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Resume Chapter I

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Resume Cost Behavior: Analysis and Use

Type of variable costs: * True variable/ proportionately variable pattern: direct material is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity. Moreover, any amounts purchased but not used can be stored and carried forward to the next period as inventory. * Step variable pattern: is the cost of a resource that is obtained in large chunks and that increases or decreases only in response to fairly wide changes in activity. Moreover, any amounts purchased but not currently used can’t be stored as inventory and carried forward to the next period.

The relevant range is that range of activity within which the assumptions made about cost behavior is reasonably valid.
Except in the case of step variable costs, it’s ordinarily assumed that relationship between cost and volume is a strictly linear. Economist correctly point out that many costs that the accountant classifies as variable actually behave in a curvilinear fashion, that is the relation between cost and activity is a curve. Although many costs are not strictly linear, a curvilinear cost can be satisfactorily approximated with a straight line within a narrow band of activity (relevant range).

The dashed line approximates the curvilinear cost with very little loss of accuracy within the shaded relevant range. However, outside of the relevant range this particular straight line is poor approximation to the curvilinear cost relationship. Manager should always keep in mind that assumptions made about cost behavior may be invalid if activity falls outside of the relevant range. 2. Fixed Costs
Total Fixed costs remain constant within the relevant range of activity. The average fixed cost per unit is progressively smaller as the level of activity increases.

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