University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

457

Pages:

2
Author:

stud_ice13

Cost behavior refers to how costs change in response to changes in production or sales volume. In cost-volume-profit (CVP) analysis, understanding different cost behaviors is essential for planning and decision-making. Here are the key types of cost behavior: 1. Fixed Costs • • • Definition: Fixed costs do not change with changes in production or sales volume within a certain range. Example: Rent for a factory remains constant at $32,000 per month regardless of the number of units produced. Impact on Unit Cost: Although total fixed costs remain the same, the fixed cost per unit decreases as production volume increases, achieving economies of scale. 2. Variable Costs • • • Definition: Variable costs change in direct proportion to changes in production volume. Example: Direct materials cost; if each unit produced uses $20 of materials, the total variable cost increases with each additional unit. Impact on Unit Cost: Variable costs per unit remain constant as production levels change. 3. Mixed Costs • • • Definition: Mixed costs contain both fixed and variable components. Example: Sales representatives’ compensation, which may include a base salary (fixed) plus a sales commission (variable). Behavior: When graphed, the cost starts at a fixed base (e.g., $32,000) and increases with each unit produced. 4. Step-Wise Costs • • • Definition: Step-wise costs, or stair-step costs, remain fixed over a certain range but increase in steps when production exceeds certain thresholds. Example: Supervisor salaries; if production increases significantly, requiring additional shifts, new supervisors may be hired at each step. Graphical Representation: The step-wise cost line is flat within each range but rises to a higher level when the next production threshold is met. Examples of Cost Classification: • • • • • Rubber for Tennis Balls: Variable (cost increases with each unit produced). Straight-Line Depreciation: Fixed (does not change with production volume). Salesperson Pay: Mixed (fixed salary + variable commission). Supervisory Salaries with Added Shifts: Step-wise (additional supervisors added at each production range). Packaging Materials: Variable (cost increases per unit produced). These types of cost behaviors are essential for CVP analysis, helping managers answer critical questions such as break-even points, target sales volumes, and how changes in costs, sales volume, or product mix impact profitability.