Cost behavior patterns are crucial for understanding how expenses change with activity levels. This topic dives into fixed, variable, mixed, and , explaining their characteristics and impacts on total and per-unit costs as production volumes fluctuate.
The concept and are key to accurate cost predictions. We'll explore methods like high-low, , and for estimating cost behavior, helping managers make informed decisions based on reliable cost information.
Cost Behavior Types
Fixed and Variable Costs
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5.1 Cost Behavior Vs. Cost Estimation | Principles of Accounting II View original
remain constant within a relevant range of activity
Do not change with fluctuations in production or sales volume
Examples include rent, insurance premiums, and property taxes
change in direct proportion to changes in activity level
Increase or decrease as production or sales volume changes
Examples include direct materials, direct labor, and sales commissions
remain constant while decrease as volume increases
change while remain constant as volume changes
Mixed and Step Costs
contain both fixed and variable components
Also known as semivariable costs
Examples include utility bills (fixed base charge plus variable usage) and cell phone plans (fixed monthly fee plus variable data charges)
Step costs remain constant within a specific range of activity but increase in steps as activity levels rise
Increase in discrete intervals rather than continuously
Examples include supervisory salaries (additional supervisor hired after reaching a certain production level) and machine maintenance costs (more frequent maintenance required at higher production volumes)
Relevant Range and Cost Drivers
Understanding Relevant Range
Relevant range defines the normal operating capacity within which cost behavior assumptions hold true
Represents the range of activity where cost relationships remain valid
Outside the relevant range, cost behavior patterns may change significantly
Managers use relevant range to make accurate cost predictions and decisions