Cost Accounting (14th Edition)

contracts, and the labs that provide technical support, training, and
product demonstrations.
Based on the initial success of the value recovery team, in 2005,
Cisco designated its recycling group as a company business unit, set
clear objectives for it, and assigned the group its own income
statement. As a result, the reuse of equipment rose from 5% in 2004
to 45% in 2008, and Cisco’s recycling costs fell by 40%. The unit has
become a profit center that contributed $153 million to Cisco’s
bottom line in 2008.
With product returns reducing corporate profitability by an
average of about 4% a year, companies like Cisco can leverage
management accountants’ insight to reduce the cost of these
returns while decreasing its environmental footprint. Not only can this
turn a cost center into a profitable business, but sustainability efforts
like these signals that the company is concerned about
preventing environmental damage by reducing waste.
As the Cisco example illustrates, managers must
understand how costs behave to make strategic and
operating decisions that have a positive environmental
impact. Consider several other examples. Managers at
FedEx decided to replace old planes with new Boeing 757s
that reduced fuel consumption by 36%, while increasing capacity by
20%. At Clorox, managers decided to create a new line of nonsynthetic
cleaning products that were better for the environment and
helped create a new category of ‘green’ cleaning products worth
about $200 million annually.
In each situation, knowledge of cost behavior was needed to answer
key questions. This chapter will focus on how managers determine costbehavior
patterns—that is, how costs change in relation to changes in
activity levels, in the quantity of products produced, and so on.
Basic Assumptions and Examples of Cost
Functions
Managers are able to understand cost behavior through cost functions. A cost function
is a mathematical description of how a cost changes with changes in the level of an
activity relating to that cost. Cost functions can be plotted on a graph by measuring
the level of an activity, such as number of batches produced or number of machinehours
used, on the horizontal axis (called the x-axis) and the amount of total costs corresponding
to—or, preferably, dependent on—the levels of that activity on the vertical
axis (called the y-axis).
Learning
Objective 1
Describe linear cost
functions
. . . graph of cost
function is a straight line
and three common ways
in which they behave
. . . variable, fixed,
and mixed