Chapter 4: Cost Behavior

Question 1

Cost behavior

Answer 1

How costs change as output volume changes. Costs can be variable, fixed, of mixed.

Question 2

Variable costs

Answer 2

Vary in a linear fashion with the production level. Constant on a per-unit-basis within the relevant range.

Question 3

Fixed costs

Answer 3

Do not vary with the production level - remains the same within the relevant range. Cost-per-unit decreases as production increases.

Question 4

Relevant range

Answer 4

Range of activity over which given fixed or variable costs are valid. (Some fixed costs may be avoidable below certain production levels or increase above certain levels. Or volume discounts on variable costs could occur.)

Question 5

Mixed cost

Answer 5

Aka: semi-variable. A cost that is neither fixed nor variable. Fixed cost components with variable rates (electricity). Also step functions (where additional supervisors must be added over certain production levels)

Question 6

Cost behavior in management accounting vs microeconomics

Answer 6

Microeconomics assumed decreasing marginal costs for additional units produced. (That then start increasing after a specific threshold)

Management accounting assumes straight liners relationships, usually a more accurate description.