Managerial Accounting For Dummies

Chapter 5

Teaching Costs to Behave: Variable and Fixed Costs

In This Chapter

Looking at fixed and variable costs in terms of cost drivers

Breaking down mixed costs into variable and fixed components

Keeping within your relevant range

Training your dog involves teaching him to react to different stimuli. When you say “Sit!”, the little guy sits on his hind legs. When you hold your hand up in the air, he tries to stand on his hind legs. When you whisper “Quiet,” he stops barking. Unfortunately, dogs have trouble learning certain things. No matter how hard you try to train the dog, he’ll always sit and watch you eat, waiting for delicious human food to fall on the floor.

Like pet dogs, costs react to some stimuli but not to others. For example, manufacturing twice as many goods will most likely double your costs, but no matter how many goods your factory produces, rent will remain the same. In this chapter, I explain how to tell the difference between variable costs, which change in response to the number of goods you make, and fixed costs, which remain the same. These distinctions help you predict how costs react to different stimuli within your business.

Predicting How Costs Behave ...