Cost Behavior

CHAPTER 6
COST BEHAVIOR TYPES OF COST BEHAVIOR PATTERNS

1. Variable Cost
2. Fixed Cost
3. Mixed / Semi-variable Cost

Cost Structure – the relative proportion of fixed, variable, and mixed costs found within an organization or firm.

1. Variable Cost - its total dollar amount varies in direct proportion to changes in the activity level. Example: Number of Trucks Radiator Cost per Total Radiator Produced Truck Cost 250 $ 30 $ 7,500 500 30 15,000 750 30 22,500 1,000 30 30,000

Activity Base – a measure of whatever causes the incurrence of variable cost.
- sometimes referred to as cost driver. Most Common Activity Bases: a. machine hours b. units produced c. units sold

• Extent of Variable Costs
The number and type of variable costs present in an organization will depend in large part on the organization’s structure and purpose.

Exhibit 6-2
Examples of Costs that are normally Variable with respect to Volume Type of Organization Variable Costs Merchandising Company Cost of Goods (merchandise) sold Manufacturing Company