Chapter 4
Cost Behavior
and Relevant
Costs
1
Introduction
What is the nature of costs and how are
they used in decision making?
Do they increase or decrease as
production volume changes?
Do they remain stable?
2
Introduction
The concept of predictable cost behavior
based on volume is very important to the
effective use of accounting information for
managerial decision making.
As production volume changes, costs may
•Increase
•Decrease
•Remain the same
3
The Behavior of Fixed Costs
Fixed costs remain the same in total, but may vary per unit
when production volume changes.
Examples: Rent, Depreciation, Salary of a Plant Manager,
Insurance, Property Taxes
$
Total Fixed Costs
$
Fixed Cost Per Unit
4
10
2
1.33
25
50
Volume
75
25
50
Volume
75
4
The Behavior of Variable Costs
Variable costs vary in direct proportion to changes in
production volume, but are fixed when expressed as per-unit
amounts.
Examples: Direct material, direct labor, and other unit-level
costs like factory supplies
$
Total Variable Costs
$
Variable Cost Per Unit
150
100
20
50
25
50
Volume
75
25
50
Volume
75
5
Relevant Range
Within the relevant range, fixed costs
are constant in total and vary per unit,
and variable costs vary in total and are
constant per unit.
6
Step Costs
Step Costs remain constant within a relevant
range of production.
Example: Janitorial services within a company
that manufactures desks
0-7,500 desks
7,501-15,000 desks
1 Janitor
2 Janitors
$25,000
$50,000
7
Mixed Costs
Fixed and Variable Components of Delivery
Van Expense
Fixed: lease payment each month
Variable: Gas, oil, maintenance costs, etc.,
that vary with the number of deliveries
made (and miles driven)
8
Relevant Costs and Cost Behavior
It can be misleading to always
view variable costs as relevant
and fixed costs as not relevant.
9
Taxes and Decision Making
Managers must consider
the impact of taxes when
making decisions.
10