28 Dec 1. A variable cost is one that varies
1. A variable cost is one that varies in proportion to a business activity.
2. With a variable cost, as the level of activity decreases, the total cost remains the same.
3. A fixed cost is a cost that does not change with the activity level.
4. With a fixed cost, the cost per unit varies proportionately with changes in the level of activity.
5. Discretionary fixed costs are fixed costs that cannot be changed over the short run.
6. An example of a committed fixed cost is when a company signs a 10-year lease on an office building.
7. A committed fixed cost is one that cannot be changed over the short run.
8. Companies should reduce fixed costs whenever possible during times of falling profits.
9. Step costs are fixed over only a small range of activity.
10. All costs are either fixed or variable. That is, a cost cannot have a fixed and a variable component.
11. Since a mixed cost has both a fixed and a variable component, both the total cost and the unit cost will vary with changes in the level of activity.
12. An example of a step cost is the natural gas bill you receive for heating your apartment.
13. Once you know how a particular cost behaves, estimating the total cost is relatively simple.
14. Three methods used for estimating the fixed and variable portions of a cost include: cost-cover graphs, the high-low method and regression analysis.
15. A scattergraph is simply a graph that shows total costs in relation to volume, or activity level.
16. The high-low method of estimating the fixed and variable components of a mixed cost is a precise approach that uses a statistical technique.
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