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Determine how variable costs change as activity measures change. How can this information be...

Question:

Determine how variable costs change as activity measures change. How can this information be applied?

Cost Behavior:

Costs behave in one of three ways; fixed, variable, and mixed. Understanding each calculation can assist in classification and reporting in the general ledger.

Answer and Explanation:

Variable costs are defined as the costs that remain the same per unit but change in total dollars with changes in volume. Examples of these costs are direct materials, direct labor, and variable overhead. Increases in sales volume will result in an increase in total variable costs while decreases in sales volume will result in a decrease in total variable costs. Overhead costs are normally applied by a cost driver such as direct labor or machine hours as determined at the beginning of the period. Any increase or decrease in actual overhead costs incurred as compared to applied overhead will be recognized as an adjustment to cost of sales. As material or labor costs increase due to market conditions, per-unit variable costs would change and be reassessed. Information on variable costs can be applied to cost-volume-profit analysis to assist a company in determining profit changes based on variations in cost and sales volume.


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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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