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:
Stepped fixed 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.
Graph 2: Variable cost per unit
The cost per unit of variable costs remains constant.
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.
Graph 4: Fixed Cost per unit
The fixed cost per unit falls as the level of activity increases but never reaches zero.
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.
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
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
Graph 7: Semi-variable costs per unit
Graph 8: Other cost behaviour patterns
This graph represents a cost which is variable with output, subject to a minimum (fixed) charge.