What is cost behavior?

Answer 1

Cost behaviour is the relationship between an activity and its cost. There are several different types of cost behaviours as I will demonstrate:

• Variable Cost:Costs that changes in total according to the activity level but have a fixed per unit cost. An example of this is raw material: if you are a shoe producing company, for each shoe produced, you will need one lace, so the cost of the last is variable depending on the amount of shoes product. The cost of the lace itself is fixed, but the total cost of production is variable.
• Fixed Cost: Costs that remains unchanged, regardless of the level of activity. An example of this is depreciation on buildings: regardless of how much production happening within the business, the amount of depreciation does not change. The per-unit depreciation cost decline with each additional unit produced, but the total cost of depreciation does not change.
• Step variable cost:Costs that are generally variable, but are fixed for a small range - items that are incrementally purchased and consumed. An example of this is a part time worker in a restaurant, when activity exceeds a certain range, another waitress needs to be scheduled, but a marginal increase in customers does not require another waitress. That is, an additional waitress can service another range of customers before another waitress needs to be scheduled.
• Step fixed cost:Costs that are fixed over a wide range but changes after a certain range. An example of this is the cost of indirect labour: a full time manager can oversee the factory for a certain range of activity before s/he can no longer handle it and thus a new full time manager or assistant manager needs to be hired to help. These managers are paid a salary thus the amount they are paid are fixed in that sense.
• Mixed cost: Some costs exhibit characteristics of both fixed and variable. An example of this is your phone bill. Each month you pay a fixed amount, but when you make a long distance phone call for example (assuming that it is not included in your monthly service), you will pay a charge per minute which is a variable cost.