Chapter 18 Cost Behavior and Cast-Volume-Profit Ananysis| VARIABLE COSTS When the level of activity is meastired in units produced, direct materials and direct labor costs are generally classified as variable costs. Variable costs are costs that vary in proportion to changes in the level of activity. For example, assume that J produces stereo sound systems under the brand name of J-Sound stereo systems are purchased from outside suppliers for $10 per unit and are assem- bled in Jason Inc.'s Waterloo plant. The direct materials costs for Model JS-I2 for the relevant range of 5,000 to 30,000 units of production are shown below We parts for the Number of Units of irect Materials Total Direct. Model 45-12 Produced Materials Cost 5,000 units $50,000 10,000 100,000 15,000 150,000 20,000 200,000 25,000 250,000 30,000 300,000 Variable costs are the same per unit, while the total variable cost changes in pro- Portion to changes in the activity base. For Model JS-12, for example, the direct mate- Fials cost for 10,000 units ($100,000) is twice the direct materials cost for 5,000 units ($50,000). The total direct materials cost varies in proportion to the number of units produced because the direct materials cost per unit ($10) is the same for all levels of Production. Thus, producing 20,000 additional units of JS-12 will increase the direct materials cost by $200,000 (20,000 x $10), producing, 25,000 additional units will in- crease the materials cost by $250,000, and $0 on. Exhibit | illustrates how the variable costs for direct materials for Model | behave in total and on a per-unit basis as production changes, Clea Variable Cost Graphs Total Variable Cost Graph $200009 —— $250.00 i Unit Variable Cost Graph $200.00 | —_—______», i 3 5 : sssac0 Bs ~ : > z° | | s é a | Init_Variable Cost 5 100,000 + zs. Unit Variable Cost 2 5 $0,000 Zs wo 1 ae L A ° 73000000 —aco 19.000 20,000 2a000 ‘Total Units (Model JS-12) Produced Total Units (Model JS-12) Produced