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Cost Defined: Introduction To Cost Accounting, Cost Concepts, Cost Behavior Analysis and Cost Accounting Cycle
Cost Defined: Introduction To Cost Accounting, Cost Concepts, Cost Behavior Analysis and Cost Accounting Cycle
Cost of Sales,
Operating Expenses o Where
DM = Direct Material
DL = Direct Labor
and Losses Period Costs
FOH = Factory Overhead
Cost Behavior
Assumptions
Relevant Range Assumptions units means the maximum capacity or the
Range of activity over which a variable cost maximum number of units the company
remains constant on a per unit basis and a can produce for a certain period. A
fixed cost remains constant in total company desires to produce 20,000units
Managers can review the various ranges of for the next period
activity and the related effects on variable o Obviously, this will be impossible to
costs (per-unit) and fixed cost in (in total) to happen using its present machinery,
determine how a change in the range will facility etc.
affect costs and, thus, the firm’s profitability o Therefore, the company will be
For instance, a company sets the relevant committed to purchase additional
range as 5,000 units to 15,000 units. 5,000 machinery or rent additional facility to
units means the lowest level of activity and produce the additional 5,000 unit. And if
15,000 units is the highest level of activity there is additional machinery, there will
o At this range, the company can expect the be additional depreciation that results to
assumptions for total fixed cost and additional fixed costs. Or if there is
variable cost per unit. Any activity level additional facility to rent, there will also
below or above the relevant range can be additional rent expenses that leads to
changes these assumptions (e.g., total additional fixed cost again
fixed costs or variable costs many Time Assumption
change) The cost behavior patterns identified are true
o To explain further, using the relevant only over a specified period of time
range 5,000 units to 15,000 units, 15,000
Beyond this, the cost may show a different period of time even within the relevant
cost behavior pattern range
Meaning to say for example, prices of direct
materials and wages paid to direct labor are Linearity Assumption
not expected to remain constant over a long
The cost is assumed to manifest a linear
relationship over a relevant range despite its
tendency to show otherwise over the long
run