- Costs can be classified in several different ways
- The total of the direct costs is known as PRIME COSTS
- The indirect costs of a business are also known as OVERHEADS
- Cost that vary with the level of economic activity are known as VARIABLE COSTS
- Cost that do NOT change with the level of economic activity are known as FIXED COSTS
- Total costs may be split into fixed and variable costs, or direct and indirect costs
- Understanding the nature of costs and their behavior in relation to the level of economic activity is central to management decision-making.
- MIXED costs are cost that include a combination of fixed and variable costs.
- The relationship between cost and the level of business activity can be determined by using several statistical techniques.
- Each method generates particular cost behavior relationship
- A scattergraph is used to illustrate the relationship between the costs and outputs
- The cost behavior relationship may be positive, negative or nil