Syllabus A. Management Information A3. Cost Classification

A3g. Types of cost behaviour 6 / 9

Syllabus A3g)

Describe and illustrate, graphically, different types of cost behaviour.

Types of Cost Behaviour

Costs can be classified according to the way that they behave within different levels of activity. 

Cost behaviour tends to classify costs as:

  • Variable cost

  • Fixed cost

  • Stepped fixed cost

  • Semi-variable cost

Variable Cost

A variable cost varies directly with output. (The more you make the more the cost - IN TOTAL)

However, the variable cost PER UNIT remains constant.

Direct costs are variable costs (Eg Raw materials, Labour and direct Overheads)

Graph 1: Total variable costs

Variable costs in total change in direct proportion to the level of activity.

ACCA F2 MA A3g Study Material: Graph - Total variable costs

Graph 2: Variable cost per unit

The cost per unit of variable costs remains constant.

ACCA F2 MA A3g Study Material: Variable cost per unit graph

Fixed Costs

A Fixed cost (within certain activity levels) remains constant (In total)

However that also means the more the output - the Fixed Cost PER UNIT will fall

Eg Salaries, Rent,  Straight line depreciation

Graph 3: Total Fixed Costs

Total fixed costs remain constant over a given level of activity.

ACCA F2 MA A3g Study Material Total Fixed Costs graph

Graph 4: Fixed Cost per unit

The fixed cost per unit falls as the level of activity increases but never reaches zero.

ACCA F2 MA A3g Study Material Fixed cost per unit graph

Stepped Fixed Costs

A stepped fixed cost is only fixed within certain levels of activity.

The depreciation of a machine may be fixed if production remains below 1,000 units per month. If production exceeds 1,000 units, a second machine may be required, and the cost of depreciation (on two machines) would go up a step.

Other stepped fixed costs include rent of warehouse (more space required if activity increases) and supervisors’ wages (more supervisors required if number of employees increase).

Graph 5: Stepped Fixed Costs

Fixed costs increase in steps as activity level increases beyond a certain limit.

ACCA F2 MA A3g Study Material Stepped fixed cost graph

Semi-variable Costs (semi-fixed/mixed)

Semi-variable costs contain both fixed and variable components and are therefore partly affected by changes in the level of activity.

Examples of semi-variable costs includes

  • Electricity and gas bills

    Fixed cost = standing charge                                                 
    Variable cost = electricity / gas used

  • Salesman's salary

    Fixed cost = basic salary                                          
    Variable cost = commission on sales made

  • Costs of running a car

    Fixed cost = road tax, insurance                                                 
    Variable costs = petrol, oil, repairs

Graph 6: Total semi-variable costs

ACCA F2 MA A3g Study Material Total semi-variable costs graph

Graph 7: Semi-variable costs per unit

ACCA F2 MA A3g Study Material Semi-variable costs per unit graph

Graph 8: Other cost behaviour patterns

This graph represents a cost which is variable with output, subject to a minimum (fixed) charge.

ACCA F2 MA A3g Study Material Other cost behaviour patterns graph