Cost_Behavior_Paper

Cost Behavior Paper Accounting /561 Your Name April 25, 2011 Linda Moore The purpose of this paper is to help management on all levels, understand current budget decisions. All managers on all levels should have a clear knowledge of basic accounting. They must understand the terms the accountants use such as cost drivers, fixed costs and variable cost. To understand what cost drivers are the reader must first understand what the term cost means. Cost is an amount to be paid or a requirement for a payment to purchase a product or a service. When a change in cost occurs over a period, this is called a cost driver. Cost drivers gives the manager an idea of what a company needs to purchase to make sure the production continues smoothly. A manager would know the amount of material needed is driven by the amount that’s produced. In other words, to determine the cost driver and material cost, we must know how much is produced. We must also know how long the equipment is existing, how much it will cost to maintain the equipment, and how much will it cost to maintain employees on the job. To be successful in planning for the company, a manager must understand how cost will flourish under certain circumstances. A manager must understand the decision making process and how it behaves in certain situations. Managers can prepare their budgets, predict cash flow plan dividend payments, and establish selling prices when using cost behavior information. From the cost behavior standpoint, there are several common cost types. The two that will be focus on in this paper are fixed and variable costs. Fixed costs are the costs of the investment goods used by the firm ( investpedia). These costs are unmovable and do not vary with activity for an accounting period. They must be paid each month or year without exception. These costs are the expenses that do not change depending on production or sales levels. These cost would be the mortgage, insurance, etc. These costs will not change, regardless of how good or bad the business is doing. A manager or business owner must first perform research and write out a preliminary budget to have some sort of idea of how much to spend to receive. This will keep the business running while maintaining a profit. This business leader must make a list of fixed costs and the variable costs. Included in this fixed cost list would be all the things listed above as well as other expense that must be paid each month without exception. Variable Cost is the amount charged for the work produced, materials charges that change according to the change in the volume of production units. The total cost is determined when you combine fixed cost and variable cost ( invest words). The total fixed cost remains the same although the total variable cost changes as production increases or decreases. An example of variable cost would be the fuel we put in our cars each day. This cost changes with the number of times we get in and go somewhere. We may normally spend about $80.00 per week if we keep our normal routine but if we drive and additional 200 miles that week than the price changes depending on how long the trips are and how many we make. There is also the term Break even analysis or breakeven point. This is the point when what is spent and what is sold breaks even. There is no gain or loss in this scenario. There’s no money earn and no money loss. An example of this is, when a company has 20 items to sell, if it sells 20 it make a profit, if it sells less than 20 it takes a loss. If it sells exactly 20 it breaks even ( Wikipedidia). Accountants use the manufacturing cost method to understand the value of input and output in production. Corporate managers can monitor the accounting system with conformity to fact. The cost per unit of production and other key performance indicators are measured to exactness. Managers cannot make accurate decisions without gathered information on how much is produced, the cost, what it would cost to compete, and investment into the future. This vital information is needed to produce accurate accounting. When comparing the different methods of measuring cost functions. Different methods are used to make or process the total expense. These different methods help to determine the fixed costs, variable costs, and the level of output per unit ( referenceforbusiness.com). These methods include account analysis, the engineering approach, the high-low approach, and linear regression analysis. In all these methods, they determine one thing, the central issue on how total costs change in relation to changes in output ( King, 2008). All costs are categorized as either fixed or variable when doing a account analysis. Some expenses can be semi variable costs. A light and gas bill is considered a semi variable cost. This is because it contains both variable and fixed cost in it. The cost that determines the accuracy depends in large part on the proportion of cost not strictly fixed or variable. For many manufacturing firms, account analysis provides a sufficiently accurate estimation of total costs over a range of output levels. References Drexel University. (June 9, 2007). Difference between variable and fixed costs. Retrieved April 12, 2008, from: //William king.www.drexel.edu/top/prin/txt/cost/cost2.html http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Costing-Methods-Manufacturing.html http://www.investopedia.com/terms/f/fixedcost.asp http://www.investorwords.com/5221/variable_cost.html http://www.referenceforbusiness.com/encyclopedia/Cos-Des/Costing-Methods-Manufacturing.html http://en.wikipedia.org/wiki/Break-even_%28economics%29 Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to management accounting (14th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.