Question

Acc105

Chapter 11 - Cost Behavior ( discussion board):

Please provide your thoughts on this simple example of cost behavior and then add an example of your own.

What do you typically pay for a large pizza? (There is no right or wrong price - just pick a reasonable price)
What would be the cost per student if two students buy that pizza?
What if four students buy a large pizza?
What does this illustrate about why average fixed costs change on a per unit basis?

Let's add the fact that a beverage costs $1 and each student eating the pizza has one beverage. So, if two people were eating the pizza, the total beverage bill would come to $2; if four people, $4. The cost per beverage remains the same, but the total cost depends on the number of people ordering a beverage.
What does this tell us about how total variable costs vary per units (or in this case students)?

Please provide another basic example of cost behavior (related to fixed or variable).

Answer 1

Solution:-

What do you typically pay for a large pizza? (There is no right or wrong price - just pick a reasonable price):-

$16.00

What would be the cost per student if two students buy that pizza:-

$8.00

What if four students buy a large pizza:-

$4.00

What does this illustrate about why average fixed costs change on a per unit basis:-

Fixed costs do not vary with the production level. Total fixed costs remain the same, within the relevant range. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.

What does this tell us about how total variable costs vary per units (or in this case students):-

Variable costs are costs which are directly related to the changes in the quantity of output; therefore, variable costs increase when production grows, and decline when production contracts. Common examples of variable costs in a firm are raw materials, wages, utilities, sales commissions, production taxes, and direct labor, among others. The variable cost does not always change at the same rate that labor does.

Instead, sometimes it fluctuates more rapidly, often it fluctuates at a lower rate, and sometimes it fluctuates at the same rate to labor. The total variable cost increases and decreases based on the activity level, but the variable cost per unit remains constant with respect to the activity level.

Please provide another basic example of cost behavior (related to fixed or variable):-

The way a specific cost reacts to changes in activity levels is called cost behavior. Costs may stay the same or may change proportionately in response to a change in activity. Knowing how a cost reacts to a change in the level of activity makes it easier to create a budget, prepare a forecast, determine how much profit a new product will generate, and determine which of two alternatives should be selected.

Fixed costs

Fixed costs are those that stay the same in total regardless of the number of units produced or sold. Although total fixed costs are the same, fixed costs per unit changes as fewer or more units are produced. Straight‐line depreciation is an example of a fixed cost. It does not matter whether the machine is used to produce 1,000 units or 10,000,000 units in a month, the depreciation expense is the same because it is based on the number of years the machine will be in service.

Variable costs

Variable costs are the costs that change in total each time an additional unit is produced or sold. With a variable cost, the per unit cost stays the same, but the more units produced or sold, the higher the total cost. Direct materials is a variable cost. If it takes one yard of fabric at a cost of $5 per yard to make one chair, the total materials cost for one chair is $5. The total cost for 10 chairs is $50 (10 chairs × $5 per chair) and the total cost for 100 chairs is $500 (100 chairs × $5 per chair).