Cost Behaviors:Define Variable, Fixed And Mixed Cost

July 18th, 2006 Comments off
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In cost accounting, we need to understand cost behaviors of :-

VARIABLE COSTS:

Those cost that change in total in direct proportion to CHANGES IN LEVEL OF ACTIVITY. An increase/(decrease) in activity brings proportional increase/(decrease) in total variable costs.

Examples like direct material costs and direct labour costs which increase in proportionate to the increase in the number of units manufactured.

Salient point :

In total absolute costs, TOTAL variable costs changes in proportionate to the changes in the level of activity BUT PER UNIT variable costs remain CONSTANT across a REASONABLE range of activity.

FIXED COSTS:

Those cost that DOES NOT change regardless of changes in activity level.

Examples like depreciation and rental remain fixed irrespective of the level of activity.

Salient point:

Those cost that DOES NOT change regardless of changes in activity level namely costs are constant hence the FIXED COST PER UNIT will VARY at different level of activity.

Example:

The more units the business produce the fixed cost per unit will decrease. Vice versa, if fewer units are produced, fixed cost per unit will increase.

Hence, cost per unit depends on the number of outputs or the level of activity.

FIXED COSTS CAN BE DISCRETIONARY OR COMMITTED:

Those fixed costs, where management have control and can change are known as DISCRETIONARY Fixed Costs And

Those fixed costs, management cannot control and must be incurred are known as COMMITTED Fixed Costs.

MIXED COSTS:

Includes both fixed and variable costs elements. To a certain extent, a cost can be semi fixed and variable. Take for example repair,maintenance and electricity which in a way varies with the level of activity whilst the other part does not.

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Financial Accounting

 
 

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