Cost Behavior Analysis - 1472 Words

Types of Costs by Behavior Cost behavior refers to the way different types of production costs change when there is a change in level of production. There are three main types of costs according to their behavior: Fixed Costs: Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc. Fixed cost per unit decreases with increase in production. Following example explains this fact: Total Fixed Cost | $30,000 | $30,000 | $30,000 | à · Units Produced | 5,000 | 10,000 | 15,000 | Fixed Cost per Unit | $6.00 | $3.00 | $2.00 | Variable Costs: Variable costs change in direct†¦show more content†¦at highest level of activity; and x1 are the number of units/labor hours etc. at lowest level of activity In other words, variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost à · change in number of units produced). Total Fixed Cost Total fixed cost (a) is calculated using the following formula: Total Fixed Cost = y2 − bx2 = y1 − bx1 | High-Low Method Example Company ÃŽ ± wants to construct a cost volume relation between its factory overhead cost and number of units produced. Use the high-low method to analyze its factory overhead (FOH) costs and build a cost volume formula. The volume and the corresponding total cost information of the factory for past eight months are given below: Month | Units | FOH | 1 | 1,520 | $36,375 | 2 | 1,250 | 38,000 | 3 | 1,750 | 41,750 | 4 | 1,600 | 42,360 | 5 | 2,350 | 55,080 | 6 | 2,100 | 48,100 | 7 | 3,000 | 59,000 | 8 | 2,750 | 56,800 | Solution: We have, x2 = 3,000 y2 = $59,000 x1 = 1,250 y1 = $38,000 Variable Cost per Unit = ( $59,000 − $38,000 ) à · ( 3,000 − 1,250 ) = $12 per unit Total Fixed Cost = $59,000 − ( $12 Ãâ€" 3,000 ) = $38,000 − ( $12 Ãâ€" 1,250 ) = $23,000 Cost Volume Formula: y = $23,000 + 12x Scatter Graph Method Scatter graph method is a graphical technique of separating fixed andShow MoreRelatedCost Behavior Analysis : Cost Management1740 Words   |  7 PagesSummary of topics studied: COST BEHAVIOR ANALYSIS is the study of how a cost in a business changes as some correlated activity to the cost changes. 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