Chapter 3: Cost behaviour, analysis & use

What is variable cost by unit and in total?

• Unit variable cost is fixed! (within the relevant range)

• Total variable cost changes based on activity level

What is fixed cost by unit and in total?

• Unit average fixed cost changes with activity (goes down with higher activity due to more spread out)

• Total fixed cost is the same with activity changes

What are cost drivers (activity base)?

A measure of what causes variable costs

• units produced

• units sold

• machine hours

• kilometers driven

How do variable costs differ across organizations?

• Public utility → company reliant on machines have high fixed costs (depreciation)

• Service company → more reliant on labour (higher variable costs)

• Merchandising company → have a mix but high variable costs

• Manufacturing company → many variable costs (direct materials)

What are step variable 

When changes in cost doesn’t move 100% with changes in activity

• ex. netflix covers a family of max 5, want one more member, need to buy a whole new subscription

What is the curvilinear cost function?

The straight line represents the constant unit variable cost

→ doesn’t start at 0 due to fixed cost component

What are the 2 types of fixed costs?

1. Committed fixed costs → cannot be changed within a short-term period

2. Discretionary fixed costs → can influence/altere the fixed cost within a short-term period

What method do you use to find the equation of the total level of activity and total cost?

High-Low method → pick the highest and lowest activity and use the corresponding costs
y = a + bx

• change in cost / change in activity to find b, sub in a point (y = total cost, x = activity)

What’s the difference between a traditional and contribution income statement?