Accounting Chapter 2.1 (Cost Behavior Patterns)

Fixed Costs have two main characteristics

1. The total cost remains fixed, regardless of changes in the level of activity. 2. The cost per unit varies inversely with changes in the level of activity.

2 characteristics of variable cost

1. The total cost varies in proportion to changes in the level of activity. 2. The cost per unit remains constant, regardless of the level of activity.

Fixed Cost

A cost that does not change in total with changes in activity, but per unit cost varies indirectly with changes in activity. You've found an apartment for $900. When you share your room with a roommate, then the total rent will remain $900. However you'll only have to pay $450 ($900 / 2 people)

activity

An event that consumes resources; any repetitive event that serves as a measure of output or usage, such as sales, production, phone calls made, or miles driven

Variable Cost

Any cost whose total varies in proportion to a business activity. Variable cost per unit is constant over the relevant range. 3 people = 9 outputs 4 people = 12 outputs 5 people = 15 outputs (3 output per person)

Meg Thomas maintains a membership at Woodridge Health and Fitness that costs her $120 per month. The membership fee would be considered a (a)variable cost. (b)fixed cost. (c)step variable cost. (d)mixed cost.

B.

Step Costs

Costs that are fixed over only a small range of activity. Once that level of activity has been exceeded, total costs increase and remain constant over another small range of activity. (data plan on a cell phone. 0-4gb = $40, 4.1gb - 8gb = $80 etc.

Macintosh Corporation leases a copy machine for a monthly fee of $100 plus a charge of $0.01 per copy. Macintosh's copy cost would be considered a (a)variable cost. (b)fixed cost. (c)step variable cost. (d)mixed cost.

D.

True or False? A variable cost remains constant in total with changes in activity level.

False

Discretionary fixed costs

Fixed costs that can be changed over the short run. (annual contract for television is a fixed cost. But, a company may choose to cut advertising costs to improve profits)

Committed fixed costs

Fixed costs that cannot be changed over the short run. (10-year lease on an office building. Until the lease period ends, nothing can be done to change the amount of rent the company pays)

cost behavior

The way total costs change in response to changes in the level of activity.

mixed costs

a cost that has both a fixed and variable component (both the total cost and the unit cost will vary with changes in the level of activity) (natural gas bill, you pay a base charge of $10 per month [fixed], and then you pay 0.06 per cubic foot for the gas you use [variable])