Types of Costs by Behavior

Cost behavior refers to the way different types of production costs change when there is a change in level of production.

There are three main types of costs according to their behavior:

Fixed Costs:

Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc.

Fixed cost per unit decreases with increase in production. Following example explains this fact:

Total Fixed Cost$30,000$30,000$30,000
÷ Units Produced5,00010,00015,000
Fixed Cost per Unit$6.00$3.00$2.00
Total and Per Unit Fixed Cost Behavior Graph

Variable Costs:

Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Although variable in total, these costs are constant per unit. For example

Total Variable Cost$10,000$20,000$30,000
÷ Units Produced5,00010,00015,000
Variable Cost per Unit$2.00$2.00$2.00
Total and Per Unit Variable Cost Behavior Graph

Mixed Costs:

Mixed costs or semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another example of mixed cost is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.

Since mixed cost figures are not useful in their raw form, therefore they are split into their fixed and variable components by using cost behavior analysis techniques such as High-Low Method, Scatter Diagram Method and Regression Analysis.

Written by Irfanullah Jan