Practice As You Learn
Cost Behavior - Fixed and Variable

Cost behavior revolves around the following rules (YOU MUST KNOW THIS):

1) Fixed costs do not change in total as volume/activity changes, within a relevant range (which is really a range used for planning)

2) Fixed cost per unit does change with changes in volume activity.
(constant fixed costs divided by changing activity = a cost per unit that changes)

3) Variable costs do change in total as volume/activity changes
(the same cost per unit x a changing volume = changing total cost)

4) Variable cost per unit does not change with changes in volume/activity.

A variable cost is something that is used/cost incurred each time that you do something, like make a product, or sell a product. The cost every time you do it does not change, but as you do more/less the total cost is more/less.

Important: When you are determining if a cost is fixed or variable ask yourself
the following question:

Will it cost me more if I make or sell one more product?

If yes – it is a variable cost – you pay every time you do one more
If no - it is a fixed cost - you pay a set amount regardless of volume

Other cost definitions – simplified:

Relevant Range - The range of activity that fixed costs won’t change
Sunk Cost – I can’t get my money back no matter what
Opportunity Cost – I won’t get the benefit of this because I chose to do
    something else
Discretionary Cost - Management can decide not to spend for this
Committed Cost - Management can’t decide not to spend for this
without a big change in goals and strategy

Learn As You Practice – Problem 1.

You must be able to determine how a cost behaves.

Juffy, Inc. manufactures peanut butter and incurs costs for the following items.
Decide if the cost is a fixed cost (F), a variable cost (V), or a mixed cost (M).

_____1. Plastic jar
_____2. Cell phone for sales people
_____3. Corn syrup, an ingredient
_____4. Worker who operates the cooking machine
_____5. Peanuts, an ingredient
_____6. Utilities at the manufacturing plant
_____7. Insurance on the manufacturing plant
_____8. Janitors working at corporate headquarters
_____9. Telephone at corporate headquarters
____10. Supervisor at the manufacturing plant
____11. Worker who puts the peanuts in the machine
____12. Worker who fills the jars with peanut butter
____13. Depreciation on the machine that cooks the peanut butter
____14. Plant manager
____15. Quality inspectors of the product
____16. Salesmen travel expenses
____17. Oil and parts for the manufacturing machines
____18. Lids for the jars
____19. Shipping to customers
____20. Advertising the peanut butter
____21. Rent at the corporate headquarters


Learn As You Practice – Problem 2.

Charlie’s Burgers sells hamburgers, fries, and drinks to the lunch crowd. In the normal course of business, costs are incurred for the following items. Determine if the costs are fixed (F), variable (V) or mixed (M). Write 1. through 15. on your paper and write the type of cost by the number.

1. Meat
2. Cashier’s wages
3. Cleaning crew wages
4. Depreciation on cooking equipment
5. Paper supplies, napkins, bags, straws
6. Rent
7. Advertisement run every Friday
8. Cook’s wages
9. Utilities
10. Depreciation on the freezer
11. Cleaning supplies, soap, etc.
12. Lettuce, ketchup, mustard, pickles, etc.
13. Buns
14. Bacon for bacon cheeseburgers
15. General liability insurance

After you have classified the costs as fixed, variable, or mixed, determine which fixed costs are discretionary and which ones are committed. Determine if there are any sunk costs.

Variable costs are neither discretionary, committed, or sunk since you incur them
every time you do something one more time.