Cost Accounting (15th Edition)

Published by Prentice Hall
ISBN 10: 0133428702
ISBN 13: 978-0-13342-870-4

Chapter 10 - Determining How Costs Behave - Assignment Material - Questions - Page 407: 10-2

Answer

Three alternative linear cost functions are Variable Cost Function: This is when total costs change in a consistent way with changes in the level of activity. For example, if you're making more units, your total costs go up proportionally. Fixed Cost Function: In this case, total costs remain constant regardless of changes in activity. For instance, your rent stays the same whether you produce a few items or many. Mixed Cost Function: This cost function combines both variable and fixed elements. Total costs do change, but not at the same rate as the level of activity. It's like having some costs that increase with production and some that stay the same.

Work Step by Step

Variable Cost Function: This is when total costs change in a consistent way with changes in the level of activity. For example, if you're making more units, your total costs go up proportionally. Fixed Cost Function: In this case, total costs remain constant regardless of changes in activity. For instance, your rent stays the same whether you produce a few items or many. Mixed Cost Function: This cost function combines both variable and fixed elements. Total costs do change, but not at the same rate as the level of activity. It's like having some costs that increase with production and some that stay the same.
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