A&MIS 212
Session 10
January 17, 2002
William F. Bentz
A&MIS 525
W. F. Bentz
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Key Issues Cost Behavior




Terminology
Understanding the concepts
Total versus units costs
Computing the fixed and variable
components of a semi-variable cost
 Points of potential confusion
A&MIS 525
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Cost Drivers
There are seven primary cost drivers
at the macro level. The one
considered most often in accounting
is the time-rate of activity. Think of
this as the volume of activity
experienced during a time period.
The driver volume is considered next.
A&MIS 525
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Cost Drivers - Volume
The issue is: How should we expect costs
to behave (vary) with respect to changes
in the time-rate of activity all else being
equal. In traditional accounting terms:
“How do costs behave with respect to
changes in volume?” First, we consider
the effects of volume changes on total
costs.
A&MIS 525
W. F. Bentz
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Total variable cost
Total
cost
Slope is the
rate of change
Activity Volume
A&MIS 525
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Total variable cost
Variable costs are those costs that vary in
direct proportion to changes in activity
volume. Such costs are normally represented by a simple affine linear
equation, Y = vX, where Y represents the
total variable cost, v represents the
variable cost per unit of activity and X
represents the volume of activity during a
period.
A&MIS 525
W. F. Bentz
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Total step-variable cost
Step-variable costs are those costs that
vary in small increments with respect to
changes in activity volume. Such costs
are also normally represented by a simple
affine linear equation, Y = vX, where Y
represents the total variable cost, v
represents the variable cost per unit of
activity and X represents the volume of
activity during a period.
A&MIS 525
W. F. Bentz
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Total step-variable cost
However, at a micro level, the increments
may be relatively large and a local manager
might treat the cost like a semi-fixed cost (
slide 28). It is a matter of perspective and
required level of precision. Manager’s
salaries effectively are variable from
McDonald’s corporate perspective, but not
from the perspective of a local franchisee
with two restaurants.
A&MIS 525
W. F. Bentz
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Total fixed cost
Total
cost
Activity Volume
A&MIS 525
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Total fixed cost
Fixed costs are those costs that do not vary
in total with respect to modest changes in
activity volume. Such costs are represented
by Y = F, where Y represents total cost, and
F represents total fixed cost. Fixed costs do
change over time, due to price changes and
as a result of decisions, but they are
relatively constant with respect to changes
in activity volume, all else being equal.
A&MIS 525
W. F. Bentz
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Total mixed cost
Total
cost
Total cost curve
Activity Volume
A&MIS 525
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Total mixed cost
Total
cost
Total cost curve
Variable component
Fixed component
Activity Volume
A&MIS 525
W. F. Bentz
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Total mixed cost
Semivariable or mixed costs are those
costs that contain both a fixed and a
variable component. Such costs are
normally represented by a simple linear
equation of the form Y = F + vX, where Y
represents total cost, F represents total
fixed cost, and v represents the variable
cost per unit of activity, and X is the
volume of activity during a period.
A&MIS 525
W. F. Bentz
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Total semi-fixed cost
Total
cost
Total cost curve
Activity Volume
A&MIS 525
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Total cost (microeconomics)
Total
cost
Total cost curve
Relevant
range
Activity Volume
A&MIS 525
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Average cost (microeconomics)
Average
Unit
Cost
Relevant
range
Total cost curve
Volume
A&MIS 525
W. F. Bentz
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OSU Bumper Sticker
I am not lost, I am exploring
A&MIS 525
W. F. Bentz
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Assumptions for 212 Purposes
 Assume direct labor is a variable
cost unless you are given
information to the contrary.
 Assume total fixed cost does not
change unless you are given
information to the contrary.
A&MIS 525
W. F. Bentz
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Assumptions for 212 Purposes
 In the absence of information to the
contrary, expect Selling and
Administrative Expense and
Manufacturing Overhead to include
both fixed and variable components.
A&MIS 525
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A&MIS 525
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