discretionary fixed costs – are fixed costs that can be changed or avoided relatively easily at
management discretion (i.e. advertising: different medias, sizes, etc.)
Committed fixed costs – are fixed costs that cannot be easily changed, long term contracts
Variable costs – costs that in total vary in direct proportion to changes in output within the
relevant range
Total variable costs = Variable rate X amount of output
Mixed costs – costs that have both fixed and variable components
Total cost = Total fixed costs + total variable costs
A step cost – displays a constant level of cost for a range of output and then jumps to a higher
level of costs at some point, where it remains for a similar range of output
Items that display a step cost behaviour must be purchased in chunks
Methods for separating mixed costs into fixed and variable components
The high-low method, the scatter graph method, and the method of least squares
Cost as an equation for a straight line:
Total cost = fixed cost + (Variable rate X Output)
The dependant variable – a variable whose value depends on the value of another variable
Independent variable – variable the measures output and that measures output and that
explains changes in the cost or other dependent variable
Slope – corresponds to the variable rate
The high-low method – method of separating mixed costs into fixed and variable components
by using just the high and low data points
1. The high point is defined as the point with the highest activity or output level. Low point
is the lowest activity or output level
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Document Summary
Cost behaviour describing whether a cost changes when the level of output changes. A cost that does not change in total as output changes is a fixed cost. A variable cost increases in total with an increase in output. A cost driver is a causal measurement that causes costs to change. The relevant range is the range of output over which the assumed cost relationship is valid for the normal operations of a firm. Fixed costs are costs that in total are constant within the relevant range as the level of output increases or decreases. Discretionary fixed costs are fixed costs that can be changed or avoided relatively easily at management discretion (i. e. advertising: different medias, sizes, etc. ) Committed fixed costs are fixed costs that cannot be easily changed, long term contracts. Variable costs costs that in total vary in direct proportion to changes in output within the relevant range. Total variable costs = variable rate x amount of output.
