2 Classification

Managerial Accounting and
Costs Terms, Concepts and Classifications
Chapter Two
Part 2
5-Cost Classifications for Predicting Cost Behavior
Cost behavior refers to how a cost will react

(change) to changes in the level of activity. The
most common classifications are:
 Variable costs.
 Fixed costs
 Mixed costs.
• For a cost to be variable ,it must be variable with
respect to something. That something is its Activity
Base.
• An Activity Base is a measure of whatever causes

the incurrence of a variable cost.
• An Activity Base is sometimes referred to as Cost

Driver :
the thing that causes the existence of costs.
The Activity Base (Cost Driver)
Units Machine
produced hours
A measure of what
causes the incurrence
of a variable cost
Miles Labor
driven hours
Variable Cost
Your total texting bill is based on how

many texts you send.
Total Texting Bill
Number of Texts Sent

Variable Cost Per Unit
The cost per text sent is constant at

5 cents per text message.
Cost Per Text Sent Number of Texts Sent

Fixed Cost
Your monthly contract fee for your cell phone is fixed
for the number of monthly minutes in your contract.
The monthly contract fee does not change based on
the number of calls you make.
Monthly Cell Phone
Contract Fee
Number of Minutes Used

Within Monthly Plan
Fixed Cost Per Unit
Within the monthly contract allotment, the average fixed cost per
cell phone call made decreases as more calls are made.
Monthly Cell Phone

Contract Fee Number of Minutes Used
Within Monthly Plan
Fixed Costs and the Relevant Range
For example, assume office space is available at a

rental rate of $30,000 per year in increments of
1,000 square feet.
Fixed costs would increase in a step fashion

at a rate of $30,000 for each additional 1,000
square feet.
Fixed Costs and the Relevant Range
90
Thousands of Dollars
The relevant range of

Rent Cost in
Relevant activity for a fixed

60
Range cost is the range of
activity over which
30 the graph of the cost
is flat.
0
0 1,000 2,000 3,000
Rented Area (Square Feet)
Cost Classifications for Predicting Cost Behavior
Behavior of Cost (within the relevant range)

Cost In Total Per Unit
Variable Total variable cost Increase Variable cost per unit

and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level rises and
level within the relevant range. increases as the activity level falls.
Mixed Costs
(also called semivariable costs)
A mixed cost contains both variable and fixed elements.

Consider the example of utility cost.
Y
Total Utility Cost
os t
c
i x ed
al m
Tot
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Mixed Costs
Y
Total Utility Cost
os t
c
i x ed
al m
Tot
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
Example (1)
If your fixed monthly utility charge is $40, your variable

cost is $0.03 per kilowatt hour, and your monthly activity
level is 2,000 kilowatt hours, what is the amount of your
utility bill?
Example (2)
Assume the following hours of maintenance work and the total maintenance costs for six months.
The High-Low Method
The variable cost per

hour of maintenance
is equal to the
change in cost
divided by the
change in hours.
$2,400
= $6.00/hour
400
Total Fixed Cost = Total Cost – Total Variable Cost
Total Fixed Cost = $9,800 – ($6/hour × 850 hours)
Total Fixed Cost = $9,800 – $5,100
Total Fixed Cost = $4,700
The Cost Equation for Maintenance
Y = $4,700 + $6.00X
Example (3)
June July
Example
Activity level in units 10,000 20,000
Variable cost 20,000 ?
Fixed cost 15,000 ?
Mixed cost 10,000 ?
Total cost 45,000 70,000
Assuming that these activity levels are within the relevant range,
the mixed cost for July was:
A.$10,000
B.$35,000
C.$15,000
D.$40,000
• What is the total cost at an activity level of 15,000 units?
A- 60,000
B- 80,500
C- 20,000
D- 57,500
Example (4)
Bakker Corporation has provided the following production and average
cost data for two levels of monthly production volume. The company
produces a single product.
Production volume 4000 units 8000 units
Cost of direct material $360,000 $720,000
Cost of direct labor $80,000 $160,000
Cost of manufacturing overhead $240,000 $360,000
Required 1-what is the total variable manufacturing cost per unit?

2-what will be the total cost of producing 6000 units?
The Traditional and Contribution Formats
Used for
external reporting.
Twichell Inc., a local retailer, has provided the following data for the 1-2
:month of December
1 - The cost of goods sold for December was:

A. $131,000 B. $128,000 C. $134,000 D. $200,000
2 -. The net operating income for December was:

A. $93,000 B. $159,000 C. $90,000 D. $156,000
Example (1): Following are the data for a new product in a
manufacturing company:
• Number of units sold . . . . . . . . . . . . 20,000
• Selling price per unit . . . . . . . . . . . . . $ 42
• Direct Material Cost / Unit $ 18
• Direct Labor Cost / Unit $ 3.6
• Variable Overhead Cost / Unit $ 2.4
• Fixed Overhead Cost (total) $ 120 000
• Variable Selling Expenses / unit $ 1
• Fixed selling costs $ 160 000
Required:
1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.
24

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Managerial Accounting and

Costs Terms, Concepts and Classifications

Cost behavior refers to how a cost will react

• An Activity Base is a measure of whatever causes

• An Activity Base is sometimes referred to as Cost

Your total texting bill is based on how

Number of Texts Sent

The cost per text sent is constant at

Cost Per Text Sent Number of Texts Sent

Number of Minutes Used

Monthly Cell Phone

For example, assume office space is available at a

Fixed costs would increase in a step fashion

The relevant range of

Relevant activity for a fixed

Behavior of Cost (within the relevant range)

Variable Total variable cost Increase Variable cost per unit

A mixed cost contains both variable and fixed elements.

If your fixed monthly utility charge is $40, your variable

The variable cost per

Required 1-what is the total variable manufacturing cost per unit?

1 - The cost of goods sold for December was:

2 -. The net operating income for December was:

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