January 22, 2021

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Four Classification of cost according to behaviour

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The cost has been classified according to its elements. Next, we will consider cost according to behaviour. Examining cost according to behaviour is important mostly for manufacturing businesses. If you make things, then classifying cost patterns according to behaviour can help in making optimal decisions such as pricing.

What are costs according to behaviour? This is the cost in relation to the activity level or the number of units produced or used.

In a manufacturing business, to produce a unit of a product, a certain amount of cost is attached. So, cost according to behaviour tends to measure how certain costs behave as more units of the product produced.

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Types of cost according to behaviour

Fixed cost: This is the cost that does not change irrespective of the activity level or the unit of product manufactured.

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This cost does not increase or decrease as a result of an increase or decrease in the number of units produced for a particular product.

A good example of fixed cost is rent. The amount paid for rent or lease of equipment used in manufacturing a product remains constant irrespective of the number of units produced. The owner of the equipment will not cease it as a result of an increase in the number of units produced as long as his rental fee or lease interest is paid as its falls due.

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Variable cost: This type of cost changes as the activity level changes. This implies that as more units of the commodity are manufactured, the cost increases and vice versa.

One example of variable cost is material cost. A firm that makes Bread needs a particular quantity of flour to make specific units of bread. Therefore, if the management decides to increase the quantity of bread it produces, then the cost of raw material (that is, flour) will also increase.

Note that all prime costs are variable costs.

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Mixed Cost: Mixed cost or semi-fixed cost or semi-variable cost is a type of cost behaviour that combines fixed cost and variable cost.

A change in the level of activity may either introduce a fixed cost element (semi-variable cost) or a variable cost element (semi-fixed cost).

One example of a mixed cost is delivery expenses. This is a combination of depreciation cost and salary of delivery man which are fixed; and fuel of the delivery van which is variable, that is, it increases as the distance travelled increases.

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Step cost: This cost is fixed at a given level of activity range. However, it step-up or increases when the range of activities increases.

Rent cost may behave in this manner. A firm may need to rent another factory or warehouse when the number of units of its product that are produced can no longer accommodate a single factory or warehouse. This thereby increases the rental cost for the firm.

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In the next article, we will consider the classification of cost according to function.

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