Cost Behavior

Cost Behavior

 

Cost behavior is defined as the way total cost behaves, or changes, when some measure of activity changes.  Activities that cause total cost to change are referred to as cost drivers.  Some of the most common activity measures include the number of direct labor hours, machine hours, units produced, and customers served.  There are all volume based cost drivers.  Other factors that drive cost, such as number of setups, orders, and shipments, are examples of nonvolume-based cost drivers.

 

  • ·        Cost Behavior Patterns

 

  • o       Relevant Range – When we analyze costs based on behavior, we must limit the range of analysis tot the relevant range, or the range of activity over which we expect our assumptions about cost behavior to hold true.  We analyzing cost behavior, it is important to limit the analysis to the relevant range and be aware that our conclusions may not be valid outside that range of activity.
  • o       Variable Costs – Variable costs are those that change in total in direct proportion to changes in activity.  Variable costs per unit remain constant.
  • o       Fixed Costs – Fixed costs remain the same in total regardless of activity level.  On a per unit basis, fixed costs decrease with increase in activity levels.  The idea that unit fixed costs decrease with increased activity levels is an important concept.
  • o       Step Costs – Step costs are fixed over a range of activity and then increase in a step like fashion when a capacity limit is reached.  Depending on the width of the steps, step costs may be treated as either step-variable or step-fixed costs.  Step-variable costs tend to be fixed over a narrow range of activity and rise in multiple steps across the relevant range.  Step fixed costs are fixed a much wider range of activity than step variable costs.
  • o       Mixed Costs – Mixed costs, also known as semivariable costs, have both fixed and variable components.  The fixed portion represents the base amount that will be incurred regardless of activity.  The variable cost is the amount that is based on activity or usage.  Most cost and design issues we will look at contain this mixed cost feature.