Table 5.1 Variable Cost Behavior for Bikes Unlimited The slope of the line represents the variable cost per unit of $60 (slope = change in variable cost ÷ Unlimited" graphs the relation of total variable costs (y-axis) to units produced (x-axis). Table 5.1 "Variable Cost Behavior for Bikes Unlimited" provides the total and per unit variableĬosts at three different levels of production, and Figure 5.1 "Total Variable Production Costs for Bikes Assume direct materials, direct labor, and all other variable production costs amount Taking it one step further for Bikes Unlimited, let’s consider all variable costs related to To total costs with changes in activity, not to the cost per unit. It is important to note that the term variable refers to what happens ![]() If volume of activity doubles, total variable costs also double, while the costSaylor URL: Variable costs typically change in proportion to changes in If Bikes Unlimited doubles its production to two bikes, total variable cost forĭirect materials also doubles to $80. If Bikes Unlimited produces one bike,total variable cost for direct materialsĪmounts to $40. Other examples include indirect materials and energy costs.Īssume the cost of direct materials (wheels, seats, frames, and so forth) for each bike at Bikes The two most common variable costs are direct materials and direct labor. However, the activity can take many different forms depending on The activity in this example is the number That varies in total with changes in volume of activity. What do we call this type ofĪnswer: This cost behavior pattern is called a variable cost. Question: We know that some costs vary with changes in activity. What are the three cost behavior patterns that help organizations identify which costs willĬhange and which will remain the same with changes in sales volume?Īnswer: The three basic cost behavior patterns are known as variable, fixed, and mixed. Some costs will change with a change in sales volume (e.g., materials for the mountainīikes). SomeĬosts will not change at all with a change in sales volume (e.g., monthly rent for the productionįacility). Understand how costs behave with changes in the number of units sold (sales volume). Question: To predict what will happen to profit in the future at Bikes Unlimited, we must Susan: I’ll meet with them tomorrow and should have some information for you within a few days.ġ. Then we can set up the income statement in a contribution margin format and determine if the numbers are within the relevant range.Įric: Perhaps you and your staff can discuss this and get me some accurate estimates.Saylor URL: What’s the next step to get a reasonable estimate of profit?įirst, we have to identify how costs behave with changes in sales and production-whether the costs are variable, fixed, or some other type. Susan: If sales increase 10 percent, I would expect profit to increase by more than 10 percent since some costs are fixed.Įric: Sounds reasonable. Susan: Where do you think sales are headed?Įric: We expect unit sales to increase 10 percent, perhaps 20 percent if all goes well. ![]() The senior management group asked me to make some projections based onĮxpected changes to our sales next month. ![]() Eric arranged a meeting withĪs you know, we are in the middle of our planning for next month. To obtain some vital financial information for budgeting purposes. Senior management is now planning for next month (August) and has asked Eric, the CFO, Susan Wesley is Bikes Unlimited’s cost accountant. Statement shows total revenue of $500,000 and operating profit of $50,000: Month (June), Bikes Unlimited sold 5,000 mountain bikes for $100 each. Parts from outside suppliers and assembles them into the mountain bikes prior to shipment. Mountain bikes and sells them to retail bicycle stores. How Do Organizations Identify Cost Behavior Patterns?Įric Mendez is the chief financial officer (CFO) of Bikes Unlimited, a company that produces
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