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Chapter 4Cost Behaviour

Ibrahim Sameer (MBA - Specialized in Finance,B.Com Specialized in Accounting & Marketing)

www.ibrahimsameer.wordpress.com

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Introduction to Cost Behaviour

Cost behaviour is the way in which costs are

affected by changes in the volume of output.

The basic principle of cost behaviour is that as thelevel of activity rises, costs will usually rise. It

will cost more to produce 2,000 unit of output than

it will cost to produce 1,000 units.

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Cost Behaviour Pattern

Fixed cost

A fixed cost is a cost which tends to be unaffected

by increases or decreases in the volume of output.

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Cost Behaviour Pattern

Examples of fixed cost include:

The salary of the MD (per month or per annum)

The rent of a single factory building (per month or

per annum)

Straight line depreciation of a single machine

(per month or per annum)

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Cost Behaviour Pattern

Step cost

A step cost is a cost which is fixed in nature but

only within certain level of activity.

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Cost Behaviour Pattern

Examples of step cost include:

Basic pay of employees is nowadays usually

fixed, but as output rises, more employees arerequired.

Royalties

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Cost Behaviour Pattern

Variable cost

A variable cost is a cost which tends to vary

directly with the volume of output. The variablecost per unit is the same amount for each unit

produced.

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Cost Behaviour Pattern

Non linear or curvilinear Variable cost

If the relationship between total variable cost and

volume of output can be shown as a curved lineon a graph, the relationship is said to be

curvilinear.

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Cost Behaviour Pattern

Semi Variable cost

A semi-variable/semi-fixed/mixed cost is a cost

which contains both fixed and variablecomponents and so is partly affected by changes

in the level of activity.

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Cost Behaviour Pattern

Examples of these costs include the following:

Electricity and gas bill

FC = standing charges

VC = charge per unit of electricity used

Cost of running car

FC = road tax, insurance

VC = petrol, oil, repair

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Cost Behaviour Pattern

Cost behaviour and cost per unit

The following tables relates to different level of

production of the zed. The variable cost ofproducing a zed is $5. Fixed costs are $5,000.

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Cost Behaviour Pattern

What happen when activity level rise can be

summarised as follows:

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Cost Behaviour Pattern

The variable cost per unit remain constant.

The fixed cost per unit falls

The total cost per unit falls

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Determining the fixed & variable

elements of semi-variable cost

The fixed & variable elements of semi variable

cost can be determined by the high low method.

Steps in high low method are as follows:

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Determining the fixed & variable

elements of semi-variable cost

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Linear Equation

A linear equation is a straight line and has thegeneral form

y = a + bx

where y = is the dependent variable

x = is the independent variable

a = is a constant, that is fixed amount

b = is also constant, being coefficient of x

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Questions & Answers

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Thank You

Ibrahim SameerSeek knowledge from cradle to grave