July 5, 2020

SB-Accounting

Accounting + Finance Blog

Classification of cost according to behavior

So far, we have discussed various cost classification. However, there is more to write on. In this article, cost behavior classification is the focus topic.

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Meaning of cost behavior

This looks at cost as it behaves with various levels of activities.

This is defined as the relationship between cost and activity level.

Key Explanations

During production processes and the provision of services costs are normally incurred.

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In cost behavior, the main concern is how the cost incurred behaves and not the element or function.

Costs can behave in major ways. Either the cost will vary with changes in the level of activities (output) or it will remain constant despite any change in activity level.

Types of cost according to Behavior

Fixed cost

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This is the cost that does not vary with output. Fixed costs do not change irrespective of the level of activities.

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An increase in the production level will not increase this type of cost in the short run. For example, in a bread factory, an increase in the quantity of bread produce will not increase the rent paid for the factory building.

Other examples of fixed costs are depreciation and salaries paid to management staff.

Classification of cost according to behavior

Variable cost

Variable cost behavior varies as output changes. A change in the level of activities will increase costs.

For example, an increase in production output from 10,000 units in January to 20,000 units in February will increase the cost as shown in the table below. An example of variable cost is wages paid to laborers.
Classification of cost according to behavior

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Mixed cost

Mixed cost or semi-variable cost or semi-fixed cost is a combination of both fixed cost and variable cost. Electricity bill and telephone expenses are good examples of a mixed cost

The table below explained the nature of mixed costs. The total cost is a mixture of fixed and variable costs.

Classification of cost according to behavior

Stepped Fixed cost

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In this type of cost behavior, the cost is fixed for a given range of activities after which it increases with another range of activities.

As shown in the table below. The cost is 10 Naira between 10,000 and 15,000 units of outputs and changes to 20 Naira as a result of the change in the range of the units of outputs.

Classification of cost according to behavior

In conclusion, cost classification by behavior sees cost as its changes with the level of activities. This is an important classification because it can be used to determine the level of activities that will break even for a business. Or the level of activities that will yield profit for a business.

READ ON  Cost accounting: Meaning and explanation
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