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Cost classification by behaviour in accounting

 

Hi, today we talk about the cost classification by behaviour in accounting.Budgets and variance reports are more effective when they reflect cost behaviour patterns.Cost classification by behaviour in accounting is the way in which cost is affected by changes in the level of activity.

Activity may be measured in terms of units of production of sales, hour worked, miles travelled, patients saw, students enrolled, or any other appropriate measure of activity of an organisation.

Cost classification by behaviour in accounting

Here are different  cost classification by behaviour in accounting

  1. Fixed cost

These are costs which remain constant over a wide range of activity for a specific time, e.g. costs of depreciation of factory building, rent, supervisor salary etc.

Diagram

Cost classification by behaviour in accounting

 

Fixed cost per unit increases with the decrease in the level of activity and decreases when level of activity increase

Diagram

Cost classification by behaviour in accounting

  1. Variable cost

Total variable cost changes in direct proportion to the level of activity. That is doubling the level of activity will double the total variable costs. Consequently, variable costs are linear. Example of variable manufacturing costs include piecework labour, direct material, and energy to operate the machine

Diagram

Cost classification by behaviour in accounting

 

Variable cost per unit or unit variable cost is constant as the level of activity increases.

 

  1. Semi-variable cost/mixed cost

Semi-variable cost/ mixed cost has both a fixed element and a variable. E.g. cost of maintenance is a semi-variable cost consisting of planned maintenance that is undertaken whatever the level of activity whereas variable element that is directly related to the level of activity.

A furthermore example is where sale representatives are paid a fixed salary plus a commission on sales.

Diagram

Cost classification by behaviour in accounting

Cost Behaviour of total cost

The total cost of a product is the combination of fixed cost and variable cost.

Total costs= fixed costs + variable cost

The total cost increase as the level of activity increases.

diagram

Cost classification by behaviour in accounting

In the above situation, the total cost per unit decreases as the level of activity increase since the fixed cost per units falls and the variable cost per unit is constant as the level of activity increase.

  1. Stepped cost

Stepped costs remain within specified activity levels, but it eventually increases or decreases by a constant amount at the various critical activity level.

Diagram

 

Cost classification by behaviour in accounting

 

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